RAROC Calculator
Build a lending rate from its components — cost of funds, expected loss, capital charge, operating cost — and test whether it clears your hurdle. Companion to Building the Rate: Risk-Based Pricing and RAROC in MSME Lending.
Inputs
Start from a preset, then adjust.
Earns 42.8 pts above the 15% hurdle.
Where the rate goes
Every component as a percentage of exposure.
| Component | % of exposure | Annual ₹ |
|---|
How this is calculated
Expected loss is PD × LGD × EAD, where exposure at default applies the credit conversion factor to the sanctioned limit. For a revolving line, a CCF near 100% is prudent — distressed borrowers draw down what is available to them.
Capital charge is Exposure × Risk weight × CRAR × Cost of equity. Indian banks hold a minimum CRAR of 9%; regulatory retail exposures including MSMEs carry a 75% risk weight under the standardised approach. Move the risk-weight slider to see why a regulatory change in risk weights is, directly, a change in price.
RAROC is (Revenue − Operating cost − Expected loss − Cost of funds) ÷ Capital allocated, tested against the hurdle rate. Below the hurdle the deal should be repriced, restructured or declined — not absorbed silently.
Break-even rate is the lending rate at which risk-adjusted return exactly equals the capital charge at your hurdle. It is almost always lower than lenders assume, and almost always higher than the discount a relationship manager is about to offer.
Illustrative model for educational use. Simplifies tenor, amortisation, tax, funding transfer pricing, cross-sell economics and lifetime versus 12-month loss horizons. Not lending, investment or regulatory advice.