NIM Floor at Branch 'C'
Branch 'C' reports the following position for the quarter ended 30 September (all figures in ₹ crore). Savings deposits ₹40 at 2.75%, current deposits ₹16 at 0%, term deposits ₹94 at an average 6.75%, giving NDTL of ₹150. The cash reserve ratio is 4.50% and SLR is 18.00%, both applied to NDTL; CRR balances earn nothing and SLR securities are held at a fixed 7.00% yield. Of the deployable funds, ₹110 is in advances yielding 10.00% and the residual ₹6.25 is parked in overnight call money at 5.20%. Operating expenses for the quarter are ₹2.20. The regional office has set a NIM floor of 4.00% on NDTL and wants a one-page note showing whether the floor can be met without changing the deposit mix. The branch's credit team states it can identify up to ₹10 of fresh standard advances next quarter at the same 10.00% yield.
1. Compute the branch's cost of deposits, net interest income and NIM for the quarter.
Read the worked answer
Cost of deposits - weight each component:
- Savings: 40 × 2.75% = 1.100
- Current: 16 × 0% = 0.000
- Term: 94 × 6.75% = 6.345
- Total interest expense = 7.445 on NDTL of 150, i.e. 7.445 / 150 = 4.96%.
The low current-account share is what keeps the cost below 5%; the 94 of term money at 6.75% is the real weight.
Interest income - first fix the deployable pool: CRR = 4.50% × 150 = 6.75 (earns nothing), SLR = 18% × 150 = 27.00. Deployable = 150 − 6.75 − 27.00 = 116.25, which matches 110 of advances plus 6.25 of call money.
- Advances: 110 × 10.00% = 11.000
- Call money: 6.25 × 5.20% = 0.325
- SLR securities: 27 × 7.00% = 1.890
- Total interest income = 13.215
Net interest income = 13.215 − 7.445 = ₹5.770 crore.
NIM = 5.770 / 150 = 3.85% (3.8467%). Operating profit = 5.770 − 2.20 = ₹3.57 crore.
So the branch is 15 bps short of the 4.00% floor at the start of the exercise.
2. Can the branch reach the 4.00% floor by deploying the idle funds in advances? Show the arithmetic and state the conditions under which the answer would change.
Read the worked answer
Gap to close: 4.00% of 150 = ₹6.00 crore of NII needed, against 5.770 currently - a shortfall of ₹0.23 crore.
Effect of redeploying the idle ₹6.25 crore: the yield gain is 10.00% − 5.20% = 4.80%, so incremental income = 6.25 × 4.80% = ₹0.30 crore.
New NII = 5.770 + 0.300 = ₹6.070 crore; new NIM = 6.070 / 150 = 4.05%. The floor is cleared by about 5 bps. The credit team's stated capacity of ₹10 crore comfortably covers the ₹6.25 crore required, so demand is not the binding constraint.
Where the answer could flip:
- Liquidity: the ₹6.25 crore is the branch's only same-day liquidity buffer beyond SLR; converting all of it to term advances leaves nothing for large withdrawals, and SLR securities cannot be assumed to be instantly monetisable without a cost.
- Capital and risk weights: advances carry a risk weight, call money and SLR securities effectively do not in the same way; the branch-level NIM gain may not survive at the bank level if capital charge is loaded in.
- Asset quality: 4.80% of extra yield on a fresh loan is worthless if the incremental probability of default exceeds it; a 10.00% loan priced without credit cost is not a 10.00% loan.
- NIM denominator: NIM is struck on NDTL here; if the bank measures on total assets the numbers move.
A defensible note would say: yes, arithmetically 4.05% is reachable, but only on the assumption that ₹6.25 crore of quality advances can be written and that the liquidity cushion is consciously run down.
3. Term deposit repricing: 40% of the term book is expected to renew at 40 bps higher. What is the new NIM, and how much of a yield increase on advances restores the original 3.85%?
Read the worked answer
Size of the repricing: 40% of 94 = ₹37.60 crore.
Extra interest cost: 37.60 × 0.40% (40 bps) = ₹0.1504 crore.
Revised NII: 5.770 − 0.1504 = ₹5.6196 crore.
Revised NIM: 5.6196 / 150 = 3.75% (3.7464%). The branch now sits 25 bps below the 4.00% floor and 10 bps below its original position - the repricing alone wipes out roughly two-thirds of the gain from deploying the idle funds.
Yield increase needed to restore 3.85%: the lost ₹0.1504 crore must be recovered from advances of ₹110 crore, so the required uplift = 0.1504 / 110 = 0.1367%, i.e. about 14 bps - advances would need to move from 10.00% to roughly 10.14%.
A useful refinement: if the idle funds have also been pushed into advances, the base is 116.25 rather than 110, and the required uplift falls to 0.1504 / 116.25 = 0.1294%, about 13 bps. The larger the earning-asset base, the smaller the repricing pass-through has to be.
The judgement point: a 40 bps deposit repricing is a fait accompli, while a 14 bps lending repricing is a competitive decision taken on the whole book, not just new loans. Senior management would weigh repricing the existing book against letting the NIM floor slip for one quarter and absorbing it through fee income or operating cost.