The Loans module of Oracle Lending focuses on the corporate lending operations of a bank. It handles all types of call, notice, fixed-tenor loans, loan commitments, prepayments, manual payments, and foreclosure.
This section contains the following topics:
Defining services as Products
A Product is a specific service, or scheme, that you offer your customers. A Loans product is a specific Loan scheme that is offered to customers. For example, a bank may offer short-term corporate loans to software development companies. This scheme can be defined as a product in Oracle Lending.
When setting up the module, the bank can define the various loan schemes that it offers as products. For each product, it can also define ‘attributes’, or in other words, the terms and conditions. When a user at the bank actually processes a loan, it can be associated with a product. The loan acquires the terms defined for the product that it involves. The bank, however, can allow a user to change the inherited attributes of a loan, while processing, to suit a special customer.
The advantage of defining a product
When defining a scheme as a product, the bank can specify the following details:
The product is defined only once. Therefore, you need not specify the basic details, every time a loan is entered into Oracle Lending. This feature drastically reduces processing time, thus allowing a bank to focus on and take advantage of, the opportunities in the market.
In Oracle Lending, it is possible to define multiple interest and charges. That is, you can specify the interest and charge that you would like to levy at the different events in the life cycle of a loan.
Interest can be calculated based on a rate, or a flat amount. Interest rates may be:
You can define tier and slab structures to compute charges. You can also define a minimum and a maximum charge, as well as a penalty for defaulted schedules.
Floating rate supports both Risk Free Rates and Non-Risk Free Rates. For more information on floating rate, refer to Interest User Manual.
Methods of interest calculation and payment
Oracle Lending allows computation of interest, using both Euro and US methods.
The repayment schedules for interests can be defined, for each transaction. Depending on the mode of payment, the interest is liquidated either automatically or manually, according to the schedule defined. The standard interest payment methods that are supported are:
Accrual of interest
The frequency of interest accrual, whether daily, monthly, quarterly, half-yearly, or annual, can be specified for a product during set up. This specification applies to the accruable components of all loans involving the product.
The Automatic Contract Update function of Oracle Lending handles accruals at the specified frequency. In addition, the interest is accrued whenever a back-dated rate change is input. An accrual, to the extent of a repayment, is automatically carried out at the time of repayment.
The module supports amendments and payments for previous accrual periods. Subsequent accruals will correct any adjustments that are to be made due to these actions.
The Loans module allows you to accrue interest at the product level. Rather than accrue interest for each loan involving a product, and then update the ledgers of the accrued interest individually, the bank can accrue interest for each contract involving the product, and pass a consolidated entry to the ledgers.
Using the Loans module, you can define flexible schedules for the payment of principle, interest, commission, and fees. Schedules for the payment of the various components can be defined individually, or otherwise. The schedules can be based on one of the following types:
A bank using this module can define a grace period for the products it offers. This specification would apply to all contracts involving the product. A penalty interest is applied in case of default in payment, on expiry of the grace period. Penalty is not be applied if the payment is made during the grace period. In case the payment is not made, the penalty is calculated from the day the payment is outstanding.
When ‘Payment Delay Days’ is given, then ‘Grace Period’ starts from ‘Pay By Date’. If payment is made after ‘Grace Period’, then the penalty starts from ‘Pay By Date’.
The module efficiently handles automated rollover of loans on maturity. When a loan is rolled over (renewed), it is processed in the following manner:
A rollover can be effected with any of the following options:
The rolled-over contract bears the same reference number as the original contract. However, the number of times the contract is rolled over is recorded and always displayed. This feature facilitates tracking. A Rollover advice is automatically generated when a loan is rolled-over.
The Loans module of Oracle Lending, allows you to define the various status, into which overdue loans should move. The module allows a bank to define:
Movement of a loan from one status to another can be either automatic, or manual. Loans, both regular and past due, can be tracked, automatically, across several user-defined status.
Back dated status change is also supported. The effect of status change is given as on the date mentioned.
Oracle Lending supports the processing of a Withholding and an Expense type of tax.
Tax can be computed based on either the liquidation amount or the schedule amount. The bank can define tax rates as slabs or tiers and define a minimum and maximum tax amount that could apply. The bank could bear the tax (Expense) or charge the customer for it (withholding).
A loan contract goes through different stages in its lifecycle. These stages are referred to as events in Oracle Lending. Events can be defined as Booking, Amendment, Rollover, Liquidation, and so on.
Once a loan contract is initiated, Oracle Lending automatically processes all the events defined for it. Starting from initiation upto liquidation, or rollover, it processes the following automatically:
In addition, you can automatically track overdue loans and classify them into various statuses. For each status, you can specify preferences like whether accruals should be stopped, reversed, or, if the loan should be transferred to a different asset account.
You can levy a penalty on premature loan payments. This penalty can be specified both in terms of a percentage and as a flat amount.
Amendments (changes to the Maturity Date, the Principal amount, the Interest Rate, interest spreads, and so on.) are possible on any loan contract, product, or group of contracts. These amendments can take effect as of back-value or future dates.
The zero-based interest accrual methodology ensures that interest accruals are recalculated and adjusted for back-valued amendments.
During the day or at the end of the day, a user with the required authority can retrieve information on the various operations, related to loans. This information can be generated in the form of reports. For more information, refer to Reports User Manual.
The bank can also choose for the Report Writer utility that comes with Oracle Lending. With this utility, the bank can custom-define the reports that it would like to generate.
Bankers' Acceptance (BA) is a negotiable financial instrument used to raise short term funds in the money market. This is a common short term borrowing at a fixed rate in Canadian credit facilities.
This functionality is applicable only if you select the product preferences as 'Bankers' Acceptance' and the payment type as 'Discounted' or ‘True Discounted’ in 'Borrower Product Definition' screen.
Limitations
The following are the limitations in BA contracts.
In Brazil, loan accounts can be booked with linear or exponential interest methods with simple, amortized, discounted schedules. Linear method is same as the current method of interest calculation/accrual supported by Oracle Banking Corporate Lending. The requirements are based on interest calculation and daily recalculation of interest accrual for loans based on exponential formula.
The interest rate provided can be per month rate or a float rate based on multiple quote basis. Since per annum rate is used by Oracle Banking Corporate Lending for loan interest calculation, the system should have a provision to convert the input rate into per annum rate.
Rate Type |
Conversion Formula |
Linear Rate Per Year |
Rate Per Month * 12 |
Exponential Rate Per Year |
(1 + Rate Per Month) ^ 12 – 1 |
Exponential calculations are achieved by deriving the effective annual rate and applying this with daily compounding.
The derived rate is applicable for schedule types Simple, Discounted and amortized schedule.
For exponential loans, the system derives the effective annual rate (R) from the Per Annum rate (r). The derived rate is used internally by system in interest calculations.
The derived rate is arrived at using the formula
R = (POWER ((1+r), (1/YEAR)) -1)*YEAR
Where r = Per Annum rate
R= Derived rate
Year = Denominator basis of Main Interest component
Example:
Consider a loan for USD 100000 with 10% interest rate per annum for 5 days.
The exponential interest calculation/accrual is required as below:
Principal |
Per Annum Interest - r |
No. of days |
Year Basis |
Derived Rate -R (((1+10%)^(1/360))-1)*360 |
100000 |
10% |
5 |
360 |
9.53% |
Interest required to be calculated for a Exponential Bearing loan is as below:
The interest calculated using derived rate R (9.53%) in bearing normal method with daily compounding is as below
Day |
Daily Interest |
Cumulative Interest |
1 |
26.48 |
26.48 |
2 |
26.49 |
52.96 |
3 |
26.49 |
79.46 |
4 |
26.50 |
105.96 |
5 |
26.51 |
132.46 |
Derived rate R is internally assigned for calculations using Exponential formula.
Formula type |
Interest Booking formula |
Discounted schedules |
DISC_SCH(PRINCIPAL_EXPECTED,(INTEREST_RATE),DAYS,YEAR,COMPOUND_VALUE) |