Methods of Interest Application

1.1.2 Methods of Interest Application

In Oracle Lending, it is possible to define multiple interest and charges. That is, you can specify the interest and charge that you like to levy at the different events in the life cycle of a loan.

Interest can be calculated based on a rate, or a flat amount. Interest rates may be:

Fixed
Floating
Floating with Manual (or Automatic) Rate Revision

You can define tier and slab structures to compute charges. You can also define a minimum and a maximum charge, as well as a penalty for defaulted schedules.

Floating rate supports both Risk Free Rates and Non-Risk Free Rates. For more information on floating rate, refer to Interest User Manual.

Methods of interest calculation and payment

Oracle Lending allows computation of interest, using both Euro and US methods.

The repayment schedules for interests can be defined, for each transaction. Depending on the mode of payment, the interest is liquidated either automatically or manually, according to the schedule defined. The standard interest payment methods that are supported are:

Bearing - Interest is liquidated on schedule payment date(s)
Discounted - In this interest payment method, the interest is deducted at the time of initiating the loan
True discounted -In this method, the bank deducts interest from the principal at the time of loan initiation
Amortized - In this method, the interest is calculated for the term of the loan, clubbed with the principal and distributed into equal installments according to the frequency you specify - monthly, quarterly, and so on.
Commitment - In this method, interest is calculated on a flat or a fixed percentage of the undisbursed loan amount.

Accrual of interest

The frequency of interest accrual, whether daily, monthly, quarterly, half-yearly, or annual, can be specified for a product during set up. This specification applies to the accruable components of all loans involving the product.

The Automatic Contract Update function of Oracle Lending handles accruals at the specified frequency. In addition, the interest is accrued whenever a back-dated rate change is input. An accrual, to the extent of a repayment, is automatically carried out at the time of repayment.

The module supports amendments and payments for previous accrual periods. Subsequent accruals make correction of any adjustments that are to be made due to these actions.

The Loans module allows you to accrue interest at the product level. Rather than accrue interest for each loan involving a product, and then update the ledgers of the accrued interest individually, the bank can accrue interest for each contract involving the product, and pass a consolidated entry to the ledgers.

Parent topic: Introduction