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PREPARED BY
MS SHILPA DUTTA
09DM018
BATCH - 2009-2011Y
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Banks constitute the fundamentals of an economy, so there are several economic and physical
factors which really disturb the bank¶s profitability and growth at times due to certain changes in
the economy. The major portion of a bank's profit comes from the fees that it charges for its
services and the interest that it earns on its assets. It is frequently seen that the profitability of
bank are restricted during periods of rising interest rates and this concern primarily for the
soundness of smaller banks, which commonly hold a large proportion of their portfolios in
longer term fixed-rate loans and so face considerable interest rate risk.

Net interest income of a bank depends partly on the interest rate spread, which is the average
interest rate earned on it assets minus the average interest rate paid on its liabilities.

What is the likely impact of rising interest rates on bank loans and deposits? Historically, rising
interest rates have been associated with slower growth of bank loans and deposits. Furthermore,
the impact of rising interest rates on bank loans has depended on bank size, with small banks
typically suffering greater declines in loan growth during periods of rising interest rates than
large banks.

Changes in interest rates affect a bank's earnings by changing its net interest income and the
level of other interest sensitive income and operating expenses. Changes in interest rates also
affect the underlying value of the bank's assets, liabilities, and off-balance-sheet instruments.
Each year, the financial products offered and purchased by banks become more various and
complex and many of these products pose risk to the bank.


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Banks are highly affected to the interest rate changes. So I would like to do my project to make a
detailed analysis of the causes and effects of interest rate fluctuations.

The objectives of my dissertation will be:

Y To understand the determinants of interest rate fluctuations.

Y To study the effects of interest rate changes in banks.

Y To study the effect of rising interest rates on banks profitability.

Y To study the measures adopted by banks to overcome interest rate risk.

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I have studied number of research articles of such related area.
X

     


-by Hesna Genay, economist, and Darrin R. Halcomb, associate
economist
The authors show how the relationships between interest rate changes, deposit growth rates, and
loan growth rates have changed in the last ten years, discuss some possible reasons, and assess
the likely impact of rising interest rates on loans and deposits going forward.
Between Îanuary 2001 and Îune 2004, the federal funds rate declined steadily to reach a
historically low 1%. Between Îune and October, however, the Federal Reserve raised the target
fed funds rate in three increments to 1.75%.
What is the likely impact of rising interest rates on bank loans and deposits? Historically, rising
interest rates have been associated with slower growth of bank loans and deposits. Furthermore,
the impact of rising interest rates on bank loans has depended on bank size, with small banks
typically suffering greater declines in loan growth during periods of rising interest rates than
large banks.

     o
Y y Tom Valentine, University of Western Sydney, Nepean

This paper argues that the direct control approach to regulating bank interest rates risk is not the
most effective one. A bank¶s interest rate exposure cannot be summarized in a single measure.
There are a number of such measures depending on the target adopted and it is not possible to
determine all of them simultaneously. Moreover changes in interest rates have a range of
complex effects on banks and these effects cannot be incorporated in any single numerical
measure of interest rate exposures.

X    

  
Y y YDiana Hancock

This paper examines the effect on bank profits and rate of return on capital of changes in interest
rates and other policies of monetary and regulatory policy. A monetary policy that focuses on
growth or level of quantities of money can imply fluctuation s in interest rate. The issue is
whether banks benefit from high interest rates imposed by restrictions on monetary quantities.

c c

A research design is the arrangement of conditions for collection and analysis of data. The
research design is the conceptual structure within which research is conducted; it constitutes the
blueprint for the collection, measurement and analysis of data. The design includes an outline of
what the researcher will do, from writing the hypothesis and its operational implications to the
final analysis of data.


The project being subjective in nature the possibility of collecting primary data from respective
banks is impossible as such information is not disclosed by them. Therefore reliability is given
on secondary data available through bank¶s disclosures and Reserve Bank of India¶s disclosure
as well as previous research carried on by analysts, journals, newspaper articles etc.

Secondary data is an important method to know the present scenario of the Indian Banking
industry being affected due to volatility of the interest rates.
Newspapers Articles, Books, Magazines etc. have been used to collect the relevant data required
for preparation of the project.






  
!! INTRODUCTION
!" OBÎECTIVE OF THE STUDY 
!# LITERATURE REVIEW
!$ RESEARCH DESIGN


  
"! BACKGROUND OF INDIAN BANKING INDUSTRY 
"" CAUSES OF INTEREST RATE FLUCTUATIONS 


  
#! RESEARCH METHODOLOGY
#" TYPE OF RESEARCH
## OBÎECTIVE OF THE STUDY
#% DATA SOURCES & COLLECTION 
#& DATA ANALYSIS & INTERPRETATION 


  '
$! OBSERVATIONS

$" CONCLUSIONS


( REFERENCES 
(( GLOSSARY 
((( APPENDIX 

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Î)*+, (*

1.Y Basel Committee on Banking Supervision (2001), Principles for the management and
supervision of interest rate risk, Bank for International Settlements.

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1.Y http://web.ebscohost.com

2.Y RBI website

3.Y www.google.com