1.9.2 Basis for Interest Application

This topic describes the basis for interest application.

The basis of the interest component being defined specifies the following two attributes:

Table 1-16 Fields Description

Fields	Description
Amount Type	If the interest rate type is Fixed or Floating, the Amount Type specifies the basis amount on which the interest rate has to be applied. For example, for the FT module, it could
Grace Period and Level Number	You can apply interest at various levels: Main interest on principal – Level 0 (Category: Expected) Interest on overdue interest – Level 1 (Category: Overdue) Interest on Level 1 interest – Level 2 (Category: Overdue) … and so on For each interest component, starting from Level 1 and belonging to ‘Overdue’ category, you can also specify the number of grace days, beyond the main interest due date, after which that interest component becomes applicable. For each such component, the default value for the number of grace days is: Number of grace days for the previous level + 30 days You can change this value, provided that the number of grace days for a component (level) does not exceed the number of grace days for any successive level. At any point, an amendment of the number of grace days for any or more interest components at the Product ICCB level will only affect new contracts. For interest components of Level 0 and ‘Expected’ category, the default value for grace days is 0 – this cannot be changed.
Settlement Currency	The Settlement Currency is the currency in which the interest amount will be calculated. The interest amount applicable for a contract will be calculated in this currency. The appropriate conversion rate (defined for the product as the applicable Rate Type) will be applied to carry out a conversion if the repayment account is in a different currency.
Category	If the interest rate type is Fixed or Floating, the Amount Basis Category specifies the type of balance that has to be considered for interest application. It could be any one of the following: Expected Overdue Normal Outstanding If the Basis Amount Category is Expected, the balance on which interest has to be applied will be the Expected balance (the balance assuming that all the scheduled repayments defined for the contract are made on time). An example of this category is the application of interest on the Bill amount. If the Basis Amount Category is Overdue, the balance on which interest has to be applied will be the amount that is overdue, based on the repayment method defined for the contract. An example of this category is the application of penalty interest on the bill amount or interest, when a repayment has not been made, as per the date specified for the contract.
Prepayment Method	The prepayment method identifies the computation of the prepayment penalty for the contract. The prepayment penalty for deposits is computed as depicted in the equation given below: Here, Prepayment Penalty indicates the penalty amount calculated Deposit Amount Withdrawn indicates the deposit amount withdrawn prematurely Prepayment Penalty Rate indicates the Rate input in Payment screen for calculation of penalty. Interest Basis indicates the Interest basis for the component for which penalty is being computed. Number of Days indicates the day count for which penalty needs to be calculated. This is calculated based on the ‘Prepayment Method’ field defined in the Product Definition. In addition to using the formula to calculate the Prepayment Penalty, the actual prepayment penalty amount being charged to the customer is also dependent on the Prepayment Method. The options available are: Oracle Banking Treasury Management This option is used where pre-payment has to be applied on the deposit contract for contract elapsed days. Custom If the Prepayment Method is Custom, then the prepayment penalty in this case will be the minimum of prepayment penalty and Gross interest on the premature withdrawal amount. The system computes the interest amount to be liquidated due to prepayment of principal. You will not be allowed to specify the interest amount during the Payment input in such a case. Note: Here, the system does not include the Acquired interest for processing. Also, if you have chosen the prepayment method as Custom, you cannot prepay or manually liquidate either the interest or the principal component. This option is used where pre-payment has to be applied on the deposit contract for contract remaining days.
Accruals	For a product, you should specify through the product ICCB Details screen whether accruals have to be carried out for the accruable components. If yes, the frequency of accruals, which could be daily, monthly, quarterly, half-yearly or annually, should be specified for each product (through the Product Preferences screen). The accruals are carried out at the specified frequency by the Automatic Contract Update function. In addition, accruals are done whenever an event (like a rate change with a Value Date, a payment, etc.) is triggered as of a date beyond the date on which the last accruals were carried out.
Allow Amendment	A change to a contract (after it has been authorized) that involves a change in its financial details constitutes an Amendment on the contract. You can indicate whether such an Amendment, called a Value Dated Change, should be allowed for the interest component being defined. You can amend the following through this function: Interest rate Rate code Spread Interest amount
Main Component	You can define any number of interest type of components (tenor based components) for a product. If you have defined more than one interest type of component, you can specify the main interest component as ‘Main Component’. This will be the interest component that will be used for capitalization or amortization purposes if the repayment schedules are defined thus. The details of this Main Component will be shown in the Contract Details screen and you can change them there without having to invoke the Contract ICCB Details screen. Components other than the main component have to be processed through the Contract ICCB Details screen.
Negative Interest Allowed	Negative Interest Allowed field remains enabled or disabled based on the maintenance in the interest class.
Negative Class Code	The system displays the negative class code.
Bulk Amount	When a contract gets rolled over, you may wish to split it into 2 contracts - one for the interest amount (I) and the other for the principal amount (P). If you want the the floating rate pickup for both the new contracts (tenor/amount) to be based on P+I of the original contract, check the 'Bulk Amount' check box. For example, if the principal amount is Rs.1000 and Interest accrued is Rs.100. Upon rollover, your bank may require two contracts, one for Rs.1000 (Principal contract) and the other for Rs.100(interest contract). Lets say the slab rate followed by your bank is: 0 – 1000 - 3% 1001 – 2000 - 4% In the normal course, system would apply 3% interest rate on both the contracts of Rs.1000 and Rs.100 (since both fall within 0 -1000 slab). But if the ‘Bulk Amount’ option is chosen, then 4% will be applied on both the contracts (as if a single contract of Rs.1100 is rolled over where system would have applied 4pct).
Stop Application	The attributes defined for a product will be automatically applied to all contracts involving the product. If, for some reason, you want to stop applying the Interest Rule defined for the product on contracts that are to be initiated in the future (involving the product), you could do so through the Product ‘ICCB Details’ screen. In effect, stopping the application of a component for a product would be equivalent to deleting the component from the product. By specifying that the application of the component should be stopped, you have the advantage of using the definition made for the component again, by making it applicable.
Propagation Required	If the interest amount collected from the borrower should be passed on to participants of the contract, check the 'Propagation Required' check box.
Consider as Discount	While defining an interest for the bills module, you can indicate whether the interest component is to be considered for discount accrual on a constant yield basis or whether accrual of interest is required. If you select the Consider as Discount option the interest received against the component is used in the computation of the constant yield and subsequently amortized over the tenor of the associated contract. This accrual is processed through the Discount Accrual module. The ‘Consider as Discount’ option is allowed only for the following events (for bills): BADV (acceptance to advance event) BPUR (collection to purchase event) BDIS (acceptance to discount event) INIT (initiation event) Note: To recall, you link an interest component to an event through the ‘Event’ option list. If you select the ‘Accruals’ option, the interest is accrued depending on the accrual preferences defined for the product. If neither option is selected, the interest is not accrued, but is recognized as income on interest liquidation. Checking the ‘Consider as Discount’ also indicates whether the interest component is to be considered for IRR computations of bills. If the payment type is ‘Discounted’ then you can select either ‘Consider as Discount’ and ‘Accruals’ option OR both together. If the options ‘Accruals’ and ‘Consider as Discount’ are selected then discounted interest is considered for IRR calculation. If the option ‘Accruals’ is not checked and ‘Consider as Discount’ is checked then the discounted interest is considered to be a part of total discount to be accrued. The above validations apply for BC (Bills and Collections) contracts also. The ‘Consider as Discount’ option is not available if the amount category is Penalty. The options ‘Accruals’ and ‘Consider as Discount’ are not mutually exclusive. If you select the ‘Accruals’ option, then it is not necessary for the ‘Consider as Discount’ option to be checked. However, for BC contracts, if you select the ‘Accruals’ option, you can either select against the ‘Consider as Discount’ option or otherwise. For Bearing contracts, if the option ‘Consider as Discount’ is checked then the option ‘Accruals’ also has to be checked. If the option ‘Accruals’ is not checked, the option ‘Consider as Discount’ is disabled. The above validations apply for BC (Bills and Collections) contracts also.
Link Contract as Ratecode	You can use this field to indicate whether a fixed rate contract may be linked to the floating rate component, instead of a rate code. Check this box to indicate that a fixed rate contract may be linked.