Accounting for Discounted Loans

15.8 Accounting for Discounted Loans

In this section, we shall discuss the manner in which you can define attributes and pass accounting entries specific to a Discounted Loan product. A discounted loan is one for which the interest is collected upfront.

On Jan 01, 2002, you lend USD 100 to customer ABC for a tenor of 1 year at a rate of interest of 10% per year. On Dec 31, 2002, he would pay you back USD 110 – repayment of principal amount of USD 100 and payment of interest of USD 10. Instead, in a Discounted Loan, you collect the interest of USD 10 upfront. Therefore, you book a loan of USD 100 while disbursing USD 100 – USD 10 = USD 90. For each event (INIT, ACCR, LIQD), the Product Event Accounting Entries Maintenance Screen allows you to select the Accounting Roles, the corresponding Amount Tags and the Debit/Credit Indicator.

For the above example, the following accounting entries will be passed on INIT:

Table 15-82 Event INIT

Accounting Role	Amount Tag	Dr/Cr Indicator	Amount
ASSETGL	PRINCIPAL	Dr	100
CUSTOMER	PRINCIPAL	Cr	100
LDDL-INTRIA	LDDL-INT_LIQD	Cr	10
CUSTOMER	LDDL-INT_LIQD	Dr	10

Accrued interest is pro-rated over the life of the loan. Accrual entries passed are as follows

Table 15-83 Event: ACCR

Accounting Role	Amount Tag	Dr/Cr Indicator
LDDL-INTREC	LDDL-INT_ACCR	Dr
LDDL-INTINC	LDDL-INT_ACCR	Cr

For the above example, let us assume that the principal amount of USD 100 is liquidated in equal installments as shown in the graph above, i.e., USD 20 is liquidated in each of five tranches. Entries for liquidation of accrued interest are passed along with the installment liquidation entries.

Note:

During each liquidation, the entire interest accrued till that date will be liquidated, irrespective of the whether the customer is repaying the full installment or not.

For the above example, the entries passed during each of the five liquidations are

Table 15-84 Event: LIQD

Accounting Role	Amount Tag	Dr/Cr Indicator	Amount
ASSETGL	PRINCIPAL_LIQD	Cr	20
CUSTOMER	PRINCIPAL_LIQD	Dr	20
LDDL-INTRIA	LDDL-INT_LIQD	Dr	2
LDDL-INTREC	LDDL-INT_LIQD	Cr	2

Parent topic: Appendix B - Accounting Entries, Advices and Error Codes