11.4 Processing Auto Capitalization of Interest

The system triggers automatic liquidation event (LIQD) in the loan contract for the interest amount due as per the schedule due date as part of the EOD batch processing.

The system registers a VAMI event with increase in principal for an amount which is equal to the interest amount liquidated as part of the automatic liquidation event (LIQD) with the value date as schedule due date as part of the BOD batch processing. The increase in principal is added to the bullet schedule of the contract.

Note:

If the schedule due date is a business day, system posts the accounting entries of both LIQD and VAMI with value date same as that of the schedule due date. If the schedule due date is a holiday, then system posts the accounting entries of LIQD with value date same as that of the schedule due date. The accounting entries of VAMI are posted on the next business date.

The system reduces the interest reserve availability to the extent of the VAMI amount in the loan contract. There would not be any change in the interest reserve amount.

Note:

  • If the schedule due date is a business day, the system reduces the interest reserve availability on the schedule due date itself.
  • If the schedule due date is a holiday, then system reduces the interest reserve availability only after the VAMI is posted on the next business date.
  • If the commitment availability amount is not sufficient for the principal increase, VAMI is failed as per existing functionality

Below examples for the automatic liquidation and VAMI processing.

Example 1: Schedule due date is not a holiday
  • Principal amount: 1,000,000.00
  • Schedule due date: 30-Nov-2016
  • Interest due on schedule date: 1,000.00
  • Service fee due on schedule date: 1,000.00
Capitalize check box is selected in the contract.
  • Interest reserve amount: 3,000.00
  • Interest reserve availability: 3,000.00
  • Current application date: 30-Nov-2016
When the current application date is equal to the schedule due date (that is, 30-Nov-2016), the system automatically liquidates the interest amount & service fee as part of LIQD.

System registers a VAMI event with increase in the loan contract with the value date as schedule due date, that is, 30-Nov-2016

  • New principal amount: 1,002,000.00
  • Interest reserve amount: 3,000.00 (No change in interest reserve amount)
  • Interest reserve availability: 1,000.00 (Reduced by the amount of VAMI)

Example 2: Schedule due date is a holiday

  • Principal amount: 1,000,000
  • Schedule due date: 31-Dec-2016
  • Interest due on schedule date: 1,000.00
  • Service due on schedule date: 1,000.00
Capitalize check box is checked in the contract.
  • Interest reserve amount: 3,000.00
  • Interest reserve availability: 3,000.00
  • Current application date: 31-Dec-2016
  • Next working date: 02-Jan-2017
When the current application date is equal to the schedule due date (that is, 31-Dec-2016 during the EOD batch), the system automatically liquidates the interest amount and service fee as part of LIQD.
System registers a VAMI event with increase in the loan contract with the value date as next business date that is 02-Jan-2017 during the BOD batch as on 02-Jan-2017.
  • New principal amount: 1,002,000.00
  • Interest reserve amount: 3,000.00 (No change in interest reserve amount)
  • Interest reserve availability: 1,000.00 (Reduced by the amount of VAM
If the above-mentioned validation is failed, that is if the sum of unpaid auto capitalization components due is greater than the Interest Reserve Availability, the system does not trigger the automatic liquidation (LIQD) and VAMI events in the loan contract.

The accounting entry for the debit leg of automatic liquidation (LIQD) is posted to the GL/proof account.

System posts the accounting entries for the credit leg of automatic liquidation (LIQD) and VAMI events as per existing functionality as part of batch processing.

Accounting entries:
  • LIQD

    Table 11-1 LIQD

    Dr/Cr Accounting Entires Component
    Dr Customer Intcomponent_liqd
    Cr Intcomponent Intcomponent_liqd
  • VAMI

    Table 11-2 LIQD

    Dr/Cr Accounting Entires Component
    Dr Asset GL Principal_incr
    Cr Customer Principal_incr

System picks Suspense GL maintained at branch parameter instead of CASA for customer leg for main interest and service fee for capitalization.

In case of batch failure, system logs the details and attempt to process the failed contracts on the next business day.

On failure of capitalization of interest due to insufficient interest reserve availability, liquidation of principal happens.

System applies the holiday preferences for schedule date.

The payment messages / billing notices generation for the LIQD and VAMI events are triggered as part of the new batch processing they are suppressed.

In the events screen, the fields MakerId and CheckerId are updated as SYSTEM for the automatic liquidation (LIQD) and VAMI events triggered as part of the new batch process. In addition, the manual payment input screen and the value dated amendment screen are updated with the maker and checker details as SYSTEM.You are allowed to reverse the VAMI (triggered as part of the new batch processing) from the value dated amendment screen.

In addition, you are allowed to reverse the automatic liquidation (LIQD) from the manual payment screen. Reversal of VAMI / LIQD does not change the interest reserve amount or interest reserve availability

Note:

You are allowed to reverse the VAMI / LIQD event in any sequence. It is not mandatory that the reversal should be done in the chronological order.

You are not allowed to perform manual liquidation for both principal and interest where the new flag Capitalize is selected.

Appropriate error messages are displayed. If customer wants to do pre-closure or partial prepayment, then clear auto capitalization interest check box and do payment.

The back value dated schedules of the main interest component is not liquidated systematically even if the flag Liquidate Back Valued Schedules is selected. during contract creation and the Capitalize check box is selected.

Note:

When you select Liquidate Back Valued Schedules check box during contract creation and Capitalize is already selected, the system displays an override message Liquidation will happen for back value dated schedules of components other than Capitalize flag checked components as Capitalize flag is checked. Do you want to Proceed?. If you click Ok, the check box is selected. If you click Cancel, the system clears Liquidate Back Valued Schedules check box.

Parent topic: Automatic Processing