# Interest Margin Calculator

by Angel One

## What Is Net Interest Margin Calculator?

A net interest margin calculator calculates the current interest margin of a bank by looking at its interest costs, investment returns, and assets that are currently earning. These calculators can be conveniently found online. One can also calculate the net interest margin manually through a formula mentioned below. But what is the net interest margin in the first place?

NIM or net interest margin is a profitability indicator expressed as a percentage. NIM can approximate the likelihood of an investment firm or bank thriving in the long term. It serves as a metric to aid prospective investors in determining whether it is worth investing in a firm’s financial services. NIM does this by offering the investors a degree of visibility into the profitability of their interest expenses versus their interest income.

Interest rate margin definition: A measurement that compares a company’s net interest income generated from their credit products like mortgages and loans alongside the outgoing interest paid to the savings account and certificates of deposit holders.

To put it simply, a net margin that is overwhelmingly positive suggests that the entity is operating with a certain amount of profitability. A negative NIM, on the other hand, implies that the firm requires some amount of corrective action by using the funds received towards paying off any outstanding dues or shifting their assets in investments that are likely to be more revenue friendly in the long term. To summarise, the interest rate margin definition is provided below.

## How to carry out Interest margin calculation?

There are many net interest margin calculators available online. However, did you know you can estimate the interest margin calculation of a bank using a simple formula? Interest margin calculation, or estimating the net interest margin for a particular firm or company requires that traders use the following formula. This net interest margin formula is as follows:

Net Interest Margin = (Returns on investments− Interest expenses) / Average Earning Assets

To put the net interest margin ratio formula into use, consider the following example. Suppose that a certain corporation X has an interest expense of ₹2 lakhs while boasting a ROI (return on investment) of ₹1 lakh. The company’s average earning assets are worth ₹10 lakhs. In this case, using the formula of net interest margin, X company’s net interest margin equals a -10%.

As per the interest margin formula, the company lost money rather than gained it as a result of their higher interest expenses in comparison to their investment returns. The recommendation for the firm is that it would probably fare better if it utilized its investment funds to pay out outstanding debt which is the cause behind the exorbitant interest expenses.

### What factors impact the net interest margin?

There is a slew of factors that can impact a financial firm’s net interest margin calculation. Fundamental among these is the degree of supply and demand. In case there is a large demand for one’s savings in comparison to their loans, the net interest margin decreases. In such cases, the bank is required to pay out a larger amount of interest than it is currently receiving. Alternatively, in case there is a higher demand for one’s loans in comparison to their savings., in which case consumers are borrowing more than they are saving, then the bank’s net interest margin increases.

A bank’s fiscal regulation which impacts its monetary policy also plays a role in its net interest margin calculation. The direction of interest applied will dictate whether or not a consumer will save or borrow funds. In fact, the monetary policies that are set by central reserves are strongly impactful on the demand for credit or savings. When a bank’s interest rates are low, consumers prefer to avoid saving and borrow more instead.

Over time, this habit leads to an increase in the bank’s net interest margin. On the other hand, suppose that a company’s net interest rates increase. This makes borrowing with a loan a lot more costly than before. In such cases, savings become a more attractive option due to the high interest earned on one’s savings. Over time, this practice will lead to the net interest margins decreasing. Hence supply and demand work like a cycle that keeps the net interest margin of a bank fluctuating.