Does Higher NIM Cause Cost Complacency and Credit Delinquency?

This paper examines the importance of Net Interest Margin (NIM) for banks' profitability and investigates whether the banks with higher NIM face cost complacency and suffer from adverse selection in their credit decisions and hence, higher Non-Performing Assets (NPAs). It evaluates the relationship of the level of NIM with the banks' wage and nonwage operating expenditure, Cost-Income Ratio (CIR) and gross NPA for scheduled commercial private sector banks and scheduled/non-scheduled Urban Cooperative Banks (UCBs) in India. The analysis shows that NIM has a significant positive impact on the profitability of banks. For scheduled commercial private sector banks, the gross NPA has the most profound negative impact on their profitability. For UCBs, the most significant negative impact comes from wage CIR. For none of the banks, credit delinquency increases with a higher NIM. While operating cost per rupee of assets is seen at an elevated level for banks with a higher NIM, the impact of the higher cost is more than offset by the increased income, and hence, the paper shows that NIM is one of the important determinants of bank's profitability and a higher NIM does not necessarily cause cost complacency and credit delinquency. [ABSTRACT FROM AUTHOR]