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Interest margin of banks

Category: Concept of the Bank and the Banking System

Interest margin — the difference between interest income and expense of a commercial bank, between interest received and paid. It is a major source of bank profits and is intended to cover taxes, losses on speculative transactions and so-called «burden» — the excess of interest income on non-interest expenses and banking risks.

Margin can be characterized by an absolute value in rubles and a number of financial ratios.

Absolute value of the margin can be calculated as the difference between the total value of the interest income and expense of the bank, as well as between interest income on certain types of active operations and interest expense related to the resources that are used for these operations. For example, between the interest payments on loans and interest expense on credit.

The dynamics of the absolute value of the interest margin is determined by several factors:

volume of credit investments, and other active operations, interest-bearing;

interest rate on active operations of the bank;

interest rate for passive operations of the bank;

difference between the interest rates on active and passive operations (spread);

shares of interest-free loans in the loan portfolio of the bank;

proportion of risk of active operations, interest-bearing;

the ratio between equity capital and attracted resources;

structure of the involved resources;

method of calculation and collection of interest;

system formation and income and expenses;


There are differences between domestic and foreign accounting standards, interest income and expenses of the bank, which affect the size of the interest margin.

There are two method of accounting for transactions related to allocation of accrued interest on the amounts borrowed and the allocation of funds to the accounts of expenditure and income of the bank: cash method and the «charges» («capacity»).

When cash accrual bank lender interest on revenue accounts are only for real-receipt of funds, ie on the date of admission to correspondent account funds debited from the payer’s account or receipt of funds in cash. The assignment of the bank-borrower accrued interest on borrowed resources at its expense account is made on the date of payment. Under the payment is meant to withdraw funds from a correspondent bank account and credited to the account of a client or giving him cash from the till. Interest accrued but not yet received or paid by the bank recorded in the accounts of income or expense in future periods.

Method «charges» lies in the fact that all the accrued interest for the current month are credited to income or expenses of the bank regardless of whether they are debited from customer’s account or credited to him.

Experience in interest income and expense of foreign commercial banks based on the method of «charges».

Accruals are not permitted to apply to the order of recording of accrued interest: 1) the loan, referred to the 2 nd, 3 rd and 4 th-risk groups, and 2) for the overdue principal on the loan, and 3) of placements, if on the last working day of the month on this contract were overdue interest payments.

If cash method is always going over the amount of interest. For example, the bank calculates interest for their own benefit or the benefit of the client 28 th of each month. When the cash method of accounting revenues and expenses of the bank in May will include interest accrued during the period from April 28 to May 28. As a result of the May earnings will be generated in part by interest income and expense relating to April (from April 28 to 30).

In the method of «charges» in the May reporting will include interest income and expenses related only to May. They will consist of interest income for the 1-27 May, credited to a bank account and income for May 28-31, at which the bank has the right, but not yet received on the account of the bank. Similarly, will be determined by the structure of expenditures for May. Income and expenses related to this reporting period but not yet received or paid before the end of the reporting period, called augmented. Size Accrued interest is defined as follows:

((Interest rate x period of annual capacity) / 360) x (Balance of loan debt or deposit)

In our example, the period capacity — from 28 th day to the end of the month.

Outlined the contents of the cash method and the method of «accrual» accounting of accrued interest shows that they have a direct impact on the interest margin.

Accrued interest can not be regarded as real income or expenditure of the bank. It is only right to income or the obligation to pay money to another person. Therefore, the growth in interest margins due to accrued interest can not be regarded as a positive phenomenon. Requires a thorough critical analysis of organizational forms of credit relationships, leading to a significant amount accrued interest. In foreign practice with expired more than 90 days arrears on interest payments increasing interest ceases. In our practice, the size of the accrued interest affect arrears, extension of bank debt (principal and interest payments), collection of interest at the end of the term of use loan.

The coefficients of interest margins may show its actual and sufficient for the bank. The actual rate of interest margin characterizes the relative magnitude of the actual percentage of the source of bank profits. It is calculated as follows:

I variant

To the actual interest margin = (Interest earned during the period (the fact) — Interest paid during the period (the fact)) / (average balance of the period assets, income)

Assets, income — all types of loans to businesses and individuals, banks, investing in securities, factoring and leasing operations, in other ventures.

Variant II

To the actual interest margin = (Interest earned during the period (the fact) — Interest paid during the period (the fact)) / (average balance of assets in the period)

Assets — total assets of the bank balance, purified from the release of provisions.

III variant

To the actual interest margin = (Interest earned on loans — Interest paid on loans) / (average balance of outstanding loans in the period)

Similarly calculated ratio of interest margin on credit operations in the interbank market (foreign currency and rubles), the securities market. The above option III calculation involves the selection of the principle of resource allocation between the active operations of the bank. In large and medium-sized banks, this could be: 1) the principle of a common «pot» of resources and 2) the principle is based on the balance sheet restructuring, taking into account the liquidity of assets and liabilities of usefulness.

Adequacy ratio of interest margin (CBM) shows her the minimum necessary for the bank level. The calculation of this factor derives from the main purpose of the margin — the costs of the bank.

Mn = ((bank’s costs — Interest expense) — Other income * 100) / average balance of assets, income

Other income — this fee and commission income from services of the bank non-lending nature, ie fee for cash management services, collection, information and advisory services of the bank for other services, refunds to customers of postal, telegraphic and other expenses of the bank, interest and commission overtaken for past periods, fines and penalties.

Sufficient margin can be calculated on the basis of evidence in the intervening period and predicted values for a planned period.

Until recently, a sufficient margin in the large and medium-sized banks only slightly higher than the zero mark. This meant that many lending institutions to break even operate at a very low percentage of income, are not particularly worried about the return flow of loans, loan portfolio quality. This situation was due to poor material and technical base, lower costs for bank protection, personnel training, higher foreign exchange earnings inflationary, low quality customer service. Development of market relations, the fight for the client, criminal situation, the introduction of currency corridor have changed the size of the required interest margin.

Comparison sufficient margin, calculated on the basis of accounting data, and actually received by the margin for this period in the whole banking or individual species to estimate their revenue management and to identify trends in the financial stability of the bank. Trend of incidence of actual margins, reducing the difference between it and the margin is sufficient wake-up call («critical» factor).

Calculation of predictive sufficient margin is required primarily for the formation of a contract interest rate for the coming period. The minimum required percentage of the bank on active operations of the sum of real resource costs, margins and adequate adjustment for expected inflation.

Comparison of the ratio of actual margins for individual active operations (loan, interbank loans and securities) to evaluate the profitability trends of the commercial bank.

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