RAROC Calculators

Banks and NBFCs have long transformed their credit pricing decisions to be able to allocate sufficient capital consistent with risks taken across their portfolios. The search for the most optimal capital charge computation and credit pricing decision has led to the evolution of Risk Adjusted Return on Capital (RAROC). The RAROC framework helps banks and NBFCs make better credit decisions when approving, structuring, and pricing deals. Risk-adjusted returns are arrived at after adjusting income for all expenses, expected losses, and return on economic capital.

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ICRA Analytics has a bouquet of advanced risk solutions in credit risk, operational risk and risk-based pricing

As a part of the credit risk management offering and solutions, we have developed an off-the-shelf RAROC calculator that can also be customised to the client’s portfolio and requirements. Moreover, we provide validation and review of our client’s existing RAROC frameworks, based on Reserve Bank of India (RBI) guidelines and seasoned industry expertise.

An illustrative RAROC calculator can be seen below:

RAROC Summary
1Total income from FB and NFB Facilities (in amount)82.76
2 Total other income (interest income, fee income, Capital Fund (10 Year G-Sec Rate) In amount) 0.90
3Income from Unutilized Limits (in amount)5.20
4Return from Capital (in amount)2.17
5Total Earning (in amount)91.03
6Operational Cost (in amount)24.63
7Cost of fund (in amount)56.25
8EL (in amount)0.18
9Total Expenses (in amount)81.06
10Risk Weighted Assets (RWA) (in amount)278.25
11Regulatory Capital Required (in amount)33.39
12RAROC (%)20.02%
13Hurdle Rate (%)9.50%

To understand more about the tool and the regulatory guidelines for risk-based pricing, read more...

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