Relationship between interest rate changes and net interest income : a case of National Bank of Pakistan

Abstract

This Research attempts to study the impact of Interest Rate Changes on Net Interest Income of Pakistani Banks and has therefore considered the case of National Bank of Pakistan (NBP) which is Pakistan’s largest Commercial Bank in terms of Asset size. The problem statement for this Research is that whether an increase or decrease in Interest Rate necessarily leads to Increase or decrease in Banking Profit. To understand this concept it will find out the relationship amongst Interest Rate and some important factors which impact Net Interest Income like Non- Performing Loans, Deposits, Borrowings, Assets, and Advances etc. Considering National Bank of Pakistan, the Research shows that it is very hard to say that whether an increase in Interest Rate will lead to increase in specific Asset of the Bank e.g. Investment because it is highly dependent on the Bank’s Policy. As for National Bank of Pakistan we saw that the Interest Rates were increasing but at the same time Investments decreased when most people would have assumed that they would increase. This happened only because the Bank wanted to gain on Advances and it did that at the cost of Investment. With Reference to Advances, an increase in Advances provides no guarantee that Net Interest Income will increase like we saw in the case of National Bank where Advances were increasing but the Bank’s Net Interest Income was decreasing only because the amount of Non-Performing Loans was rising. So because of this ambiguity this topic was taken up for Research to see the general impact of Interest Rate changes on Banking