A bank is planning to grant a loan of Ten Million Dollars ($10 million) to a firm in the manufacturing sector. The current market interest in this sector is 8%. The bank expects to charge a servicing fee of 15 basis points ($15,000). The loan has a maturity of 6 years with a duration of 5.5 years. The cost of funds for the bank is 6%. Assume the bank has estimated the risk premium on the manufacturing sector to be approximately 2.25% based on two years of historical data. The return on equity (ROE) is 10.0%.

Estimate the risk adjusted return on capital (RAROC) for the above loan.

Using the risk adjusted return on capital model, decide whether the bank should grant the loan. Show your calculations.

A bank has estimated that in the agricultural sector, it would lose 38 cents for every dollar defaulted and the management would not accept losses beyond 6% of equity. What is the concentration limit for agricultural sector?