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Many Banks and Financial Institutions use lending rates that are linked to the Base Lending Rates defined by the Central Bank of the country. Home Loans and other longer term loans are usually given out by banks/financial institutions at floating interest rates - where the interest rate applicable for the loan is linked to the interest rate set by the Central Bank and is periodically revised by the Central Bank. The interest rate applicable for the loan, can change during the tenure of the loan. The loan may start off as a 10% loan and may get revised to 10.5% after a period of time and can even be revised downwards (for example: 9.5%) depending on guidelines issued by the Central Bank from time-to-time.
Background and strategic fit
This feature will bring Mifos X closer to a true bank and real-life financial institutions and not restrict it's its usage to micro-finance scenarios where interest rates are fixed during the tenure of the loan account.
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d) If the Floating Interest Rate change OR the Base Lending Rate change occurs between two instalmentsinstallments, then the interest for the next instalment will be calculated based on the exact date of change. For example:
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Interest till 1st April = (20,000 * 10.50% * 20/365) + (20,000 *10.75% * 1110/365)
i.e. interest computed with old rate for 20 days and then interest computed with new rate for the remaining 11 10 days.
e) Audit Trail has to be maintained and displayed to user for:
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| Attribute | Description | Notes |
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| Interest rate linked to Base Lending Rate? | Boolean value that describes if this loan product is linked to the Base Lending Rate of the bank | True / False. This field is applicable for non-floating interest rate loans too. Default False. |
| If True, then rate above (or less) the Base Lending Rate | Interest rate differential – For example +1.5% would mean 1.5% above the Base Lending Rate | This can be a range, as I it exists in Mifos today (min, default and max) This field is applicable for non-floating interest rate loans too. |
| Floating Interest Rate? | Boolean value that describes if this loan product has a floating interest rate or not. | True / False Default False. |
| If yes, then allow period based interest rates to be captured. | Interest rate differential for different periods. For example: a) 01-Jan-2009 to 10-Apr-2012 Interest differential is +1.5% b) 11-Apr-2012 to 21-Jun-2014 Interest differential is +1.75% c) 22-Jun-2014 to <null> Interest differential is +1.25% | Validations: There should not be any gaps in the periods. If “Interest rate linked to Base Lending Rate” is set to true, then an interest rate differential is provided. Else, actual interest rates may be given by user, instead of an Interest Rate Differential |
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| Question | Outcome |
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Should Base Lending Rate and Floating Interest Rate be provided for the same period? For example: if Base Lending Rate is given as yearly rate, can Floating Interest Rate be provided as a monthly rate? Will there be any conflicts during calculations? | |
| Is it ok to keep the floating interest linked to the disbursal date (and not link it to the loan application submission date and loan approval date)? | Yes, Should be linked to disbursal date (DBH) |
| Should floating interest rate be application for products that do not support Interest Recalculation? If yes, need to get list of exact scenarios to be supported. | |
| Once a loan account starts using a floating interest rate and repayments are already made, then it is planned to not allow any modification prior to the repayment date for Base Lending Rate and loan product level Floating Interest Rate. Is this ok? | yes, the only time it would be feasible to make a modification prior to repayment date is in the case of error correction. this would then be done thru journal entries. (DBH) |
Out of Scope
- TBD