If the bank in the Illustrations 5.1 and 5.2 desires to give its shareholders a return of 20 per cent, its assets amount to Rs. 10,000 crore, and its capital amounts to Rs. 1,000 crore, what should be the profit margin it should target for the borrower seeking Rs. 50 crore of credit, assuming that its cost of funds and servicing costs remain at the levels described above, and the risk premium is 0.731 as calculated above?

Desired return = 0.20 3 1000/10000 = 0.02

Therefore, the bank should target a minimum return or profit of 2 per cent on the transaction. The bank already has proposed a return of 3 per cent which is profitable for the bank.