10.11 Interest Rate Revision on a Loan

The type of interest that is applicable on a loan depends on the definition of the product that it involves. If floating interest rates are applicable for a product, the frequency at which the changing interest rates should be applied on contracts involving it is also defined for the product.

The Interest Rate Type of a product can be one of the following: fixed, floating, zero or special.

The floating interest rates are defined through the Floating Rate Definition screen. A Rate Code identifies a set of rates defined for a combination of Currency, Amount Limit (optional) and Effective Date. When processing a loan, you should link it to the floating rate table by indicating the Rate Code. The rates defined for the Rate Code is applied on the deposit (or in other words, the contract).

The rates are applied to a contract depending on whether it has been defined with Auto Refresh or Periodic Refresh.

The changes in floating rate can be applied on a contract in two ways. In one method called the Auto Refresh method, all the rate changes during the liquidation or accrual period is considered. In the other method called the Periodic Refresh method, the rates as of a specific frequency or date is applied.

The following example illustrates this point.

Example

Tenor: The Start Date of the contract is 1 October 1997 and the End Date 30 November 1997.

The contract has a floating rate and the rates in the floating rate table change in the following manner:

Date	Rate
1 October 1997	12%
12 October 1997	11.5%
25 October 1997	11%
15 November 1997	12%
30 November 1997	12.5%

Liquidation Frequency: Monthly

If the contract is defined with Auto Refresh, the liquidation on 30 October considers all the rate changes that were done between 1 October and 30 October. The rates are applied for the number of days for which they remained unchanged in the rate table, as follows:

From	To	Rate
1 October	1 October	12%
12 October	24 October	11.5%
25 October	30 October	11%

For a contract with Periodic Refresh, the rates prevailing on the refresh dates are used for accruals and liquidation. If the contract is defined with Periodic Refresh and the refresh dates are defined as the 15 October, 1 November, 15 November and 30 November, the rate applied for the liquidation on 30 October is as follows:

From	To	Rate
1 October	14 October	12%
15 October	30 October	11.5%

The Automatic Contract Update does the interest accruals for those loans for which a rate revision becomes due today, whatever the way they have to be applied - every time the rate changes, or periodically.