CMA Final · Risk Management in Banking and Insurance · Credit Risk Management
A bank uses the foundation internal ratings-based style approach for a borrower. Facility EAD is Rs 200 crore, collateral recoverable value after haircut is Rs 60 crore, and PD is 2%. Loss given default is measured as the uncovered share of the exposure, with no recovery on the uncovered part and no cost of recovery. What is the expected loss?
Expected loss is Rs 2.80 crore. Collateral of Rs 60 crore leaves Rs 140 crore uncovered, so LGD is 70%. Multiplying PD of 2%, LGD of 70% and EAD of Rs 200 crore gives the result. Ignoring collateral would overstate the loss at Rs 4 crore.
- ARs 2.80 croreCorrect
- BRs 4.00 crore
- CRs 1.20 crore
- DRs 0.80 crore
Explanation
Uncovered amount = 200 − 60 = Rs 140 crore, so LGD = 140/200 = 70%. EL = 0.02 × 0.70 × 200 = Rs 2.80 crore. Rs 4.00 crore ignores collateral (LGD 100%). Rs 1.20 crore uses the collateral share 30% as LGD. Rs 0.80 crore uses 20% as LGD, an unsupported figure.
Did you get it right without looking?
One question tells you little. A timed set on Credit Risk Management shows your real accuracy, how long you take and where you lose marks.
More Credit Risk Management questions
- Under the Basel framework, the 'loss given default' (LGD) of a credit exposure is best described as:
- A bank has a term loan with EAD of Rs 80 lakh, one-year PD of 3% and LGD of 40%. What is the expected loss on this loan?
- A bank's loan portfolio has an exposure of ₹200 crore to a borrower with PD of 3%, LGD of 45%, and a guarantee covering 30% of the exposure …
- Which feature distinguishes the Internal Ratings-Based (IRB) approach from the standardised approach to credit risk under Basel norms?
- Under the Basel framework, which of the following is the correct formula for Expected Loss (EL) on a credit exposure?
- Which of the following is a recognised credit risk mitigation technique that reduces a bank's capital charge under Basel norms?