The formula for After-tax Risk-Adjusted Return on Capital (RAROC) is: RAROC = (After-tax Net Income) / Economic Capital

1. Calculate Economic Capital (EC): 10.0% * JPY 4.2 billion = JPY 420 million.
2. Calculate Pre-tax Net Income: Since the loan is fully funded by deposits, the interest expense applies to the entire loan amount. Pre-tax Net Income = Interest Income - Interest Expense - Expected Loss - Operating Costs + Return on Economic Capital

• Interest Income = 3.2% * 4.2B = 134.4M
• Interest Expense = 0.4% * 4.2B = 16.8M
• Expected Loss = 2.0% * 4.2B = 84.0M
• Operating Costs = 0.5% * 4.2B = 21.0M
• Return on EC = 1.4% * 420M = 5.88M Pre-tax Net Income = 134.4 - 16.8 - 84.0 - 21.0 + 5.88 = JPY 18.48 million.

3. Calculate After-tax Net Income: JPY 18.48 million * (1 - 0.38) = JPY 11.4576 million.
4. Calculate After-tax RAROC: JPY 11.4576 million / JPY 420 million = 0.02728, or 2.73%.