Introduction

The functionality of Deposit Accounts covers typical use-cases of term-deposits provided in microfinance which are Fixed-Term Deposits and Certificate of deposit.

Fixed-Term Deposit (FD): is money deposited at bank/mfi that cannot be withdrawn for a specified term/tenure (unless a penalty is paid). When the term is over it can be withdrawn or it can be held for another term.
Certificate of Deposit (CD): Certificate deposit is different from that of fixed-term deposit in terms of its negotiability. CD is negotiable and can be rediscounted when the holder needs some liquidity, while fixed deposits typically would be (or must be) kept until maturity.

Use-case: Submit Deposit Account Application

When setting up/creating a deposit account the following details need to be known:

Term/tenure: What is the length of the term/tenure (in months)
Deposit amount: How much money is being deposited for the term. There would typically be some rules around min and max deposit supported.
Nominal annual interest rate: What is the interest rate to be applied to deposit amount for the term expressed as a nominal annual rate. There would typically be some rules around min and max interest rate supported.
Interest compounding frequency: Interest is usually compounded at periodic intervals like monthly, quarterly, annually
Commencement date: On what date does the term/tenure commence from.

Using the above information, it should be possible to derive the following at time of opening/creating a deposit account:

Maturity date: Given commencement date and tenure length, maturity date is known.
Accrued interest on maturity: Given the deposit does last until maturity date as intended, the amount of interest accrued on the deposit over the term can be calculate using an excel like FV algorithm
Maturity amount: Given the deposit does last until maturity date as intended, this is simply the sum of origin deposit amount and the accrued interest on maturity.

A status is automatically assigned to the deposit account of SUBMITTED_AND_AWAITING_APPROVAL (represented on database as integer value 100).

Use-case: Approval of Deposit Account

Approval is done by higher ups in the organization. There might a scenario where the User enters the Deposit account and sends it to approval from the manager. This is normally used when customer demands higher interest rate on the FD. Manager negotiates with customer and comes to a common understanding in the changes to interest rate with some additional criteria of increasing the tenure of the deposit as initially agreed or by increasing the Deposit amount. Hence, provision for changing the interest rate, Deposit amount, Tenure & interest type frequency is required while approving the FD.

Maturity date: Recalculate the projected maturity date given the current commencement date and tenure length.
Interest on maturity: Recalucate the the amount of projected interest accrued given the current deposit amount and tenure.
Maturity amount: Recalculate using new projected interest accrued
Record of deposit transaction: When account is activated, a transaction recording transaction related information such as date, amount and type of transaction (DEPOSIT) should be recorded.
Status: Status of deposit account moves from SUBMITTED_AND_AWAITING_APPROVAL to ACTIVE ?

Use-case: Rejection of 'deposit account application'

There will be cases where the negotiations with customers fail on the interest payable component while the Deposit account in approval status, such cases should be marked as rejected along with the reasons for the rejection. It helps for management to evaluate such rejected cases and to frame products accordingly.

Status: Status of deposit account moves from SUBMITTED_AND_AWAITING_APPROVAL to REJECTED ?

Use-case: Applicant withdraws from 'deposit account application' process

Customers changes his mind and wants to withdraw from the deposit process. Those cases should be marked as withdraw along with the reasons for withdraw.

Status: Status of deposit account moves from SUBMITTED_AND_AWAITING_APPROVAL to APPLICANT_WITHDREW ?

Use-case: Modification of Deposit Account Application

The deposit account may not commence on the exact date given when 'submitting the application' for the deposit account. The date on when the 'deposit' transaction is received by the bank/mfi is the date typically from which the deposit account becomes 'active'.

When activating/commencing the deposit account, it should be possible to modify/set details of the account as needed:

Term/tenure: What is the length of the term/tenure (in months)
Deposit amount: How much money is being deposited for the term.
Nominal annual interest rate: What is the interest rate to be applied to deposit amount for the term expressed as a nominal annual rate.
Interest compounding frequency: Interest is usually compounded at periodic intervals like monthly, quarterly, annually
Commencement date: On what date does the term/tenure commence from: Deposit start date commence from the date of approval. Initial FD date which commence on adding the FD account gets override with the Approval date.

As a result of activation any or all the following 'derived' fields should be set

Maturity date: Recalculate the projected maturity date given the current commencement date and tenure length.
Accrued interest on maturity: Recalucate the the amount of projected interest accrued given the current deposit amount and tenure.
Maturity amount: Recalculate using new projected interest accrued
Account status: The status of the account should transition from 'PRE-ACTIVATION' to 'ACTIVE'.
Record of deposit transaction: When account is activated, a transaction recording transaction related information such as date, amount and type of transaction (DEPOSIT) should be recorded.

Use-case: Withdrawal and closure on Maturity of Deposit Account

A typical scenario is that the deposit account reaches the maturity date and the customer withdraws their deposit amount and accrued interest which effectively closes the deposit account.

Use-case: Full withdrawal and pre-closure of deposit account

Some deposit accounts allow for the customer to withdraw thier money in full from the account earlier than the maturity date but the result of this is heavy penalization. This is known as pre-closure. On pre-closure the interest accured to date is calculate from the closure date (length of time money was in deposit account), pre-closure interest rate and the original deposit amount.

Use-case: Renewing or 'Rolling over' a Deposit Account

Its typical to allow a customer to renew an existing deposit account on maturity. If deposit account allows renewal (sometimes known as rolling it over) then we simply want to create/open another deposit account with the same 'terms', 'Matured Amount', 'Interest Rate' for Auto renew scenario. The following may be different for manual renew cases:

Use-Case: Manual Renewal of Deposit Account

Deposit amount: The amount deposited might be the original deposit again or the entire amount (Deposit Amount + (Interest Accrued - Interest Withdrawn)) received from previous deposit account.
Term: Customer may opt for different term from the original deposit term.
Record it as a renewal: We should record that this deposit account is a renewal from a pre-existing deposit account (probably best to track the deposit account id it is a renewal of.)
Interest Rate: MFI / Bank may give different interest rate based on the market offerings during the renew period.

Use-case: Automatic rollover or renewal of deposit account

Deposit amount: The amount deposited might be the originial deposit again or the entire amount received from previous deposit account.
Term: It will remain same as the original deposit term.
Record it as a renewal: We should record that this deposit account is a renewal from a pre-existing deposit account (probably best to track the deposit account id it is a renewal of.)
Interest Rate: MFI / Bank may give different interest rate based on the market offerings during the renew period.

Interest Pay-out (Simple Interest Type):

Financial institutions also offers to pay the monthly realised interest component to its members as cash / cheque on monthly or quarterly based on the interest payout frequency selected for the FD Product.

Use Case: Interest pay-out frequency

An example for simple interest calculation interest payout, member has opted a FD product with a tenure of 12 months with annual interest rate of 12%, FD amount as 100000/-
Interest Realized per Month: 1000/-. Similarly, if it is a quarterly interest payout the realised interest component for 3 months i.e., 3000/-, is paid as cash / cheque to the FD holder.

This type of FD's are generally offered as to give some income to the FD holders.

Job Process for updating matured FD accounts

FD which passes the maturity date and not renewed or withdrawn should be marked as "Matured" in the status column for the respective FD accounts.

Post Maturity Interest Rate:

Customer should renew or withdraw upon the maturity of a Fixed Deposit. However, sometimes customers delay in doing so. In such scenario interest associated with the FD account will not be used for further interest calculation. Instead a regular interest rate or No interest is posted for those customer. Hence, to accommodate that there is a separate parameter provided as "Post Maturity Interest Rate"

Use Case: FD matured and customer not opted for renew or withdraw

Interest will be posted with the Post maturity interest rate as defined while creating a FD account for that customer.

Appendix:

Algorithm to calculate Effective Annual Rate (EAR) = (1 + (i/n))^n -1 where,

i = nominal interest rate
n = number of compounding periods

Algorithm to calculate accrued interest due on future maturity date: use excel FV function where,

rate = rate per compounding period e.g. in case of monthly rate (6% per annum / 12 months)
number of periods = number of compounding periods in term/tenure e.g. 12 for a 12 month loans with monthly compounding
present value = the amount of the deposit (the present value represented as a negative number)