CMA Final · Risk Management in Banking and Insurance · Credit Risk Management
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 that is fully effective and carries zero loss. Treating the guarantee as reducing the loss-bearing exposure (the guaranteed part has no loss), the expected loss on the facility is:
With a fully effective guarantee on 30%, only ₹140 crore bears loss. Expected loss is 3% × 45% × ₹140 crore, which equals ₹1.89 crore. Using the whole ₹200 crore would overstate it at ₹2.70 crore, ignoring the guarantee.
- A₹2.70 crore
- B₹1.89 croreCorrect
- C₹0.81 crore
- D₹4.05 crore
Explanation
Unguaranteed exposure = 200 × 70% = ₹140 crore. EL = 0.03 × 0.45 × 140 = ₹1.89 crore. Using the full ₹200 crore gives ₹2.70 crore, which ignores the guarantee; ₹0.81 crore is the loss on only the guaranteed part.
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
- In the context of credit risk, 'loss given default' (LGD) is best described as:
- A bank has a loan exposure of Rs 50 crore to a borrower. The estimated probability of default (PD) is 2%, loss given default (LGD) is 40%, a…
- A bank uses the foundation internal ratings-based style approach for a borrower. Facility EAD is Rs 200 crore, collateral recoverable value …
- A bank holds a corporate exposure of ₹50 crore that carries a risk weight of 150% under the standardised approach. If the bank must maintain…
- A bank's loan portfolio has three borrowers with exposures of ₹100 crore each. Each has a one-year PD of 4%, LGD of 50%, and defaults are as…
- A bank has an exposure at default of ₹40 crore to a manufacturing firm. The one-year probability of default is 2.5% and the loss given defau…