CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
A bank sanctions Bharat Steels Ltd a non-fund based limit of Rs 5 crore for performance bank guarantees and fixes a margin of 10% to be held as cash margin. If the full limit is utilised, how much cash margin must the company place with the bank?
The cash margin is 10% of the Rs 5 crore guarantee limit, which equals Rs 50 lakh. The company must deposit this amount when the limit is fully used, leaving the bank with an unsecured contingent exposure of Rs 4.5 crore.
- ARs 5,00,000
- BRs 4,50,00,000
- CRs 50,00,000Correct
- DRs 55,00,000
Explanation
Margin = 10% x Rs 5,00,00,000 = Rs 50,00,000. Rs 5,00,000 results from applying 1% instead of 10%. Rs 4.5 crore is the unmargined exposure, not the margin. Rs 55 lakh wrongly grosses up the limit.
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