Module: | MODULE B: RISK MANAGEMENT
Q384: A bank sanctions an unsecured personal loan of ₹ 10,00,000 to a retail customer. Previously, the standard risk weight for this category was 100%. Following the recent dynamic adjustments by RBI to curb excessive growth in specific retail segments, what will be the exact Risk Weighted Asset (RWA) value for this loan?
Calculate the Risk Weighted Asset (RWA) value.
✅ Correct Answer: B
The correct answer is B. To curb the runaway growth and systemic accumulation of risk in the unsecured retail lending space, the RBI dynamically increased the risk weights on unsecured consumer credit (excluding housing, education, and vehicle loans).
Step 1: Identify the revised Risk Weight.
The standard risk weight was increased by 25 percentage points, shifting from 100% to 125%.
Step 2: Calculate the Risk Weighted Asset (RWA). The formula is: Loan Amount × Risk Weight.
RWA = ₹ 10,00,000 × 125% = ₹ 12,50,000.
This means for a ₹ 10 Lakh loan, the bank must calculate its capital adequacy requirements based on an inflated asset value of ₹ 12.50 Lakhs, thereby increasing the cost of capital and disincentivizing excessive unsecured lending.
Option A assumes the obsolete 100% rate.
Options C and D use arbitrary multipliers.
Step 1: Identify the revised Risk Weight.
The standard risk weight was increased by 25 percentage points, shifting from 100% to 125%.
Step 2: Calculate the Risk Weighted Asset (RWA). The formula is: Loan Amount × Risk Weight.
RWA = ₹ 10,00,000 × 125% = ₹ 12,50,000.
This means for a ₹ 10 Lakh loan, the bank must calculate its capital adequacy requirements based on an inflated asset value of ₹ 12.50 Lakhs, thereby increasing the cost of capital and disincentivizing excessive unsecured lending.
Option A assumes the obsolete 100% rate.
Options C and D use arbitrary multipliers.