3.1.3 Collateral Depreciation Methods

This topic describes the information on Collateral Depreciation Methods.

Following methods are considered for collateral depreciation. Method of depreciation refers to how the cost should be treated as expiring over the life of assets.

• Straight line method
• Written down value method (reducing balance method)
• Sum of years digit method

Straight line method

If the useful life of assets is 10 years, depreciation is calculated at 10% every year on the original cost. However, rate of depreciation specified is considered for straight line method. Revaluation rate for frequency specified is arrived considering the depreciation rate per year signified.

Written down value method

In this scenario, depreciation value reduces over the period as depreciation is calculated on the written down value of the collateral in second and subsequent years, as compared to the original cost in the first year.

Sum of years digit method

This can be considered with the following example.

• Original cost of collateral is 15000
• Useful life of the item is 3 years
• Sum of digit of the useful life is 3+2+1 = 6 years
  • First year depreciation is 3/6 * 15000 = 7500
  • Second year depreciation is 2/6 * 15000 = 5000
  • Third year depreciation is 1/6 * 15000 = 2500

External

Securities type of collateral will follow ‘External’ method of revaluation. Collaterals which are created with security code gets collateral value based on latest price signified for the particular security in GCDSECTY (price fetched externally).

Securities type of collateral which derives its value from security maintenance (GCDSECTY) and accordingly collateral value is calculated.

Whenever price changes for a particular security, latest price is signified in security maintenance for the price code with effective date and collateral marked for external revaluation is picked up and updated with latest price on the next revaluation date and arrive at the modified value the collateral. On the next revaluation date, the system picks up the closest price change (latest price change) when multiple price changes are existing for a particular security to re-valuate the collateral.

Based on price changes, the collateral value may appreciate or depreciate during revaluation and accordingly collateral value gets updated.

Last revaluation date is updated as the date of automatic revaluation and next revaluation date is updated considering the last revaluation date + frequency + holiday processing setting.

History of revaluation is updated and same is available for inquiry at collateral level.

Custom

This method can be used for customizing the revaluation process of the collateral.

Holiday setting – Ignore holidays

If the next revaluation date falls on a holiday and holiday settings at collateral level is ignore holidays, the system consider GEDPARAM setting (‘S’ or ‘N’) and accordingly revaluation is done. In case of consecutive holidays covering multiple frequencies revaluation considers the number of frequencies and arrive at collateral value accordingly.

With Holiday Processing setting

In respect collateral with holiday processing settings like move forward/move backward and with consecutive holidays covering multiple frequencies, revaluation considers the number of frequencies and arrive at collateral value accordingly.

In case calendar is not available for either branch or currency on next revaluation date and the holiday processing setting has to consider the holiday for branch and/or currency, next revaluation date is considered as a working date and updated accordingly.

Revaluation of a Suspended Collateral

When a collateral is suspended, such collaterals are not candidates for automatic revaluation even though next revaluation date is equal to business date. Suspended collaterals cannot be manually revaluated.

However, when suspension is revoked, the system revaluates such collaterals up to date and update the latest collateral value.

Exception logging

When collateral value reduces, revaluation of the collateral stops when the same goes to negative.

When the collateral which is a candidate for automatic revaluation and the modified value on account of revaluation is negative, revaluation process skips such collaterals and exception is logged in ‘gctm_collat_exception’ table.

In addition, exception scenarios like on account of revaluation resulting in reduction of collateral value, available amount at linked pool level and/or at facility level goes not negative, such exceptions are logged.