Interviewer view · keep this screen to yourself
Return on equity of a personal loan book in India
You run the case. Read the prompt, answer questions from the notes below, and share data only when the candidate asks for it or gets stuck. Score at the end.
Case timer
00:00
1. Read the prompt aloud
Read it slowly, then pause. Let the candidate ask questions before they structure.
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?
2. Answers to clarifying questions
This case has no scripted clarifying answers. Answer from the prompt, and say "assume what you think is reasonable" if the prompt does not cover it.
3. A model structure
Compare the candidate's structure with this one. A different split can be just as good if it is clean and fits the problem.
- Return on equity of the loan book
- Net interest income = loans x (loan rate minus funding cost)
- Minus operating costs and expected credit losses
- Minus tax
- Divide by the equity the bank must hold
4. The working, step by step
Each step shows how a strong candidate works it out. Share a new fact from it only when the candidate asks or is stuck, and let them do the math: the result in the dark box is what they should reach.
Step 1: Net interest income
What a strong candidate does: The spread is 14 minus 7, which is 7 percent of INR 1,000 crore.
Net interest income (INR crore): 1,000 × (0.14 - 0.07) = 70
Step 2: Operating costs
What a strong candidate does: 2 percent of the loan balance.
Operating costs (INR crore): 1,000 × 0.02 = 20
Step 3: Credit losses
What a strong candidate does: 3 percent of the loan balance is expected to go bad each year.
Credit losses (INR crore): 1,000 × 0.03 = 30
Step 4: Profit after tax
What a strong candidate does: Profit before tax is 70 minus 20 minus 30, which is 20. Keep 75 percent after tax.
Profit after tax (INR crore): (70 - 20 - 30) × 0.75 = 15
Step 5: Equity needed
What a strong candidate does: 12 percent of the loans.
Equity (INR crore): 1,000 × 0.12 = 120
Step 6: Return on equity
What a strong candidate does: Profit after tax divided by equity.
ROE (percent): 15 ÷ 120 × 100 = 12.5
The recommendation to listen for
At the end, say: "The CEO walks in. What is your recommendation?"
The bank should not launch the book as designed, because it earns about 12.5 percent on equity, below the 14 percent cost of equity. First, after INR 70 crore of net interest income, credit losses of INR 30 crore are the biggest cost. Second, cutting expected losses from 3 to 2.5 percent through better underwriting adds INR 5 crore before tax and lifts ROE to about 15.6 percent, above the bar. The risk is that losses on unsecured loans can double in a downturn. As a next step, test the underwriting model on past loan data before launch.
Risks a strong answer names: This simplified model ignores that equity itself funds part of the loans, which slightly lowers funding cost; In a downturn, credit losses on unsecured loans can double; Prepayments shorten the life of loans and reduce income.
Score the candidate
Score each criterion from 1 to 5. A 2 or a 4 sits between the descriptions.
This case has no exhibit. Score Exhibit reading on how the candidate used the data you gave them: did they pick out the number that matters and say what it means?
Total
0 out of 25
Score all five criteria to see the band and the feedback template.