Specifying Rate Code Usage

1.4.1 Specifying Rate Code Usage

If you specify Auto Rate Code usage, all the rate changes made during the liquidation or accrual period is considered. If you specify periodic rate code usage, the rates are periodically refreshed and the rates as of a specific frequency is applied.

This frequency is specified in the Contract Schedules screen while the Rate Code Usage is specified in the Interest Class Maintenance sub-screen of the Loans and Commitment Product Definition screen.

Note:

If you want the floating rates to be applied automatically every time they change, you should specify Auto Rate Code usage in the Interest Class Maintenance sub-screen of the Loans and Commitment Product Definition screen.

Table 1-8 Interest Rate Details

Field	Description
Rate Type	The Rate Type indicates whether the interest is a Fixed Rate, a Floating Rate or a Special amount. When creating a product, you should specify the Rate Type based on which interest is computed.
Floating Rate Code	If the Interest Rate Type has been specified as Floating, indicate the Rate Code to which the product has to be linked. The Rate Code corresponds to the rates, defined in the Floating Rates table, that have to be applied for the product. A Rate Code identifies a set of rates defined for a combination of Currency, Amount (if it is necessary) and an Effective Date. Select the Rate Code applicable for the product you are defining from the option-list provided. The Rate Code can be changed during contract processing.
Floating Rate Type	In addition, you should specify the method in which the rates in the Floating Rates table have to be applied on the loan. It could either be automatic application (meaning the rate has to be applied every time it changes), or periodic application (meaning the rate has to be applied at a regular frequency, defined for each contract involving the product).
Borrow Lend Ind	For floating rate interest, you should also indicate if the interest rate for a given rate code to be applied, from the Floating Rates table, is the Borrow rate, Lend rate or Mid rate.
Reset Tenor	If interest rates are defined for the tenor of a contract, you should specify the Reset tenor. This indicates the tenor for which the floating rate (when applied automatically) needs to be picked up from the Floating Rates Table, for contracts using this product.
Rate Calc Type	Interest rates based on the tenor of a contract could be applied in any of the following ways. Rate Cycle Down - Indicates that the rate of the lower tenor slab should be used. Rate Cycle Up - Indicates that the rate of the upper tenor slab should be used. Rate Cycle Interpolate - Indicates that the rate should be interpolated between the rates of the upper and the lower slabs. Rate Cycle Round-off - Indicates that the tenor of the component should be rounded off to the nearest whole number. The rate defined for the derived tenor is applied to the component. Example The Floating Rates table has the following tenor-based interest rate definitions:Table 1-9 The tenor of the contract to be processed is 9 days. This falls between the 5 day and 15 day slabs for which interest rates are defined in the table. Depending on the Rate Cycle Type specified, the interest rate for 9 days are applied as follows. Up: The interest rate for 15 days is applied, that is 16%. Down: The interest rate for 5 days is applied, that is 12%. Interpolated: The interest rate is interpolated from the available rates for 5 days and 15 days on a straight-line basis. The interest rate for 9 days is 13.6%. Round Off: The tenor of the contract is rounded off to the nearest tenor value for which a rate is maintained. In this case, a rate of 12% is applied since the nearest tenor value for which a rate is maintained is 5 days. If the tenor of the contract were 12 days, the interest rate applied can be 16%. You can specify the various floating rate parameters explained above for a fixed rate type of interest. The appropriate floating rate is then applied at the beginning of the contract, however, this rate is subsequently remain fixed during the contract.
Fixed Rate Type	If the rate type is Fixed, you have to indicate whether the rate can be entered by the user or needs to be picked up from the rate maintenance table. The following options are available. User Input (U) – This option may be used if you want the user to specify the rate of interest applicable on the contract. Standard (S) – If you opt for this option, the system pick-ups the rate from the Standard Rate. Maintenance screen. This rate is a combination of the Standard Rate, Amount-Slab-Wise Spread and Tenor-wise Spread. However, you can change this rate at the contract level. Agency - If the loan product is of Agency Contract type (specified in the Loans and Commitment – Product Preferences screen), select the rate type as Agency. The system allows you to associate only those interest components with the loan product for which Rate Type is Fixed and Fixed Rate Type is Agency. For more details, refer the topic Identifying products for agency contract creation in the Defining the Attributes specific to a Loan product topic of the Bilateral Loans User Manual.
Interest Computation	You have to specify the method to be used for computation of interest. The available options are: Simple - Indicates that the interest is computed using the Simple Interest formula Compound - Indicates that the interest is compounded
Compounding on holidays	You can opt to compound interest on holidays. Select the Compounding on Holidays option to indicate the same. The Interest Computation and Compounding on Holidays options are available only for Loan and Commitments products. These options can be specified only for a product. You cannot change them at the contract level. The example given below explains the method used for compounded interest calculation: Assume that you have a Normal-Bearing contract with the following details. Value Date - 2nd April 02 Maturity Date- 10th April 02 Principal Amount -10, 000, 000.00 Rate of Interest-10 % (Main Interest Component) Holiday - 6th April 02 Further, the contract has Interest and Principal payment as bullet schedules. Case 1: Now, if you opt for Interest Computation method as Compound and compound interest on holidays, the computation of compounding interest is done as shown below Table 1-10 Case 2: If you select the Interest Computation method as Compound but do not opt for compounding interest on holidays, the computation of compounding Interest can be as shown below Table 1-11
Fixed Rate Code	You can maintain several standard rate codes in the Standard rate code maintenance screen. Subsequently, you can also maintain the rates for each of these codes in the Standard Rate Maintenance screen. If you select the Fixed Rate Type as Standard, you have to select the appropriate rate code from the option-list provided. The Standard rates maintained for the selected rate code is applicable on all contracts processed under the product being maintained.
Prepayment Penalty Rate Code	Likewise, select the rate code based on which the system selects the prepayment penalty rate for all contracts under the product.
Waiving interest on premature withdrawal	You can opt to waive Interest on premature withdrawal of the loan. Select the No interest on premature withdrawal option to indicate that interest needs to be waived if premature withdrawal (partial of full) is done for the loan.
Reapplying Interest rate on prepayment	If the Fixed rate type is Standard, you can opt to reapply interest when a prepayment is made. You can reapply interest on one of the following: On Prepaid Amount – Select this option to indicate that interest on the prepaid amount is recalculated during prepayment based on the rate applicable for the current tenor of the loan. On Outstanding Balance – This option indicates that interest is recalculated on the outstanding balance during prepayment based on the rate applicable for the current tenor of the loan.
Rule ID	You can link a rule to a product. In the Product ICCF Details screen, in the Rule ID field, pick the rule you want to link to the product. For an interest type of rule, all the interest-related details have to be specified in the Product ICCF Details screen.
Settlement Currency	The Settlement Currency is the currency in which the interest amount is calculated. The interest amount applicable for a contract is calculated in this currency. The appropriate conversion rate (defined for the product as the applicable Rate Type) is applied to carry out a conversion if the repayment account is in a different currency.
Interest Details 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/Margin & Spread Adjustment Interest amount Acquired interest - If the contract was already initiated when it was input, the interest amount that has been accrued should be entered here. The amount is taken into account during the next liquidation cycle. You can make changes to the acquired interest through this screen. Waiver - The attributes of an interest component that have been defined for a product is applied on a contract involving the product. If, for some reason you do not want to apply the interest component for the contract you are processing, you can do so by checking this field. The interest is calculated but it is not applied on the contract. To amend a contract, you have to invoke the contract, ICCF Details screen of the ICCF module through the Value Dated Changes function.
Refinancing Required	While creating a loan product, you have the option of indicating whether the accruals/ liquidations involving a particular component should be tracked for refinancing. Select the check box positioned next to this field to indicate that refinancing is required.
Original component	If you enable the Refinancing Required option, you have to identify the original component for the refinance component.
Consider as Discount	While defining an interest component for either the loans or the bills module, you can indicate whether the interest component is to be considered for discount accrual on a constant yield basis. The consider as discount option is available for, Export Bill products, for the Discount operation Discounted or True Discounted loans The value of this field is defaulted from the Interest Class Maintenance screen. However you can change it over here. For Bearing contracts, if the option Consider as Discount is selected then the option Accrual Required also has to be selected. If the option Accrual Required is not selected, the option Consider as Discount is disabled. For Discounted contracts, you can select either one of the options or both together. If the options Accrual Required and Consider as Discount are selected then discounted interest is considered for IRR calculation. If the option Accrual Required is not selected and Consider as Discount is selected, then discounted interest is considered a part of the total discount to be accrued. If neither option is selected, the interest is directly recognized as income during interest liquidation. Note: This option is not available if the amount category is Penalty.
Negative Interest Allowed	Negative Interest Allowed is added at interest class level which is applicable for main interest classes of OL module. Following are the important functionalities of the Negative Interest Allowed option. A negative interest class is internally generated on saving of negative interest allowed interest classes. Negative interest component is linked to OL product, if negative interest is applicable for main interest component. Negative interest component tracks accrual and liquidation of negative interest rate. Processing changes are done at contract level to support life cycle events with negative interest. Float rate codes with negative interest rate can be attached to these modules. Note: The Negative Class Code gets updated on save with the name of negative class code auto generated. If any interest class already exists with same class code as the negative class code being auto generated, an error appears on saving the main interest class code itself. You can input name in Negative Class Code field manually and save the record.
Net Negative Interest	The Net Negative Interest check box is available in the Product Preferences screen. If this check box is selected, then during interest liquidation, the system internally nets the positive and the negative amounts being paid to the customer. This check box is only for products with negative interest allowed is selected for main component. For information on Alternative Risk-Free Rates, refer to Interest Class Maintenance in this User Manual.
Penal Compounding on Rate Revision	The Penal Compounding on Rate Revision check box is available in the Interest tab of Product Preferences screen. You select or clear for penalty products. It allows you to add back the unpaid amount at the end of every schedule to the basis amount for penalty calculation for the next month during rate revision.

Table 1-9 Tenor-based Interest Rates

Tenor	Interest Rate
5	12%
15	16%

Table 1-10 Case 1 - Compounding Interest Computation

Schedule Date	Start Date	End Date	Basis Amount	Compound Interest	Rate	Calculated Amount	No of Days	Daily Avg. Amount
04-02-02	04-01-02	04-02-02	10,000,000	0.00	10.00	2,739.73	1	2,739.73
04-03-02	04-02-02	04-03-02	10,000,000	2,739.73	10.00	2,740.48	1	2,739.73
04-04-02	04-03-02	04-04-02	10,000,000	5,480.21	10.00	2,741.23	1	2,739.73
04-05-02	04-04-02	04-05-02	10,000,000	8,221.44	10.00	2,741.98	1	2,739.73
04-07-02	04-05-02	04-06-02	10,000,000	10,963.42	10.00	2,742.73	1	2,739.73
04-07-02	04-06-02	04-07-02	10,000,000	13,706.15	10.00	2,743.48	1	2,739.73
04-08-02	04-07-02	04-08-02	10,000,000	16,449.63	10.00	2,744.23	1	2,739.73
04-09-02	04-08-02	04-09-02	10,000,000	19,193.86	10.00	2,744.98	1	2,739.73
04-10-02	04-09-02	04-10-02	10,000,000	21,938.84	10.00	2,745.74	1	2,739.73

Table 1-11 Case 2 - Compounding Interest Computation

Schedule Date	Start Date	End Date	Basis Amount	Compound Interest	Rate	Calculated Amount	No of Days	Daily Avg. Amount
04-02-02	04-01-02	04-02-02	10,000,000	0.00	10.00	2,739.73	1	2,739.73
04-03-02	04-02-02	04-03-02	10,000,000	2,739.73	10.00	2,740.48	1	2,739.73
04-04-02	04-03-02	04-04-02	10,000,000	5,480.21	10.00	2,741.23	1	2,739.73
04-05-02	04-04-02	04-05-02	10,000,000	8,221.44	10.00	2,741.98	1	2,739.73
04-07-02	04-06-02	04-07-02	10,000,000	8,221.44	10.00	5,483.96	2	2,739.73
04-08-02	04-07-02	04-08-02	10,000,000	13,705.40	10.00	2,743.48	1	2,739.73
04-09-02	04-08-02	04-09-02	10,000,000	16,448.88	10.00	2,744.23	1	2,739.73
04-10-02	04-09-02	04-10-02	10,000,000	19,193.11	10.00	2,744.98	1	2,739.73

Parent topic: Defining Interest Details