Branch Scorecard: NIM, Cost-to-Income and NPA Ratios
Branch Q has the following annual figures, in ₹ crore: deposits ₹200, comprising CASA of ₹80 at 3.0% and term deposits of ₹120 at 6.5%; advances ₹140 yielding 10.5%; investments ₹40 yielding 7.0%. Non-interest income is ₹1.2. Operating expenses are ₹5.0, of which staff costs are ₹3.2 and other costs are ₹1.8. Gross NPA is ₹9.8 and provisions held are ₹2.4. The branch head is preparing a scorecard for the regional office. The regional office uses net interest margin on earning assets, meaning advances plus investments; cost-to-income ratio on net interest income plus non-interest income; gross and net NPA ratios on gross advances; and credit-deposit ratio. A recovery of ₹3.5 crore from a written-off account is expected next month but has not yet been received. The branch head wants to know whether to prioritise CASA mobilisation or retail term lending to improve the scorecard.
1. Compute net interest margin, cost-to-income ratio, gross NPA ratio, net NPA ratio and credit-deposit ratio. Show each formula and figure.
Read the worked answer
Interest income = 140 × 10.5% + 40 × 7.0% = 14.7 + 2.8 = ₹17.5 crore. Interest expense = 80 × 3.0% + 120 × 6.5% = 2.4 + 7.8 = ₹10.2 crore. Net interest income = 17.5 − 10.2 = ₹7.3 crore. Earning assets = 140 + 40 = ₹180 crore. NIM = 7.3 ÷ 180 = 4.06%. Total operating income = 7.3 + 1.2 = ₹8.5 crore. Cost-to-income = 5.0 ÷ 8.5 = 58.82%. Gross NPA ratio = 9.8 ÷ 140 = 7.00%. Net NPA = 9.8 − 2.4 = ₹7.4 crore; net advances = 140 − 2.4 = ₹137.6 crore; net NPA ratio = 7.4 ÷ 137.6 = 5.38%. Credit-deposit ratio = 140 ÷ 200 = 70%.
2. The branch wants to bring cost-to-income to 50% without changing income. What operating expense cut is needed, and what should the branch head check before promising it?
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Required operating expenses for a 50% ratio = 50% × 8.5 = ₹4.25 crore. Current expenses are ₹5.0 crore, so the required cut is ₹0.75 crore, or 15% of operating expenses. If staff costs are left untouched at ₹3.2 crore, other costs would need to fall from ₹1.8 crore to ₹1.05 crore, a 42% cut, which may be unrealistic without harming controls. Before promising the target, the branch head should check which costs are discretionary, whether the cut affects audit, security or customer service, and whether the ₹3.5 crore recovery is recognised in the right period. A cost target should not be met by deferring necessary expenses or by under-provisioning.
3. Which lever-CASA mobilisation or retail term lending-is more scorecard-effective? Support your answer with one calculation for each.
Read the worked answer
CASA: shifting ₹10 crore from term deposits to CASA saves interest expense of 10 × (6.5% − 3.0%) = ₹0.35 crore. NII becomes ₹7.65 crore; NIM = 7.65 ÷ 180 = 4.25%, up about 19 basis points; cost-to-income = 5.0 ÷ (7.65 + 1.2) = 56.5%. Retail term lending: deploying ₹10 crore at 10.5% adds NII of ₹1.05 crore. NIM = (7.3 + 1.05) ÷ (180 + 10) = 8.35 ÷ 190 = 4.39%, up about 34 basis points; cost-to-income = 5.0 ÷ (8.35 + 1.2) = 52.4%. Lending gives the larger scorecard movement, but raises credit-deposit ratio from 70% to 75% and adds credit risk. Given the 7% gross NPA, the better judgement is to prioritise CASA and selective secured retail lending, not unsecured growth.