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

Neelam Bank has a one-year gap report showing rate-sensitive assets of Rs 600 crore and rate-sensitive liabilities of Rs 750 crore. If market interest rates rise, what is the likely effect on net interest income on this gap position?

Net interest income is likely to fall. Gap equals rate-sensitive assets minus liabilities, 600 minus 750, which is a negative Rs 150 crore. When rates rise, more liabilities reprice upward than assets, so funding costs increase faster than income.

  1. ANet interest income is likely to fall, as the bank has a negative gap of Rs 150 croreCorrect
  2. BNet interest income is likely to rise, as the bank has a positive gap of Rs 150 crore
  3. CNet interest income is unaffected, since gaps matter only for foreign exchange
  4. DNet interest income is likely to rise because liabilities exceed assets

Explanation

Gap = RSA - RSL = 600 - 750 = -150 crore, a negative gap. With more liabilities than assets repricing, a rate rise increases funding cost more than yield, reducing net interest income. The option claiming a rise treats the gap as positive, which is a sign error.

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