IMPORTANT CASE STUDIES ON EXPOSURE ON A BORROWER – PART-2ND | PRACTISE CAIIB CASE STUDIES FOR CAIIB BFM PAPERS

Important Case Studies on exposure on a borrower | BFM Exams 2024 | Preparation material for exposure calculation for CAIIB 2024

This article is the 2nd installment of CAIIB case studies for CAIIB BFM PAPERS written for the CAIIB candidates. who want to sharpen their skills & want to clear the November CAIIB BFM Exams 2024. We hereby are providing the Case studies on the calculation of exposure on a borrower – one of the most important BFM topics & scoring too from the applicable syllabus of BFM Exams 2024. You can also read the CAIIB exam & registration dates of BFM November Attempt 2024 by visit our page.

Well before you go ahead for with the case studies, we would like to take your attention on our CAIIB Study Material 2024 prepared for candidates to help them pass CAIIB 2024. The material follows the latest prescribed syllabus of IIBF CAIIB papers. Here are the highlights of our CAIIB BFM Study Material 2024 full course:

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BFM CASE STUDIES FOR CAIIB EXAM 2024

BFM CASE STUDY 3 ON EXPOSURE ON A BORROWER:

Naag Bank has – credit exposure = Rs. 80 crore. It is secured by financial collateral security – A+ rated bonds = Rs. 40 crore (issued by a Public Sector Undertaking of Indian Govt. The period of this credit exposure = 4 years and the residual maturity of the financial collateral = 3 years. The financial collateral is an eligible credit risk mitigant. And there is no currency mismatch. 

(As per guidelines of RBI, the haircut applicable to this collateral = 6% while the haircut applicable on account of currency mismatch = 0% provided there is no currency mismatch and the haircut applicable on account of currency mismatch 0.08%, if there is currency mismatch.

You are to calculate the following values based on the above information:

Q-01: What will be the haircut adjusted collateral value?

1. Rs. 40.00 crore 
2. Rs. 37.60 crore 
3. Rs. 27.57 crore 
4. Rs. 12.43 crore

Q-02: Calculate the value of haircut adjusted collateral when adjusted for maturity mismatch.

1. Rs. 40.00 crore 
2. Rs. 37.60 crore 
3. Rs. 27.57 crore 
4. Rs. 12.43 crore

Q-03: What will be the value of exposure at Risk?

1. Rs. 40.00 crore 
2. Rs. 37.60 crore 
3. Rs. 27.57 crore 
4. Rs. 12.43 crore

Answers of BFM Case study 3:

01-I 

02-III 

03-IV

Explanation of Answers of BFM Case study 3:

1. In the given case, the residual maturity of collateral < the residual maturity of the loan, therefore, there is maturity mismatch. But as stated, there is no currency mismatch in the case. To find calculate the net exposure qualifying for capital adequacy purpose, at the 1st stage, we will calculate the hair cut of the collateral and then we will calculate the value of hair-cut adjusted collateral after taking into account any adjustment on account of maturity mismatch.

The calculations are below:

Step – 1: 

Haircut adjusted collateral value / C = C x (1 – H, C = 40 x (1 – 6% – 0%) = 40 x 94% = Rs. 37.60 Crore.

Whereas,

C = original value of collateral. 

I-lc = haircut appropriate to the collateral-security (according to the RBI guidelines = 6%) and 

Hu = the haircut for currency mismatch = 0% if exposure and collateral are in the same currency and 

Hu = 0.08% if the exposure and collateral are in the different currency).

Step – 2:

Value of haircut adjusted collateral after adjustment of maturity mismatch:

P = C x (t – 0.25) / (T – 0.25) = 37.60 x (3-0.25) / (4-0.25) = 37.60 x 2.75 / 3.75 = Rs. 27.57 crore

Whereas,

P = value of credit risk mitigant adjusted for maturity mismatch;

t = minimum of T & residual maturity of credit protection expressed in years;

T = minimum – 5 years and residual maturity of the exposure expressed in years. 

The value of exposure at risk i.e E = Max {0, (current value of the exposure – value of the adjusted collateral for any hair cut and maturity mismatch)} = Max {0, (40 – 27.57)} = Rs. 12.43 crore

2. Same as above

3. Same as above

BFM CASE STUDY ON EXPOSURE ON A BORROWER 4:

‘Outlandish Bank’ has an exposure = Rs. 100 crore with residual maturity 3 years. It is collaterally secured by RBI relief Bonds = Rs. 20 crore with a residual maturity mismatch. 

The applicable haircut according to RBI guidelines for relief bonds = 7% and for Pa rated bonds = 4%. 

Q-01: What will be the adjusted collateral value of this security if it’s for the purpose of risk mitigation?

1. Rs. 100.00 crore 
2. Rs. 50.00 crore
3. Rs. 49.20 crore 
4. Rs. 50.80 crore

Q-02: ‘Outlandish Bank’ has an exposure = Rs. 100 crore with residual maturity 3 years. It is collaterally secured by RBI relief Bonds = Rs. 20 crore with a residual maturity of 3 years;

AA rated bonds = Rs. 30 cr. 

There is no maturity mismatch. 

The applicable haircut according to RBI guidelines for relief bonds = 2%; The applicable haircut for AA rated bonds = 4%. 

You are to calculate the value of exposure at risk for the purpose of risk mitigation.

1. Rs. 100.00 crore 
2. Rs. 50.00 crore
3. Rs. 49.20 crore 
4. Rs. 50.80 crore

Answers of BFM Case study 4:

1-III 

2-IV

Explanations of Answers of BFM Case study 4:

1. The weightage of: 

the collateral for relief bonds = 20% and 

the collateral for AA rated bonds = 30%

The HC = (20% x 2%) + (30% x 4%) = (0.4 + 1.2) = 1.6% 

The value of hair cut adjusted collateral C = C x (1 – 1 – 1, – C = 50 x (1- 1.6% – 0%) = 50 x 98.40% = Rs. 49.20 Crore.

2. The weightage of: 

the collateral for relief bonds = 20% and 

the collateral for AA rated bonds = 30%

The HC = (20% x 2%) + (30% x 4%) = (0.4 + 1.2) = 1.6% 

The value of hair cut adjusted collateral C = C x (1 – 1 – 1, – C = 50 x (1- 1.6% – 0%) = 50 x 98.40% = Rs. 49.20 Crore

The value of exposure at risk i.e. E = 

= {0, (current value of the exposure — value of the adjusted collateral for any hair-cut & maturity mismatch)} 

= Max {0, (100 – 49.20)} = Rs. 50.80 crore

You can also find the BFM case studies Part-1 on the same topic (covers BFM Case Study 1 & 2) as well as other case studies by visiting our official site. We will soon be publishing the next set of case studies from the BFM syllabus soon. 

If you liked this series of case studies, do mention it in the comment box because your appreciation is what keeps us motivated & we are sure the case studies are highly helpful to get you put your knowledge of the course to actual test!

So, here we take our leave & we wish you all the best for your upcoming CAIIB Exams 2022!

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