Title: Transforming Multidisciplinary Research Through Artificial Intelligence
Chief Editors: Dr. Nagasudha R and Dr. Geetha V
Associate Editors: Dr. Aarti Sharma and Ms. P. Nithyashankari
Co-Editors: Dr. Madhumathi Reddim and Dr. Shishira Srinivasa
ISBN: 978-93-7183-019-5
Chapter: 14
DOI: https://doi.org/10.59646/804/14
Author: Dr. Santosh Laxman Adamane
Abstract
Interest rates have a large impact on the profitability, lending and financial well-being of the banking industries. The purpose of this research paper is to investigate the effect of interest rate policies on banking profitability and specifically how changes in the policy rate affect the banks’ net interest margin, lending, banks’ deposit costs, and overall financial performance. The research is of a mixed-method design, which involves both quantitative like bank profitability and interest rates and qualitative like bank professional views data. The findings suggest that the impact of interest rate changes on a bank’s profitability may vary significantly across banks, with these variations depending on the asset and liability mix of the banks, how they lend and in what markets, and the market environment. If the interest rate hike does not offset the rise of banks’ funding costs, then higher interest rates can boost bank interest income and enhance profit, but if the interest rate hikes are rapid, banks’ deposit expenses may rise, credit risks may increase and demand for loans may also decline. On the other hand, reduced interest rates can boost borrowing and economic activity, but can also put pressure on banks’ net interest margin and interest income. Furthermore, smaller banks, less liquid banks, banks with different loan portfolios, and banks of varying powers in setting interest rates are subject to different impacts of interest rate policies. Despite these hurdles, sound policies in interest rates can help to foster financial stability, promote responsible lending practices, and establish a more stable environment for banking activities. The paper presents the strategies for managing their interest rate fluctuations such as asset liability management, risk management and income diversification. This study proves that the interest rate policy plays an important role in the profitability as well as stability of financial institutions. The analysis applies to policy makers, banking institutions, investors as well as financial regulators to have an understanding about the implications of varying interest rate environments. The research results can be used to add to literature on how banks could adjust to the shifting interest rates while retaining profitability and stability.
Keywords: Interest rate policies, Banking profitability, Monetary policy, Net interest margin, Interest rate risk, Bank performance, Lending rates, Deposit rates, Financial stability, Commercial banks