1. Bilateral Loans
  2. Disbursing a Loan
  3. Loan Disbursement Details
  4. Indexed Loans

4.2.28 Indexed Loans

To guard against the fluctuations in the value of money in the economy due to inflation, you can maintain loans in a separate imaginary currency called the index currency. (The index currency is maintained in the Currency Maintenance screen of the Core Services module.)

Note:

Since the index currency is linked to the local currency of your branch, you can only mark loans quoted in the local currency as indexed loans.

The fluctuations in the inflation rate is effected by the fluctuation in the exchange rate between the Index currency and the LCY.

Example

You have advanced Mr. Brian Williams a loan of USD 10,000 under the scheme Short Term Loans for Individuals at 12% interest for a period of five months.

As a consequence of inflation the price index has gone up from 50 to 55 as of the date of loan repayment.

Now what Mr. Williams has to pay you is computed as follows:

P = 10,000 x 55/50 = USD 11,000

The interest is calculated on the new principal amount.

To index a loan you have to choose the index currency as the loan currency while maintaining the contract details of the loan. However, you have to specify the LCY equivalent of the contract amount. The system computes the amount in index currency based on the exchange rates maintained in the Currency Rates Maintenance screen.

The Impact

As a consequence of maintaining indexed loans the following functions is affected:
  • Interest accruals are reflected in the index currency.
  • Payment advices for customers are generated in the index currency. Even if the advice has the local currency equivalent, the conversion will be based on the rate as of the generation date rather than the payment date.
  • Repayment schedules are maintained in the index currency.
  • In the central bank report, this loan is identified as a local currency loan.
  • If the loan is pre-paid during the course of the month the exchange rate for the particular deal has to be calculated manually and entered into the system.
  • When payments are overdue, the dues continue to remain in the index currency. Upon liquidation the prevalent exchange rate between the index currency and the local currency is applied.

Parent topic: Loan Disbursement Details