A necessary factor in calculating net interest income is the interest paid on the assets.
Net interest income (NIR) is a measure used by companies to show how much money is being made or lost from paying interest, and two factors are needed to calculate this. These are the interest paid on assets, which is the money companies are earning from customers and assets, and what companies pay for liabilities, or money they are paying to customers and other entities. Companies often look for a positive NIR because it shows they are making more money from the assets they are paying for. While banks typically use this calculation because they tend to pay more than other companies and focus primarily on interest rates, other companies may also use it.
A bank pays interest rates to customers for depositing money.
A necessary factor in calculating net interest income is the interest paid on the assets. This describes all the money a business is receiving from interest payments, such as loans or credit cards. For example, if a company is earning $20 US Dollars (USD) on a loan and $35 USD on a credit card, then its monthly interest paid on the assets is $55 USD.
The second factor needed to calculate net interest income is the interest the company pays on liabilities. A bank pays interest rates to customers for depositing money, and these amounts must be added up. To calculate NIR, positive interest is subtracted from negative interest. For example, if positive interest is the $55 USD mentioned above and negative interest is $40 USD, then the company has an NIR of $15 USD.
Most companies strive for positive net interest income because it shows that they are making more money from interest rate based payments than they are losing. Negative NIR can be a bad sign, especially if it’s a large number, because it means companies are paying a lot of money and may not be able to recover from losses. To get a better NIR, companies can cut programs through which they pay customers, they can reduce interest paid on liabilities, or they can get more positive assets.
This formula can be used by almost any company that earns and pays for assets and liabilities based on interest rates, but banks often use it. Banks mostly lose and make money from interest rates on their daily transactions, so this is a natural way for banks to find out if they are gaining or losing funds. Other companies use factors such as how much they have to pay investors and how much they earn from investing in other companies or projects.