Interest rate risk of Indian banking sector a critique of Ajay Shah's methodology

Abstract

This paper primarily looks at the interest rate exposure of various financial Institutions using a methodology suggested by Ajay Shah. More importantly it critically assesses the proposed methodology stress testing many of the assumptions and looking at the validity of a lot of considerations. A case study of Union Bank of India is also studied comparing the methodology adopted by them and the framework proposed by Ajay Shah. An important premise of the framework studied is that information available in the public domain is sufficient to quantify the interest rate risk of banks. However the maturity patterns of the long portion of the current and savings accounts of the banks have a significant impact on the results and conclusions got on interest rate risk is already hedged. In this context the assumption of no interest rate derivative usage puts the results on a weak footing.