Interest-Rate Risk in the Indian Banking System

The banking sector was an important area of focus in economic reforms of the 1990s. The first phase of banking reforms were focused on credit risk: dealing with the issues of recognition of bad assets, appropriate provisioning for them, and requiring adequate equity capital in banks. In recent years, interest rates dropped sharply. Banks have profited handsomely from the increased prices of bonds and loans. However, this has raised concerns about what could happen in the banking system in the event of an increase in interest rates.