Question

ABC Bank Ltd has extended a Rs.10 crore loan at 5% over the repo rate. The loan is to be repaid in equal quarterly instalments. The bank’s funding of the loan is to be done by 5 years deposit, interest rate on it being 6.5%. Which of the following risk associated with this transaction can lead to variation in the bank’s net interest income in one year?

Q: Answer-ABC Bank Ltd has extended a Rs.10 crore loan at 5% over the repo rate. The loan is to be repaid in e...

Repricing risk is the risk of changes in interest rate charged earned at the time a financial contracts rate is reset . Here the interest on the loan extended asset is variable while that on the deposits liability is fixed. Any change in the interest rate will impact the net interest income by repricing of the loan of the bank and changing the net spread between interest earned and interest paid.