National Australia Bank aims to overcome the threat of tighter and tighter margins by being more selective with the business it puts on its books, particularly in business banking.NAB chief executive Andrew Thorburn said the bank had a competitive advantage in servicing high-margin business segments, including small business, agribusiness, health and private wealth.These segments produce twice the return on equity that institutional, corporate and commercial property business earn.In retail and business banking NAB wants to do business with customers who are prepared to have a relationship with the bank (buy multiple products) and generate a high return.Thorburn said the bank had introduced a price discovery process into its SME lending. When a business banker writes a new loan, if it falls outside the banker's parameters it goes to the business banking centre for review. NAB said it faced pressure on its margin in the second half of the financial year, with the costs of deposits, short-term wholesale funding and term wholesale funding all rising.Group executive finance Gary Lennon said: "We do have headwinds for the second half."The group net interest margin of 1.93 per cent was up one basis point year on year and up five bps half on half.The Australian banking division's NIM was 1.7 per cent - up five bps year on year and 9 bps half on half.Over the six months to March the bank gained five bps of lending margin after re-pricing its mortgages and four basis points from lower deposit costs. Higher wholesale funding costs cut into these gains, costing the bank six bps.The bank said term funding markets had been volatile since the start of the year and credit spreads widened as a result of the instability of oil prices and concerns about global growth.Since the start of the year a number of deposit-taking institutions have been raising their deposit rates and the trend is becoming more widespread. Lennon said the bank was looking to shift its deposit base away from higher-cost term deposits.