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Thursday, June 9, 2016

Net Interest Income

 

Net interest income

There is no such thing as turn over or sales for banks. Instead, net inter est margin is an indica tor of bank's perfor mance; it is the difference between the income earned on lending and interest spent on deposit. Better perform ing banks have Net Interest Margin (NIM) in the range of 4% and above while average banks have NIM of 2 or 2.5%.

2. Non-interest income

Income earned on treasury oper ations is signifi cant portion on non in terest income. It is the bank's income mainly from service such as processing fees or penal ty charges. Also it in cludes sale of assets sales, commission earned on sale of third party products like in surance, pension schemes, and mutual funds.

3. Non performing assets

A non performing assets (NPA) are loans where the borrower pay ments has remained overdue for a period for over 90 days. Banks are required to classify NPAs further into Substandardwhen the loan is over due for 90 days, Doubtful assetswhen the loan is over due for 12 months and Loss assetloans that are considered uncollectible.

4. Provisions

It is slice of income that banks have to set aside to cover potential losses on loans. The longer the overdues, the higher is he provisions that banks have to make on loans. However if the borrower provide security against the loan, provisions are lowered.

5. CASA

CASA stands for current account and savings account despoits.

Banks do not pay any interest on current account and as low as 4% on savings account. The higher share of CASA to total deposits the better it is since it brings down the cost of deposits and paves way for better margins.

6. Capital Adequacy Ratio (CAR)

CAR is a cushion that banks have to maintain in form of its owned funds to off-set any loss that the banks makes if an accountholders fails to repay dues. The CAR is decided by central banks to prevent banks from becoming insolvent in the process and taking excess leverage.

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