Interest is an important component of contracts processed by your bank. It is expressed as a percentage of the principal amount. Typically, one party pays interest to another party for using the latter’s assets. Interest is typically expressed as an annual percentage rate (APR).

You should define the attributes for interest components by way of defining interest rules. These interest rules should, in turn, be linked to a product, so that the attributes of the interest rule will be applied on all contracts involving the product. However, while capturing the details of a contract, you can modify some of the attributes defined for a rule. Further, for a contract, you can also indicate that the application of a specific Interest component should be waived.

In this chapter, we shall discuss the processing of interest on contracts. This will include defining Interest Rules, linking them to a product, and applying them on a contract.

For example, you could link two Interest Rules to a product, one with 20% fixed interest and another with floating interest. These two will be processed as two different interest components. The expense and accrual accounts can be different for these components. The two interest components will be reported as different components in all reports and also in the customer correspondence relating to the contract.