INTEREST RATE RISK MANAGEMENT: A COMPARATIVE STUDY OF STATE BANK OF INDIA AND HDFC BANK M Guru Santhosh 1, Prof. V N Prakash Sharma 2 1 II MBA (Finance) Student, 2 Assistant Professor Dept. of Management and Commerce, Sri Sathya Sai Institute of Higher Learning, (India) ABSTRACT The Indian banking sector is exposed to various types of risks such as liquidity risk, interest rate risk, credit risk, exchange risk etc. which affects the bank s Net Interest Income (NII) which is the basic source of a bank s profitability. The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities have exposed the banking system to Interest Rate Risk (IRR). This study is aimed at measuring the interest rate risk in HDFC bank and SBI using the traditional gap analysis model. The findings revealed that the banks were exposed to Interest Rate Risk (IRR). Keywords: Interest rate risk, Net Interest Income, Traditional gap analysis. I. INTRODUCTION The impact of movements in interest rates on the financial condition of a bank is called interest rate risk. Since, it has a direct impact on the profitability of a bank, it becomes an important area for the management of a bank to focus on the methods to manage and mitigate this risk. The earnings perspective and the economic value perspective are the two most common perspectives of assessing a bank s exposure to interest rates. Traditional gap analysis, earnings sensitivity analysis, rate adjusted gap, duration gap analysis are some of the various techniques used to measure the exposure of earnings and economic value to changes in interest rates. II. OBJECTIVE OF THE STUDY Using the information available to the public domain, this paper attempts to assess the interest rate risk carried by the above mentioned banks in 2010, 2011, 2012, 2013 and 2014. III. RESEARCH METHODOLOGY The present study has used analytical research design to assess the interest rate risk situation in HDFC Bank and SBI. It has used secondary information from the RBI website and the annual reports of HDFC Bank and SBI. 434 P a g e
IV. ANALYSIS AND INTERPRETATION The data has been treated using the traditional gap analysis model wherein a repricing gap report has been prepared by distributing the Rate Sensitive Assets (RSA s) and Rate Sensitive Liabilities (RSL s) into various time buckets based on the time remaining for their next repricing or maturity, whichever is earlier. The rate sensitive assets and liabilities are distributed into eight time buckets. They are: 1 14 days 15 28 days 29 days to 3 Over 3 to 6 Over 6 to 1 year Over 1 year to 3 years Over 3 years to 5 years Above 5 years. Then the gap between the rates sensitive assets and liabilities has been calculated which is the difference between the RSA s and RSL s for each of the time buckets. A positive gap indicates that, The bank has more rate sensitive assets than rate sensitive liabilities, which means that the bank is asset sensitive. In such a scenario where the RSA s > RSL s, an upward movement in the interest rates will result in an increase in the NII of the bank since more assets are repriced than liabilities provided the rise in interest rates is equal for both RSA s as well as RSL s at given point in time. However, a downward movement in interest rates will lead to a decrease in the NII of the bank. A negative gap indicates that, The bank has more rate sensitive liabilities than rate sensitive assets, which means that the bank is liability sensitive. In such a scenario where the RSA s < RSL s, an upward movement in the interest rates will result in a decrease in the NII of the bank since more liabilities are repriced than assets provided the rise in interest rates is equal for both RSA s as well as RSL s at given point in time. But, a downward movement in interest rates will lead to an increase in the NII of the bank. In case a bank has a gap of zero, then RSA s = RSL s, in such a scenario, an equal change in the interest rates will not lead to any changes in the NII of the bank since, the interest income and interest expense is the same. Therefore, we can conclude that the sign of the gap determines whether there is any change in the interest income or expense of a bank due to changes in interest rates. 435 P a g e
4.1 Measurement of Interest Rate Risk 4.1.1 Asset Liability Mismatch The assets and liabilities of the sample banks can be roughly classified into two categories based on the time frame, short term assets and liabilities (less than 1 year) and long term assets and liabilities (more than 1 year). Since, the fluctuations in interest rate are more important for short-term assets and liabilities, the present study has focussed only on short-term assets and liabilities. A negative gap indicates that the liabilities are more than the assets and a positive gap indicates that the assets are more than the liabilities. Figure 1: Short Term Asset Liability in HDFC Bank The above graph implies that during the period of study, short-term liabilities are lower than short term assets in HDFC Bank. The gap remained positive throughout the period of study. It was Rs 142434 million in 2010, Rs 253087 million in 2011, Rs 344290 million in 2012, Rs 398766 million in 2013 and Rs 520520 million in 2014. Under such circumstances, decline in the interest rates will adversely affect the banks position, but an increase in interest rates will affect positively as they will have a direct impact on the profitability of the bank. Figure 2: Short Term Asset Liability in SBI The above graph depicts that during the period of study, short term liabilities are more than the short-term assets in SBI. The gap remained negative throughout the period of study. It was Rs (1172578) million in 2010, Rs 436 P a g e
(1727771) million in 2011, Rs (1951715) million in 2012, Rs (2086826) million in 2013 and Rs (2975133) million in 2014. Under such circumstances, a rise in interest rates will adversely affect the banks position, but a fall in interest rates will affect positively as they will have a direct impact on the profitability of the bank. V. GAP ANALYSIS Bank 2009-10 2010-11 2011-12 2012-13 2013-14 HDFC 41181 79317 223500 220807 171748 SBI 105764 (11817) 91233 246214 305975 Table 1: GAP in HDFC Bank and SBI (in millions of Rs) The above table presents the gap i.e., the difference between the rates sensitive assets and rate sensitive liabilities in HDFC Bank and SBI during 2009-14. In all the five financial years, HDFC Bank had a positive gap. The gap has increased continuously except for the year 2014. The gap was Rs 41181 million in 2010, Rs 79317 million in 2011, Rs 223500 million in 2012, Rs 220807 million in 2013 and Rs 171748 million in 2014. In the case of SBI, there has been a positive gap in all the financial years except for the year 2011. It was Rs 105764 million in 2010, Rs (11817) million in 2011, Rs 91233 million in 2012, Rs 246214 million in 2013 and Rs 305975 million in 2014. Since, both the banks predominantly have a positive gap during the period of study; they should adopt measures to manage interest rate risk. VI. MATURITY GAP REPORT Time Buckets 1-14 days 15-28 days 29 days to 3 Over 3 to 6 Over 6 to 1 year 2009-10 (10503) 13530 63359 64209 11839 2010-11 (42527) 15247 55920 66031 158416 2011-12 170049 8478 4622 2488 158653 2012-13 103590 17783 83015 49430 144948 2013-14 120695 1654 173985 67830 156356 Table 2: Table showing GAPS s in various time buckets of HDFC Bank Ltd (in millions of Rs) Table 2 contains the maturity buckets for the period 2009-2014. In the year 2009-10, HDFC Bank has a positive gap in 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets. There is a negative gap only in 1 14 days time bucket. There has been a huge increase in the positive gap in the 29 days to 3 and over 3 to 6 buckets as compared to the 15-28 days bucket. At the same time, there has been a huge decrease in the over 6 to 1 year bucket. However, the overall gap of HDFC Bank is positive. 437 P a g e
In the year 2010-11, there has been a positive gap in 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets but a negative gap in the 1-14 days bucket. There has been a continuous increase in the positive gap in 29 days to 3, over 3 to 6, and over 6 to 1 year buckets. Therefore, the overall gap in HDFC Bank has been positive. Unlike in the previous years, 2011-12 has had a positive gap in all the time buckets. But, the positive gap has reduced drastically in the 15-28 days, 29 days to 3, over 3 to 6 time buckets as compared to the positive gap in 1-14 days bucket. Again, in over 6 to 1 year time bucket, the positive gap has increased as compared to the positive gap in over 3 to 6 time bucket. However, the overall gap has been positive. In the year 2012-13, there has again been a positive gap in all the time buckets and the overall gap of HDFC Bank has been positive. During the year 2013-14, there has again been a positive gap in all the time buckets. However, there has been a tremendous decline in the positive gap in 15-28 days bucket as compared to the gap in 1-14 days bucket. However, it has increased in the immediate 29 days to 3 time bucket. The overall gap of HDFC Bank has been positive. TIME 1-14 15-28 29 DAYS OVER 3 OVER 6 BUCKETS DAYS DAYS TO 3 TO 6 TO 1 MONTHS MONTHS YEAR 2009-10 87103 (145953) (184237) (308327) (621164) 2010-11 (18899) (89811) (102552) (548427) (968082) 2011-12 (237868) (104022) (98429) (633904) (877492) 2012-13 114819 (223720) (165324) (472434) (1340167) 2013-14 (53707) (178012) (663450) (782266) (1297698) Table 3: Table showing GAPS s in various time buckets of SBI (in millions of Rs) Table 3 contains the maturity buckets for the period 2009-2014. In the year 2009-10, SBI has negative gaps of high volume in 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets. The bank has a positive gap only in 1-14 days bucket. The negative gaps have been increasing continuously. However, the overall gap in SBI was found to be positive due to the positive gaps for the time buckets 1-14 days, over 1 year to 3 years and above 5 years. During 2010-11, SBI has negative gap in 1-14 days, 15-28 days, 29 days to 3, over 3 to 6, over 6 to 1 year time buckets and the gap was found to be continuously increasing. The overall gap of SBI was also found to be negative. In 2011-12, again there has been negative gap in 1-14 days, 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets. However, the overall gap was found to be positive due to the positive gaps in over 1 year to 3 years and above 5 years time buckets. SBI has negative gaps in 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets but, a positive gap in 1-14 days time bucket in 2012-13.However, the overall gap in SBI was found to be positive due to the positive gaps for the time buckets 1-14 days, over 1 year to 3 years and above 5 years. 438 P a g e
During 2013-14, SBI had negative gap in 1-14 days, 15-28 days, 29 days to 3, over 3 to 6 and over 6 to 1 year time buckets. But, due to the positive gaps in over 1 year to 3 years and above 5 years time buckets, the overall gap of SBI was positive. VII. CONCLUSION HDFC bank and SBI were exposed to interest rate risk during the period of study 2009-2014. A few strategies that the banks can implement to mitigate the interest rate risks to attain a desirable gap position are discussed. To reduce a positive gap, the banks can extend the maturities in the investment portfolio, increase floating rate deposits, increase short-term borrowings, increase long-term lending or increased fixed rate lending. To reduce a negative gap, the banks can reduce the maturity of the investment portfolio, or increase long-term deposits, or increase short-term lending or increase floating rate lending. VIII. ACKNOWLEDGEMENT We thank our Beloved Lord for helping us in this endeavour. We also thank the faculty of the Department of Management and Commerce, Sri Sathya Sai Institute of Higher Learning for their constant support and encouragement. We are grateful to International Journal of Science, Technology & Management (IJSTM) for providing such avenues to people who are passionate about research. Last but not the least; we also thank all the unseen hands who have made this work possible. REFERENCES [1]. Dr. Shashi Srivastava and Dr. Divya Srivastava, Interest Rate Risk Management: A Comparative Study of State Bank of India and ICICI Bank, International Journal of Management and Social Sciences Research (IJMSSR), Volume 4, No. 7, July 2015. [2]. Padmalatha Suresh and Justin Paul, Management of banking and financial services (India, Pearson, 2015). [3]. Dr. B. Charumathi, Asset Liability Management in Indian Banking Industry - with special reference to Interest Rate Risk Management in ICICI Bank, Proceedings of the World Congress on Engineering 2008 Vol II WCE 2008, July 2-4, 2008, London, U.K. 439 P a g e