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Return on equity of a personal loan book in India
The prompt
A private bank in India plans a new personal loan book of INR 1,000 crore. The loan rate is 14 percent a year and the bank's funding cost is 7 percent. Operating costs are 2 percent of the loan balance each year, and expected credit losses are 3 percent a year. Tax is 25 percent. The bank must hold equity equal to 12 percent of the loans. What return on equity does the book earn, and is it worth doing if the cost of equity is 14 percent?
Your interviewer will share data as you ask for it. Ask clarifying questions, state a hypothesis, then lay out your structure out loud before you calculate.
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