Risk Management – Numerical Problems
BY – RAJENDRA MOHANTY
TARGET GROUP –CAIIB
Certified training institute for IIBF flagship certification courses, such as DB&F, JAIIB, CAIIB, CCP, Forex etc.
• Find out the exposures of a borrower’s account having the various funded loans from the following table
for the purpose of capital calculation. Out of the undisbursed portion of the Term Loan, as per the
confirmed approval sanction of the bank, ₹60 lakh to be disbursed within 1 year from the date of
outstanding available and the rest will be disbursed after 1 year period.
Facility Limit Sanctioned Balance Outstanding in Lakh
Cash Credit 200 100
Bills Purchased 60 30
Packing Credit 40 30
Term Loan 200 40
Q i. What is the total outstanding balance to be considered for capital calculation?
Q ii. What would be the eligible unavailed portion of amount to be considered for capital calculation for the
exposures other than Term Loan?
Q iii. What would be the total eligible adjusted exposures to be considered for calculation of capital for the
exposures other than Term Loan
Q iv. What would be the eligible undisbursed portion of Term Loan to be considered for capital calculation?
Q v. What is the total eligible exposure on the unavailed and undisbursed portions to be taken for calculation
of capital for all the exposures given?
Q vi. What will be total adjusted exposure to be considered for capital calculation?
Q. Your Bank has an investment in Govt. Bonds worth Rs.5 crore. The
maturity period is 5 years. Face value being ₹100 with coupon rate of
8% p.a. The bond has a market yield of 10%, and the price is now
₹92.00. Due to change in interest rate, the market yield changes to
9.90% and the market price to ₹92.50.
Q1. Based on the above information, calculate the BPV of the bond.
Q2. Also calculate what will be the change in the value of investment,
for the total investment of ₹5 crore, for per basis point change in the
yield.
Q3. If there is a 0.10% change in the yield, what would be the change
in the value of the bond on the investment of ₹5 crore?
Q i. If the daily volatility of a security is 2%, How much would be its monthly & yearly
volatility? (Assume month has 24 working days and a year has 250 working days)
Q ii. If per annum volatility of a security given is 40%, and the number of trading days
per year is 250, then find out the daily volatility of the securities.
Q iii. IBS Bank has invested ₹5 crore in shares of M/s IIBF Ltd. The daily volatility given
is 1.50%. At 95% confidence level find out (i) Daily VaR amount, (ii) Weekly VaR
amount and (iii) VaR amount for 64 days. (If the Z value of 95% confidence level as per
normal distribution table is 1.90 – which is the probability).
Q iv. The shares of IBS Pvt. Ltd. have shown 1.25% daily volatility, during the previous
45 days of trading for an investment amount of ₹5 Lakh, Calculate the VaR for 1 month
(assuming there are 25 trading days in a month) with 98% confidence level. Z value of
98% confidence level is 2.06.
Your Bank holds ₹450 Crores shares of IBS Ltd. Co., whose market price
standard deviation is 2% per day. Assuming there are 252 trading days a
year, determine the maximum loss level over the period of 1 trading day
and 49 trading days with 99% confidence level (Z score being 2.33).
The Annual volatility for an investment is given as ₹24 Crore, with a
confidence level of 95% (Z – score 1.65). Calculate the VaR for 1 year as
well as that of 6 years.
Q. If a Bank’s LCR is maintained at 110% level, where the net cash outflow for the
next 30 days is ₹550 crore, then find out the total HQLA amount maintained by
the Bank?
Q. If the AFS (Available Stable Fund) of a Bank is ₹375 crore and the Required
Stable Funding is ₹325 crore, then find out the NSFR of the Bank.
Q. A Bank’s Tier 1 capital is ₹11500. The bank’s Leverage Ratio is 4.5%. Calculate
the total exposure or earning assets of the bank.
Q . From the following information, find out what is the RAROC %?
i. Lending Exposure ₹10 Lakh
ii. Risk Weight & EAD of the exposure 100%
iii. ROI on the exposure 10% p.a.
iv. Capital Adequacy Ratio on the exposure 11.5%
v. Return on Capital (ROC) 5%
vi. Lending is funded by a deposit of same amount
vii. Cost of fund 7% p.a.
viii. Operating Expenses for this ₹5000
ix. Expected Loss 1.5%
• Calculate RAROC from the following information:
Particulars Amount
Exposure ₹25 lakh
Revenue ₹2.30 Lakh
Economic Capital ₹1.83 Lakh
Cost of Capital & Exposure ₹1.70 Lakh
EAD 10%
PD 25%
LGD 55%
Q. From the available data given by BCA Bank Ltd., answer the following questions. Exposures are
in Crores. Total Exposure given for consideration is ₹26120 Crores. The Gross NPA at the beginning
of the year in consideration was ₹1698 Crores and NPA adjusted during the year was ₹832 Crores.
Asset Category Exposure Amt. Probability of Exposure at Loss Given
Default (PD) Default (EAD) Default (LGD)
Corporate AAA 6545 0% 75% 50%
Corporate A 4740 0.5% 70% 50%
Retail Housing 7855 1% 80% 60%
Retail Vehicle 1670 2.5% 90% 60%
Retail Personal 4560 3% 100% 70%
Credit Card 750 5% 110% 70%
Q i. What is the expected incremental NPA of the Bank for the year in question?
Q ii. What is the level of NPA at the end of the year?
Q iii. Find out the Gross NPA% of the bank at the end of the year in question?
Q iv. What is the portfolio default rate of the Bank?
Q v. Find out the Expected Loss?
Q . M/s XYZ Co. has availed a Project Term Loan from Bank to the tune
of ₹500 Lakh for a period of 5 years payable in EMI. The TL is secured
by collateral worth ₹200 Lakh. If the probability of default (PD) as
projected by the Bank for the TL is 90%, find the Expected Loss of this
exposure.
Q. Your Bank has sanctioned an Export Packing Credit of Rs.1,00,000 to My
Company Ltd., which is not yet rated by any external credit rating agency. However,
your bank has taken ECGC cover to the extent of 75% of this loan sanctioned. If the
risk weight for exposure to ECGC is 20%, then calculate the minimum capital to be
provided for this exposure when CAR is 9%. (Assume the RW for the unrated
exposure is 100%).
Q. An exposure of ₹1050 crore is backed by financial collateral of A+ Debt Security
instruments of 600 crore issued by others. The tenor of the exposure is 3 years while
the residual maturity of the financial collateral is 2 years. There is no currency
mismatch. The haircut applicable to Debt Security is 7.5%. Calculate the Net Exposure
qualifying for the capital.
Q . Credit Portfolio of Dragon & Fly Bank
Out of Total Credit Fund Based Exposure of Rs.10250 Crore, (i) AAA Rated Corporate Lending – 4600 Crore, (ii) A Rated
Corporate Lending – 3400 Crore, Unrated Corporate Loans beyond 1 year period of rating – 1500 Crore, Retail Exposure
(General) – 750 Crore, Eligible Financial Collateral available for funded exposures (a) AAA Rated Corporate Loan – 350 Crore
(b) A rated Corporate – 250 Crore (All EFC have 0% haircut and there is no mismatch in either currency or tenure), Financial
Bank Guarantee to Corporate - AAA rated – 1350 Crore, Documentary LC to A rated Corporate – 900 Crore, Bid Bonds to A
rated Corporate – 150 Crore. Arrive at the Capital Charge for Total Credit Risk with the minimum capital requirement as
prescribed
Rating under BaselRWIII by NFB
RBI. Exposure CCF
AAA 20% Fin. Guarantee 100%
A 50% Perf. Guarantee 50%
B 100% Bid Bonds 50%
BBB & Below 150% Std By LC 100
Unrated 100% Doc LC 20%
Unrated beyond 1 150% Clean LC 100%
year or above 50 cr
Q. Problem regarding Capital Conservation and Profit distribution:
Q i. How much the Corporation Bank can distribute as dividend out of their net profit, to ensure
compliance of Basel III norms?
Q ii. What is the maximum amount which Syndicate Bank distribute as dividend to ensure
compliance under Basel III?
Bank CET1 Net Profit after tax &
provision in Crores
Corporation Bank 5.75% 800
Syndicate Bank 6.50% 1200
RBI guidelines regarding CCB – Capital Conservation Ratio & Profit
distribution
CETI Ratio after including the current Minimum Capital Conservation
period’s retained Earnings (Expressed as % of Earnings)
5.5% - 6.125% 100%
> 6.125% - 6.75% 80%
> 6.75% - 7.375% 60%
> 7.375% - 8.00% 40%
> 8.00% 0%
The following table gives information about the number of loan accounts with different credit ratings as on the observation
period of 31.03.2019 & 31.03.2020 of IBS Bank Ltd. Answer the questions based on the available data. (The rows give you
the record of number of loan accounts migrated from 31.03.2019 to 31.03.2020 – for example total number of accounts
under AAA was 100 in 31.03.2019, which have migrated into different ratings in March 2020).
Rating Mar 19 March 2020
AAA AA+ AA A+ A BBB C Default
AAA 100 70 16 4 4 2 2 2 0
AA+ 100 10 60 14 10 0 2 2 2
AA - - - - - - - - -
A+ - - - - - - - - -
A 200 - - - 20 160 12 4 4
BBB 400 - - - 20 - 240 60 80
C 60 - - - - - 10 40 10
Default - - - - - - - - -
Q i. What is the % of AAA rated borrowers that remained at the same rating level during the observation period?
Q ii. What is the number of AAA rated accounts as at the end of the observation period?
Q iii. What is the % of migration of borrowers from rating A and BBB to Default category?
Q iv. What is the % of migration of borrowers from rating A and BBB to Default category?
Q v. What is the total number of borrowers in the default category at the beginning and at the end of the observation
period?
The following table gives information about the number of loan accounts with different credit ratings as on the observation
period of 31.03.2019 & 31.03.2020 of IBS Bank Ltd. Answer the questions based on the available data. (The rows give you
the record of number of loan accounts migrated from 31.03.2019 to 31.03.2020 – for example total number of accounts
under AAA was 100 in 31.03.2019, which have migrated into different ratings in March 2020).
Rating Mar 19 March 2020
AAA AA+ AA A+ A BBB C Default
AAA 100 70 16 4 4 2 2 2 0
AA+ 100 10 60 14 10 0 2 2 2
AA - - - - - - - - -
A+ - - - - - - - - -
A 200 - - - 20 160 12 4 4
BBB 400 - - - 20 - 240 60 80
C 60 - - - - - 10 40 10
Default - - - - - - - - -
Q vi. Calculate the % for migration of AA+ loan accounts to AA ratings.
Q vii. What is the % of BBB category loan accounts, that did not change their rating during the observation period?
Q viii. What is the % of A category loan accounts that were upgraded to A+ category during the observation period?
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