Net interest income is the amount of interest that a financial institution earns on assets in its possession, less any interest payments that the institution makes on any of its current liabilities. Subtracting the interest payments on liabilities from the interest payments on assets allows a bank or other financing institution to determine if there is indeed some type of gain in interest income, or if the gross earned interest income is offset completely by the interest that is paid out. While banks primarily use this concept of calculating the net interest income margin, corporations and even households can also use the same basic approach to determine if there is some sort of net gain achieved with interest income.
There are a number of different assets that generate interest income for banks. Personal mortgages, secured and unsecured loans, and commercial loans are a few examples. As bank customers repay these loans, the institution receives payments on the applied interest as well as payments on the principle of each loan. This total amount of interest income that is earned on these types of assets is known as gross interest income, or simply interest income.
In order to determine if the bank has realized net interest income, it is necessary to identify and subtract any interest payments that the institution has made on the personal checking accounts, savings accounts, Certificates of Deposit, and other relevant obligations. If the interest income that was received during a given period exceeds the amount of interest income that was paid out during the same period, then the bank has indeed earned net interest income. If the amount of interest paid out is higher than the amount that is taken in, the institution has not made any type of net gain in regard to interest.
This same general approach can be employed by a business or even an individual investor to determine if net interest income was generated within a defined time period. Businesses may identify the amount of interest paid on loans and other obligations, then subtract that figure from any amount earned on interest-bearing accounts that are currently in operation. If the interest earned is more than the interest paid, then net interest income has been generated for the period.
In like manner, households can look closely at the amount of interest income that is earned from bank accounts and various types of interest-bearing investments, including bond issues and certificates of deposit. That figure is then compared to the interest paid on a mortgage, car loan, and any other debt obligation where interest is assessed. If the bank accounts and various investments are generating more interest income than is being paid on debt instruments, then the household has generated net interest income.