Posted in Finance, Accounting and Economics Terms, Total Reads: 53
Definition: Negative Gap
Negative Gap is the scenario when the interest incurred by the bank on liabilities exceeds the interest earned by bank on its assets For Example- If A bank has liabilities on which interest to be paid (Recurring Deposits, FDs) is ₹100 Cr and the bank has assets on which interest earned is ₹50 Cr then this is a situation of Negative Gap.
Positive Gap is the opposite of Negative Gap and is the scenario when the interest earned by the bank on assets exceeds the interest incurred by bank on its liabilities
In the case of Negative Gap and if market interest rate is high then this is a very bad situation for bank as bank has to pay high interest on the liabilities. On the other side, if market interest is low then bank can recover from Negative Gap situation as bank will earn more interest on its assets.