Banks are one of the most important financial intermediaries in any financial system around the world.In emerging economies like India, they play a very pivotal role in the finance sector. Banks in India have come a long way with a small network of branches confined to the urban and metropolitan areas of the country at the time of independence to spreading into deep inner pockets of rural India today. Banking services for long have remained the primary source of institutional finance in India.
The history of banking in India is characterized by pre-independence private ownership, the gradual nationalization of major private sector banks in the post-independent India and their de-regularization in the post-liberalisation period (in respect of the alternate areas of business that they have been allowed to venture into because the central bank, in India's case, the RBI would always remain as the regulator irrespective of the extent of de-regulation and until the central government decides to do away with central banking as is also the case with the developed capitalist economies). With the diversification that they have undergone over the years, the banks have been exposed to newer risks in business.
Earlier in Indian banking, it was the credit risk or the risk of default on the loan accounts. The norms were also not stringent and the banks were held to ransom by their political master's who organized 'loan-melas' and distributed a lot of public money to the undeserving. Not surprisingly, over-employment coupled with a poor asset quality caused a crisis like situation in banks. On some occassions, the central government had to infuse fresh capital into them. Whereas prudential norms recommended by various committes set-up by the RBI (Narasimham Committee, Marathe Committee, Nayak Committee etc) led to the improvement of asset-quality of banks thereby reducing the NPAs, the de-regulation of interest rates and making them market determined post-liberalization has exposed the banks to interest rate risk.
The incidence of interest rate risk in Indian banks is one of the key issues of focus in Indian banking today. The direction where the interest rates are headed and the impact that it would have on the banks' cashflows is a topic which the industry watchers, academicians, banker's and the regulator's are all talking about.
This project tries to trace the interest rate risk in Indian banks by trying to quantify it in terms of the impact that it would have on it's core capital. It follows a simple methodology of calculating the Net Present Value (NPV) of the future cash flows of 34 Scheduled Commercial Banks (SCBs) included in the study for certain interest rate scenarios.
Apart from the calculations, the project also reviews some of the reports already available on the Interest Rate Risk in Indian banks. These include the PhD thesis of Radhe Shyam Bolisetty (NIBM, Pune 1997) working paper of Ila Patnaik & Ajay Shah (ICRIER, New Delhi, Dec 2002), Soumya Sircar (ICICI Bank Treasury Research, Mumbai), and Crisil Information Services Ltd report (CRISInfac, Mumbai, May 2004).
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