The Chiefs of all the public sector banks in the country have been advised by the Finance Minister P. Chidambaram not to focus on high interest margins but to keep the margins low. He said that low margins mean lower interest rates, which would attract more borrowers and thus accelerate credit growth in the economy.
He suggested the managements of the PSBs to remain "happy" with a net interest margin of 3 percent. Though, it seems that this suggestion has not been welcomed by the bankers.
Net interest margins (NIM) act as a financial indicator of a bank's financial health. High levels of NIM indicate that the lenders are not extending the benefits of lower rates to customers who have borrowed money from them. A bank's NIM is the difference between the total interest earned by it (via loans and investments) and the interest it has paid on its deposits and to other lenders from which the bank may have borrowed. It is denoted as a percentage.
Chidambaram also said that many foreign banks have been able to achieve high level of profits with a margin of just 2 percent.
On the matter, the Chairman and Managing Director of Dena Bank, Ms. Nupur Mitra said, "If banks have higher margins, it would mean either they are lending to riskier projects where they are earning a very good rate of interest on loans or they are making good profit without passing it to borrowers." The Chief of State Bank of India, Mr. Pratip Chaudhuri added, "An NIM of 3% is good for the economy. When a businessman is borrowing, he always looks at the rate of interest to decide on the viability of the project."