Specifications of Line of Credit Feature in Mifos X
Line of Credit Overview
The Line of Credit is a blessing for those who need financial aids at regular intervals. In this system, the borrower can apply for a particular loan amount from a bank but he or she needn’t take the entire amount in one shot. Once the loan amount is approved, the borrower can take a small amount out of the entire fund for the present need and keep the remaining amount with the bank. The interest will be charged only on the amount that the borrower has withdrawn and not on the entire amount. As a result, the customer can manage his or her monthly expenses easily without getting burdened with the loan EMIs.
In this lending system, the borrower also has to pay a lower interest rate compared to a traditional loan. It is like a credit card where you can pay the charges only for the amount that you have used and not for the entire credit limit.
Suppose, the bank has sanctioned Rs.50,000 to you based on your LOC application, and from the approved amount you have taken out Rs.10,000 as per your requirement. In such an instance, you have to pay the interest amount for only Rs.10,000 and not for the total amount.
Loan Product Configuration
New Option to enable the "tranche disbursements" and "overdraft "should be included in the product creation section
Overdraft Checkbox, amount limit, and interest rate for overdraft should be set at the product level, which can be again configured at the time of loan account creation.
NOTE: Overdue feature is optional can be ignored for the first phase or permanently based on other's input.
Tranche features as being the heart of the LOC should be flexible in order to meet the requirement.
The new option "Disburse New Tranche" should be available for all the loan accounts of the products which have LOC enabled.
Disburse New Tranche Screen should consist of the below-mentioned Parameters which would define the repayment schedule accordingly
Installment Start Date
Total No. of installments
Fees inclusion option
Interest Rate change option
The system should allow the "Disburse New Tranche" option to disburse the amount which is lesser than or equal to the (total approved amount-principal outstanding).
Undo of last disbursed tranche option should be available.
Checks and Validations Required
The disbursement date cannot be before the last transaction date.
Installment start from date cannot be before the proposed Disbursement Date.
the schedule can be generated based on the new parameters provided at the tranche disbursement stage.
No Tranches are not required to be limited or pre-added at the time of loan creation, Tranche validation should only be based on (total approved amount-principal outstanding) amount.
Repayment Schedule configurations specific to Tranches
When LOC is enabled for the loan account, a repayment schedule should be generated only for the Disbursed amount and based on other parameters like (FRP, Installment amount etc)
When a New Tranche is Disbursed, a new schedule should be generated, Future Installment's EMI and Interest should be recalculated as per the new outstanding amount.
If a new Installment start date is mentioned, Previous Installment dates should be auto rescheduled as per the new parameters.
Following are a set of scenario examples on how the schedule would behave with new tranche introductions
Scenario 1- when all repayments are completely paid and a new tranche is disbursed
Scenario2: 2nd Tranche Disbursement when the first tranche is still not complete and FRP for the second tranche is not mentioned
Scenario3: 2nd Tranche Disbursement when the first tranche is still not complete and FRP for the second tranche is mentioned
NOTE: Any new scenarios possible we will be adding to this section.
Charges specific to Line of Credit and Tranches
The current tranche charge feature to be enhanced to support a custom amount/% for each tranche and to exclude or include for the tranche at the time of disbursement.
User should be able to select the charge which needs to be charged at the time of each disbursement.
Loan closure enhancements
In the system currently, loan accounts get closed when the loan is paid fully, meaning when the outstanding is zero.
The loan account should remain active even when the loan installments are completely repaid, this will allow the users to disburse a tranche whenever it is needed.
Manual Close option should be provided to close the loan manually once the customer/institute decides to close to the loan.
Approval Amount Modification
User should be able to increase or decrease the loan approved amount based on the customer/institute recommendation
There is no need for accounting changes as we are not altering or introducing new financial transaction types.