The present paper addresses the problem of interest rate risk in Indian commercial banks. GAP analysis model is used to measure the interest rate risk for the period 2008- 09 to 2010-11. The interest rate risk arises from timing differences in the repricing of banks’ assets and liabilities and off-balance sheet instruments. The GAP analysis helps to forecast the bank’s financial standing for different risk-taking strategies under various economic scenarios. The findings of the study reveal that rate-sensitive assets and ratesensitive liabilities are increasing for all the selected banks. The study concludes that HDFC Bank is the best bank on the basis of positive gap of residual maturity of its assets and liabilities. State Bank of India (SBI), Punjab National Bank (PNB) and ICICI Bank have negative balance in all these time buckets. On the basis of these results, the study finds that SBI, PNB and ICICI Bank are exposed to interest rate risk. On comparing the combined performance of all public and private sector banks, private sector banks are in a better position compared to the public sector banks. Public sector banks have to be careful about the rate-sensitive assets and liabilities to avoid interest rate risk.

Banking sector has played an important role in the development of Indian economy. Before the economic reforms of the 1990s, banks were under strict supervision and control. But during and after these reforms, Indian banks have undergone significant changes. The deregulation of interest rates, provisioning and capital adequacy, emergence of new private sector banks, and increasing use of technology have changed the whole scenario of Indian banks. In this liberalized era, Indian banks are facing continuous challenges. In this rapidly changing business environment, banks are compelled to encounter various types of risks like credit risk, liquidity risk, market risk and interest rate risk. Handling of such risks in an efficient and integrated manner is essential for maintaining sound financial health. Failure to manage these risks efficiently would affect the financial stability of a bank, which leads to the probability of insolvency. Such increasing importance of risk management paves the way for the present study. The present study is an attempt to analyze the interest rate risk of the Indian commercial banks.

Interest rate risk is the risk to earnings or capital arising from movement of interest rates. It is the potential for changes in rates to reduce a bank’s earning or value. The interest rate risk arises from timing differences in the repricing of banks’ assets and liabilities and off-balance sheet instruments. These repricing mismatches are fundamental to the business of banking and generally occur from either borrowing short-term to fund long-term assets or borrowing longterm to fund short-term assets. Another reason for interest rate risk is due to the imperfect correlation in the adjustment of interest rates earned and paid on different instruments. As defined by New Basel Accord (Basel II), “Interest rate risk of a bank is given by the maximum absolute decline of its economic value caused by an upward and downward 200 basis points parallel interest rate shocks in relation to its regulatory capital” (BIS, 2004a and 2004b).