Explain the concept of Interest Rate GAP.

Explain the concept of Interest Rate GAP. 

Ans. RSA means “Rate sensitive assets” and RSL means ‘rate sensitive liabilities.’ The difference between RSA and RSL is called GAP. If RSA > RSL, GAP will be positive; If RSL > RSA then GAP will be negative. A negative gap is not necessarily a bad thing, because if interest rates decline, the bank's liabilities would get repriced at lower interest rates and income would increase. However, if interest rates increase, liabilities would get repriced at higher rates and income would decrease.