Module: | MODULE B: RISK MANAGEMENT
Q379: A corporate client has an outstanding fund-based loan of ₹ 50 Crore and an un-availed non-fund-based Letter of Credit (LC) limit of ₹ 20 Crore. The regulatory Credit Conversion Factor (CCF) applicable for this specific Letter of Credit is 50%.
Calculate the total Exposure at Default (EAD) for this corporate client.
✅ Correct Answer: B
The correct answer is B. Exposure at Default (EAD) calculates the total value a bank is exposed to at the exact moment a borrower defaults.
It must account for both drawn (fund-based) and undrawn/off-balance sheet (non-fund-based) limits.
Step 1: Identify the fund-based exposure, which is directly added at 100% value.
Here, it is ₹ 50 Crore.
Step 2: Convert the non-fund-based off-balance sheet exposure using the Credit Conversion Factor (CCF). The un-availed LC is ₹ 20 Crore, and the CCF is 50%.
Converted Exposure = 20 Crore × 50% = ₹ 10 Crore.
Step 3: Sum the exposures to find total EAD.
EAD = 50 Crore + 10 Crore = ₹ 60 Crore.
Option B is the only mathematically sound calculation based on regulatory CCF application.
It must account for both drawn (fund-based) and undrawn/off-balance sheet (non-fund-based) limits.
Step 1: Identify the fund-based exposure, which is directly added at 100% value.
Here, it is ₹ 50 Crore.
Step 2: Convert the non-fund-based off-balance sheet exposure using the Credit Conversion Factor (CCF). The un-availed LC is ₹ 20 Crore, and the CCF is 50%.
Converted Exposure = 20 Crore × 50% = ₹ 10 Crore.
Step 3: Sum the exposures to find total EAD.
EAD = 50 Crore + 10 Crore = ₹ 60 Crore.
Option B is the only mathematically sound calculation based on regulatory CCF application.