Matter of Interest

The difference between the rate at which a bank borrows and the rate at which it lends is the  net interest margin.

Devangshu Datta        Print Edition: March 8, 2007

Bank balance sheets often refer to the “net interest margin” (NIM). Bankers informally call it the “spread”. Banks borrow money and lend it out again. The difference between the rate at which a bank borrows and the rate at which it lends, is the NIM. Without a positive NIM, banks bleed.

NIM is important for anyone who is both a lender and a borrower. If returns don’t exceed borrowing costs, you’re a net loser. As recently as five years ago, middle-class Indians could ignore this, since they were debt-free, net lenders. The lion’s share of household savings was parked in debt instruments like bank FDs, corporate deposits, chit funds, etc. As interest rates rose, the middle class celebrated.

Times have changed. The middle class is no longer debt-free. MONEY TODAY’s popular feature “Portfolio Doctor” analyses the personal finances of readers. Scarcely any of the submissions we’ve received features debt-free households. Most people have home or vehicle loans, often both. A significant proportion use credit cards as well. Retail in general and home loans in particular are the fastest growing business lines for banks.

Word’s Worth
"Why give tax exemption for exports? Infosys, with profits of over Rs 3,500 crore after paying taxes (in other countries) does not pay tax here”
—NR Narayana Murthy,
Infosys chief mentor
“An increase in home loan rates would not deter genuine home buyers but investors would keep away”
— Deepak Parekh, chairman, HDFC
“We don’t intend to do an IP O.We have the resources for our expansion plans”
— Arun Sarin, CEO,Vodafone
after the Hutch buyout
“ There is a degree of subjectivity in the valuation of art.There is no benchmark”
—Dipak Gupta, ED, Kotak Bank,
on lending with art as collateral

On the other hand, middle-class Indians remain enamoured of debt as savings instruments. The greater part of household savings is still invested in debt instruments though the mix now includes debt mutual funds rather than chit funds or company deposits. So, as a normal middle-class Indian, you are likely to be both borrower and lender.

Have you calculated your NIM? You can get a rough idea by comparing the interest rate your investments fetch against the rates you pay. Your NIM is likely to be negative. Banks borrow at lower rates (FDs at 9% or less) than they lend (home loans 11% plus, auto loans 10% approximately).

If you’re financing a house, capital appreciation may balance off a negative NIM. But if you’re financing a depreciating asset (such as a car or a computer), this is not possible. In that case, it may make sense to liquidate some of your debt investments to pre-pay loans. Bankers know that NIM is endangered when interest rates rise. This is just as true for householders. 

 The difference is that  most householders are unaware of the implications.

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