Management of Interest Rate Risk in Indian Banking

Swamy, Vighneswara (2013): Management of Interest Rate Risk in Indian Banking. Published in:

Abstract

In a move towards effective management of interest rate risk in Indian banking, in addition to the existing return on Interest Rate Sensitivity under Traditional Gap Analysis, a new return is being introduced to monitor the interest rate risk using Duration Gap Analysis (DGA), called Interest Rate Sensitivity under Duration Gap Analysis (IRSD). The DGA involves bucketing of all Risk Sensitive Assets (RSA) and Risk Sensitive Liabilities (RSL) as per residual maturity/re-pricing dates in various time bands and computing the Modified Duration Gap (MDG). One of the important things to note is that the RSA and RSL include the rate-sensitive off-balance sheet assets and liabilities as well. MDG can be used to evaluate the impact on the Market Value of Equity (MVE) of the bank under different interest rate scenarios. The past few years have seen banks’ foray into financing long-term assets, such as home loans and infrastructure projects. Banks have been allowed to raise funds through long-term bonds with a minimum maturity of five years to the extent of their exposure of residual maturity of more than five years to the infrastructural sector. This article attempts to illustrate the significance of interest rate risk management and approaches towards its management in the Indian context.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest Rate Risk Management, Duration Gap Analysis, Maturity Gap Analysis, Risk Sensitivity, Modified Duration Gap, Banking Risk
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Basel Committee on Banking Supervision (BCBS) 2004. “Principles for the Management and Supervision of Interest Rate Risk.” Available at http://www.bis.org/publ/bcbs108.pdf

Lopez, J.A. 2004. Supervising Interest Rate Risk Management, FRBSF Economic Letter, Number 2004-26, September 17, 2004, Economic Research, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, CA 94120

RBI Guidelines on Asset Liability Management Practices in Banks, http://www.rbi.org.

Vighneswara Swamy (2011). “Risk Management in Financial Institutions”. ISBN-13:978-1-12-134521-8 ISBN-10 1-12-134521-2 Publisher: McGraw Hill Custom Publishing