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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Godavari Bank has Rs 400 crore of rate-sensitive assets and Rs 550 crore of rate-sensitive liabilities in the 1-year bucket. Assuming a parallel rise of 1 percentage point (1%) in rates applies to all of them for the year, what is the approximate change in net interest income and why?

Net interest income falls by about Rs 1.5 crore. The repricing gap is 400 minus 550, a negative Rs 150 crore, so the bank is liability-sensitive. Multiplying the gap by a 1% rate rise gives a reduction of Rs 1.5 crore.

  1. ADecrease of Rs 1.5 crore, since negative gap of Rs 150 crore is exposed to rising ratesCorrect
  2. BIncrease of Rs 1.5 crore, since the gap is Rs 150 crore
  3. CDecrease of Rs 9.5 crore, since total of assets and liabilities is Rs 950 crore
  4. DIncrease of Rs 5.5 crore, since liabilities reprice upward

Explanation

Gap = RSA minus RSL = 400 - 550 = -150 crore (liability-sensitive). Change in NII = gap x change in rate = -150 x 1% = -1.5 crore. A positive sign would apply only for an asset-sensitive bank. Adding the two balances is the wrong base.

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