Module: | MODULE B: RISK MANAGEMENT
Q382: Scenario: XYZ Bank's Credit Risk Management Department has mandated a minimum internal rating of 'BBB' for extending long-term project finance. A major infrastructure company with an internal rating of 'BB' approaches the bank for a ₹ 500 Crore term loan. Based on the hurdle rate mechanism, consider the following statements regarding the correct regulatory actions:
1. The proposal should be declined at the screening stage as it breaches the bank's established minimum hurdle rate.
2. The bank can sanction the loan if the business unit aggressively prices the risk, bypassing the Credit Risk Management Department.
3. The hurdle rate establishes a strict pre-sanction threshold to prevent the onboarding of sub-investment grade intrinsic risk.
Which of the statements given above is/are correct?
2. The bank can sanction the loan if the business unit aggressively prices the risk, bypassing the Credit Risk Management Department.
3. The hurdle rate establishes a strict pre-sanction threshold to prevent the onboarding of sub-investment grade intrinsic risk.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: A hurdle rate acts as an absolute floor for credit acceptance.
If a borrower ('BB') falls below the mandated hurdle rate ('BBB'), the proposal is intrinsically high-risk and must be rejected at the initial screening stage before further appraisal.
Statement 3 is correct: The primary function of a hurdle rate is to serve as a strict pre-sanction threshold, filtering out excessive intrinsic borrower risk and preventing sub-investment grade loans from polluting the portfolio.
Statement 2 is incorrect: Business units and origination teams are strictly prohibited from bypassing the Credit Risk Management Department.
Aggressive pricing does not cure underlying default risk, and overriding a hurdle rate without a sanctioned Board exception violates core RBI and Basel risk governance frameworks.
If a borrower ('BB') falls below the mandated hurdle rate ('BBB'), the proposal is intrinsically high-risk and must be rejected at the initial screening stage before further appraisal.
Statement 3 is correct: The primary function of a hurdle rate is to serve as a strict pre-sanction threshold, filtering out excessive intrinsic borrower risk and preventing sub-investment grade loans from polluting the portfolio.
Statement 2 is incorrect: Business units and origination teams are strictly prohibited from bypassing the Credit Risk Management Department.
Aggressive pricing does not cure underlying default risk, and overriding a hurdle rate without a sanctioned Board exception violates core RBI and Basel risk governance frameworks.