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Raroc hurdle

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Bank of Limpopo has a RAROC hurdle rate of 17% on all lending deals. The amount lent to Khensani Enterprises is R30m. The risk weight is 100% with capital adequacy of 8.5%. Accordingly, the capital required for the R30m loan is 3m; hence the target RAROC (as per Bank of Limpopo's credit policy) would be R0.51m (R3m x 17%). However, due to policy issues encountered in real life, the net margin earned on the loan is R0.36m. Khensani Enterprises is willing to offer deposits as security up to 10% of the facility amount and this can be deployed at 2.25% net margin by Bank of Limpopo. Please explore whether this will result in meeting the RAROC hurdle.

Reference no: EM133353433

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