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Case study - 3 : Effect of change of interest rates on net interest income
#1
Effect of change of interest rates on net interest income

International Bank has the following repricing assets and liabilities:
Call money— Rs.300 cr , Cash credit loans — Rs.240 cr , Cash in hand - Rs.200 cr , saving banks - Rs . 300 cr  , fixed deposit - Rs . 300 cr , current deposit Rs . 250 cr 

On the basis of above information , answers following questions 
01. What is the adjusted gap in repricing assets and liabilities?: a)Rs.540 cr b)Rs.600 cr c)Rs.60 cr negative d)Rs.60 cr positive
02. What is the change in net interest income, if interest falls by 2% points across the board i.e. for all assets and liabilities?:a) improves by Rs.1.20 cr b)declines by Rs.1.20 cr c)changes by Rs.1 cr d) there is nochange

03) If the interest rates on assets and liabilities increase by 2%, what is the change in net interest income?:a)improves by Rs.1.20 cr b) declines by Rs.1.20 cr c)changes by Rs.1 cr d) there is no change 
04)If interest rate falls on call money by 1%, on Cash credit by 0.6%, on saving bank by 0.2% and on FD by 1%, what is change in net interest income?:a)improves by Rs.0.72 cr b)declines by Rs.0.82 cr c)decline by Rs.0.84 cr d)declines by Rs.0.96 cr 
05)If interest rate increases on call money by 0.5%, on Cash credit by 1%, on saving bank by 0.1% and on FD by 0.8%, what is change in net interest income?:

a)declines by Rs.1.05 cr
b)improves by Rs.0.90 cr 
c)declines by Rs.1.25 cr
d)improves by Rs.1.20 cr
Explanations: 01
Que-1: (SB + FD)— (Call money +CC) = (300 + 300)— (300 + 240) = Rs.60 cr (assets are less than liabilities — Hence negative gap). The
cash in hand and current account deposits are not subject to re-pricing as these are not interest bearing, hence these have been ignored.
Que-2: There is negative gap (interest bearing liabilities more) of Rs.60 cr [(300 + 300)— (300 + 240)], which means the interest cost declines
@2% on this negative gap, which leads to increase in NIL Hence it is Rs.60 cr x 2% = Rs.1.20 cr.
Que-3: There is negative gap of Rs.60 cr [(300 + 300)— (300 + 240)],3.00 cr) = 3.60 cr
Net fall in interest income = 4.44 cr—3.60 cr = 0.84 cr.
Que-4: Increase in interest amount in case of assets = (Call — 300 x 0.5% = 1.50 cr) + (Cash credit — 240 x 1% =2.40) = Rs. 3.90 cr.
Increase in interest amount in case of liabilities (SB— 300 x 0.1 = 0.30 cr) + (300 x 0.8% = 2.40 cr) = 2.70 cr
Net improvement = 3.90 cr—2.70 cr = 1.20 cr.
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