3.4.1 Impact of Loan Outstanding on Spread

For any change in the loan outstanding balance, the system re-picks the spread rates based on the latest outstanding amount. The loan outstanding balance undergoes for changes in the following scenarios.

• VAMI – To Increase the Principal Amount
• VAMR – Vami Reversal
• LIQD – Principal payment / prepayment done
• REVP – Reversal of Payment

Note:

The change in spread rate impacts the schedules of the underlying contract, as the effective interest rate changes with the change in the spread.

Example

Let us assume that a contract is booked with the following details.

• Principal Amount - 12,000,000
• Interest Rate – 5%
• Value Date – 28-Sep-05
• Maturity Date – 28-May-06

The spread maintained for the borrower, branch, product, and currency combination with the latest effective date with the component type as Slab is as follows:

From Amount	To Amount	Spread Rate
0	1000000	2%
1000000	10000000	3%
10000000	11000000	4%
11000000	9999999999	5%

Initially when the contract is booked the spread picked up is 5%. The principal amount due of 2000000 along with the Interest amount of 100000 is paid on 28-Oct-2005. As a result of the payment the remaining schedules are recomputed using the spread rate of 4%.

The schedules are recomputed in the following ways.

Principal	Interest Rate	Start Date	End Date	No of Days	Interest Amount	Daily Avg Amount
12000000	10%	28-Sep-05	28-Oct-05	30	100000	3333.333333
10000000	9%	28-Oct-05	28-Nov-05	31	77500	2500
10000000	9%	28-Nov-05	28-Dec-05	30	75000	2500
10000000	9%	28-Dec-05	28-Jan-06	31	77500	2500
10000000	9%	28-Jan-06	28-Feb-06	31	77500	2500
10000000	9%	28-Feb-06	28-May-06	89	222500	2500

Similarly if the spread basis is tier, then the schedules of the contract is formed in the following manner.

Principal	Effective Rate	Start Date	End Date	No of Days	Interest Amount	Daily Avg Amount
12000000	8.167%	28-Sep-05	28-Oct-05	30	81666.67	2722.222
12000000	8.167%	28-Oct-05	28-Nov-05	31	84388.89	2722.222
12000000	8.167%	28-Nov-05	28-Dec-05	30	81666.67	2722.222
12000000	8.167%	28-Dec-05	28-Jan-06	31	84388.89	2722.222
12000000	8.167%	28-Jan-06	28-Feb-06	31	84388.89	2722.222
12000000	8.167%	28-Feb-06	28-May-06	89	242277.8	2722.222

The effective rate of 8.167% is arrived using the weighted average logic.

The weighted rate is calculated as below

((1000000*7%+9000000*8%+1000000*9%+1000000*10%)/12000000)*100

The result rate is used for computation of interest.

Similarly the schedules undergo changes if there is a principal payment which changes the loan balance and the effective spread rate.

The schedules built are as follows:

Principal	Effective Rate	Start Date	End Date	No of Days	Interest Amount	Daily Avg Amount
12000000	8.167%	28-Sep-05	28-Oct-05	30	81666.67	2722.222
10000000	8.3%	28-Oct-05	28-Nov-05	31	71472.22	2305.555
10000000	8.3%	28-Nov-05	28-Dec-05	30	69166.67	2305.556
10000000	8.3%	28-Dec-05	28-Jan-06	31	71472.22	2305.555
10000000	8.3%	28-Jan-06	28-Feb-06	31	71472.22	2305.555
10000000	8.3%	28-Feb-06	28-May-06	89	205194.44	2305.556

The effective rate of 8.3% is arrived using the weighted average logic explained below.

The weighted rate is calculated as below:

((8000000*8%+1000000*9%+1000000*10%)/10000000)*100

The resultant rate is used for computation of interest.

Note:

• Defaulting of spread is done only once. Any subsequent changes in spread are done through Spread Maintenance screen.
• It is applicable only for LCY Loans.
• The tier basis is always amount based.
• In case the spread maintenance is not available then the system defaults the spread as 0.