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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

Kaveri Textiles Ltd. has an annual turnover of Rs 120 crore. Its bank fixes a bank guarantee limit using a norm of 10% of turnover, and the borrower has existing guarantees outstanding of Rs 4 crore. The bank treats non-fund exposure as converted to credit exposure at 50% for the purpose of a total exposure ceiling of Rs 10 crore on the borrower. What further guarantee can be issued without breaching the ceiling?

Further guarantee permissible is Rs 8 crore. The turnover norm caps total guarantees at Rs 12 crore, leaving Rs 8 crore after existing Rs 4 crore. The exposure ceiling would allow Rs 16 crore more at 50% conversion, so the turnover norm is the binding constraint.

  1. ARs 2 crore
  2. BRs 12 crore
  3. CRs 8 croreCorrect
  4. DRs 4 crore

Explanation

Ceiling on guarantee counted at 50% conversion: existing 4 crore counts as 2 crore. Remaining ceiling = 10 - 2 = 8 crore of converted exposure, which allows 8 / 0.5 = 16 crore of guarantees by that logic, but the 10%-of-turnover norm caps total guarantees at Rs 12 crore, so further guarantees permitted are 12 - 4 = Rs 8 crore. Both limits give at least 8, and the binding one is the turnover norm.

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