Introduction:

A Loan provisioning is an expense that is reserved for default/bad performing loans/credits. It is an amount set aside in the event of that loans defaults. or It is an expense set aside as an allowance for bad loans or credits. Loan loss provision is also known as the "Valuation Allowance" or "Valuation Reserve".  It is also known as "Allowance for Loan Loss"                              

In any group of loans, banks (used to refer to all financial institutions) expect there can be some loans that do not perform as expected. These loans may be delinquent on their repayments or default the entire loan. This can create a loss to the bank on expected income. Therefore, banks can set aside a portion of the expected repayments from all loans in its portfolio to cover all or a portion of the loss. In the event of loss or in critical situations banks can use the amount set aside to cover the loss instead of taking a loss in its cash flow. This loan loss reserve acts as an internal insurance fund.

Example:

Let's assume organization ABC has made $ 100,000 of loans to different individuals and companies. Though ABC organization works very hard to ensure that it lends to only those people who can repay the total amount on time, naturally some may default, some may fall behind and for some ABC organization has to renegotiate.

Organization ABC estimates that 1% of loans amount that is $ 1000 will never comeback. So this $ 1000 is ABC organization's loan loss reserve and it records this amount as negative number on the asset portion of its balance sheet.  If and when organization ABC decides to write all or a portion of a loan off, it will remove the loan from its asset balance and also remove the amount of the write-off from the loan loss reserve. The amount deducted from the loan loss reserve may be tax deductible for organization ABC.

How to define a Loan Provision:

Any loan can be categorized into 4 types and the definition of these categories changes country to country. For example

  • Standard: Good financial condition. The debtor is paying the principal and interest punctually without any dues.
  • Sub-Standard: Some payments of principal and/or interest are overdue by 'x' amount of days or more.
  • Doubtful Loan: Some payments of principal and/or interest are overdue as follows
    • 'y' days or more in the case of a loan with an original term of  less than 1 year
    • 'z' days or more in the case of a loan with an original term of one year or more
  • Loss: Some payments of principal and/or interest are overdue as follows
    • 't1' days or more in the case of a loan with an original term of less than 1 year
    • 't2' days or more in the case of a loan with an original term of one year or more

Based on in which category the loan belongs to organization can reserve the amount based on his country regulations. For example

  • For the loans falls under Standard category no need to have any provision or management can take the decision to keep 5% of the loan amount aside
  • For the loans falls under Sub-Standard category, the management can decide to keep 20% of the loan amount aside
  • For the loans falls under Doubtful category, the management can decide to keep 50% of the loan amount aside
  • For the loans falls under Loss category, the management can decide to keep 100% of the loan amount aside

 

Loan Loss Provision API(s)

1) http://serveraddress:port/mifosng-provider/api/vi/loanprovision/list

optional request parameters for GET request

{
"offset" : 0,
"limit" : 15,
}

Description: This API will return the provision history data on which provision report is created.The request parameters offset and limit are used for the pagination. Organization can select a particular date and can view the provision/generate the report. Please find the mock up screen below


2) https://serveraddress:port/mifosng-provider/api/v1/loanprovisioning

Optional parameters for Create request

{
	"createjournalentries" : true,
	"date" : true,
	"recalculateprovisioning": true
 
}

Description: This API should be used to generate loan loss provision entries. Date request parameter indicates on which the provision entries should be created. If createjournalentries parameter is true, then loan loss provision details will be added into journal entry. Before creating new journal entries, it will reverse previous journal entries if they present. If createjournalentries is false then it will not create the journal entries. If recalculateprovisioning true, then it will delete previous provision entries if present and it will create new provision entries. If recalculateprovisioning is false, it will return previous provision entries if present.The request parameters offset and limit are used for the pagination. This method will return list of provision entries in JSON data format

Optional parameters for Get Provisioning details

 {
 "summaryview=true",
 "categorywise=false", 
 "branch=all",
 "offset" : 0,
 "limit" : 15,
}

The summary view for all branches is shown below

 The summary view for all branches with category wise is shown below

The summary view for a selected branch is shown below (categorywise parameter is not used in case of branch view)

The non summary view for a selected branch is shown as below (categorywise parameter is not used in case of branch view)

Non summary view of all branches is shown below

Loan Loss Provision Implementation in Mifos X:

We need to create a table to keep all loan provision categories.The table name is 'm_provision_category''. The table definition is defined below. The category names will vary based customer to customer.

 

NameDatatypeLengthRemarks
idBIGINT20Primary Key & Auto Increment
category_nameVARCHAR100Not Null
DescriptionVARCHAR200 

 

By default Mifos X system will create and insert the following categories into this table based on customer requirements. So the data will look like below.

idcategory_nameDescription
1STANDARDPunctual Payment without any dues
2SUB-STANDARDPrincipal and/or Interest overdue by x days
3DOUBTFUL

Principal and/or Interest overdue by y days with 1 year original term (or)

Principal and/or Interest overdue by z days with more than 1 year term

 

4LOSSPrincipal and/or Interest overdue by t1 days with 1 year original term (or)
Principal and/or Interest overdue by t2 days with more than 1 year term

 

Note: We can provide a GUI in client to add these categories into this table which is not covered in this specification.

Now how to associate loan provision to  a product? In create loan product screen, we have the option to enable loan loss provision as shown in mock up screen below

Organization can choose each category one by one and can add it to the loan product. Organization can choose minimum and maximum over dues in days and can provide provision percentage differently for each loan product. Both Liability & Expense combos will have all GL accounts. So organization can choose liability & expense accounts against each provision category differently,

Once the new loan product form is submitted, product loan provision details will be stored in 'm_loanproduct_provision_details'. The table definition is defined below.

NAMEDatatypeLengthRemarks
idBIGINT20PRIMARY KEY & AUTOINCREMENT
loanproduct_idBIGINT20FOREIGN KEY
category_idBIGINT20FOREIGN KEY
min_ageBIGINT20NOT NULL
max_ageBIGINT20NOT NULL
provision_percentageINT4DEFAULT 0
liability_accountBIGINT20FOREIGN KEY acc_gl_account.id
expense_accountBIGINT20FOREIGN KEY acc_gl_account.id
created_byBIGINT20FOREIGN KEY m_appuser.id
created_onDATE  
modified_byVARCHAR100FOREIGN KEY m_appuser.id
modified_onDATE  

 

For any given tenant, the provision details for a particular loan product will look like below.

idloanproduct_idcategory_idmin_agemax_ageprovision_percentageliability_accountexpense_accountcreated_bycreated_onmodified_bymodified_by
1103451005abcd accountdcba account10031-Dec-201420010-Jan-2015
2103452306020abcd accountdcba account20031-Dec-201440010-Jan-2015
31034536018050abcd accountdcba account40031-Dec-201450010-Jan-2015
410345418036090abcd accountdcba account30031-Dec-201460010-Jan-2015

While editing the loan product, persisted provision details will be restored in the edit loan product screen

Provision Calculation For Loan:

By using the following query we can get all active loan ids along with product id, overdue in days, outstanding loan balance, provision category id, provision percentage, due date


SELECT loan.id as loanid,
loan.product_id as productid,
GREATEST(datediff(CURDATE(),sch.duedate),0) as numberofdaysoverdue,
loan.total_outstanding_derived as outstandingbalance,
lpc.category_id,
lpc.provision_percentage,
sch.duedate
FROM m_loan_repayment_schedule as sch
LEFT JOIN m_loan as loan
ON sch.loan_id = loan.id
LEFT JOIN m_loanproduct_provision_category lpc
ON loan.product_id=lpc.product_id
and lpc.min_age <= GREATEST(datediff(CURDATE(),sch.duedate),0) and  GREATEST(datediff(CURDATE(),sch.duedate),0) < lpc.max_age
WHERE loan.loan_status_id=300 and sch.principal_amount > 0 and sch.completed_derived=false and
lpc.category_id > 0 and lpc.provision_percentage > 0
GROUP BY sch.loan_id
HAVING sch.duedate=min(sch.duedate)

The result of the above query will look like below (mock data).

loanidproductidnumberofdaysoverdueoutstandingbalancecategory_idprovision_percentageduedate
44011150.000000152015-10-28
55011310.000000192015-10-28
131169216300.00000041002013-10-15


The charge calculation for above data is shown below.

loanidproductidnumberofdaysoverdueoutstandingbalancecategory_idprovision_percentageduedateAmount to be reserved
44011150.000000152015-10-28557.500000
55011310.000000192015-10-281017.900000
131169216300.00000041002013-10-1513040.000000

 

In Mifos X, there are two ways to trigger provision calculation for all active loans..

1) Under System-> Manage Scheduler Jobs, organization can find the loan loss provision job. This job will run at customer defined intervals.



After calculating the provision amounts for all active loans, the data will be saved into 'acc_gl_journal_entry'.

2) Organization can generate provisioning data manually under accounting section as shown in below mock up screen

Mifos system, calculates provision date for all active loans and will generate a tabular view as shown below. Once user selects OK on this screen, this data will be saved into 'acc_gl_journal_entry table'

 

As current journal entry is not sufficient for provision reports, we need to introduce a new table in the database. The table name is 'm_loan_provision_entry' and the table definition is shown below.

NameDatatypeLengthRemarks
idBIGINT20PRIMARY KEY and AUTOINCREMENT
currency_codeBIGINT20FOREIGN KEY m_currency.id
office_idBIGINT20FOREIGN KEY m_office.id
product_idBIGINT20FOREIGN KEY m_product_loan.id
category_idBIGINT20FOREIGN KEY m_provision_category.id
overdue_in_daysBIGINT20DEFAULT 0
amount_to_be_reservedBIGINT20DEFAULT 0
created_byBIGINT20FOREIGN KEY m_appuser.id
created_onDATE NOT NULL
modified_byBIGINT20FOREIGN KEY m_appuser.id
modified_onDATE  

 

Whenever the provision calculation is done, system is going to make an entry in the 'provision_history' table. The structure of the table is shown below

NameDatatypeLengthDescription
idBIGINT20PRIMARY KEY & AUTO INCREMENT
created_onDATE NOT NULL
journal_entry_createdINT1DEFAULT 0
created_byBIGINT20m_appuser_id or scheduler job dummy id
created_onDATE  

 

Changes required in existing Classes:

  • While creating any loan product template, provision categories should be added to the response object. For this
    • org.mifosplatform.portfolio.loanproduct.data.LoanProductData should have one more instance variable to hold provision categories
    • New interface org.mifosplatform.organisation.provisioning.service.ProvisionCategoriesReadPlatformService should have a method to retrieve all provision categories.
      • The method name is List<EnumOptionData> retrieveProvisionCategories() ;
    • Provision Categories should retrieved and set to LoanProductData in org.mifosplatform.LoanProductsApiResource.handleTemplate(final LoanProductData productData)
    • Client application should read response param "provisioncategoies" if available it should display provision categories as shown in create product mock up screen
  • While creating a loan product, the provision categories along with min age, max age, percentage to provision should be read and saved into DB. For this
    • New entity class org.mifosplatform.organisation.provisioning.domain.LoanProductProvision for 'm_loanproduct_provision_category' should be added
    • org.mifosplatform.portfolio.loanproduct.domain.LoanProduct should have set of LoanProductProvision
    • Client application should send loan product provision categories as part of the request params while creating a loan product. The parameter name is 'loanproductprovisons'
    • Provision categories should be read and added in org.mifosplatform.portfolio.loanproduct.domain.LoanProduct.assembleFromJson(...)
  • While retrieving a loan product (s), we need to retrieve the provision categories and associate with the Loan Product object (s). For this
    • org.mifosplatform.portfolio.loanproduct.service.LoanProductReadPlatformServiceImpl.retrieveLoanProduct(Long loanProductId) should be modified to associate provision categories
    • org.mifosplatform.portfolio.loanproduct.service.LoanProductReadPlatformServiceImpl.retrieveAllLoanProducts() should be modified to associate provision categories
    • org.mifosplatform.organisation.provisioning.service.ProvisionCategoriesReadPlatformService should expose a method to retrieve the provision categories based on loan product id
  • While updating a loan product (s), we need to update the provision categories associated to that loan product (s). For this
    • org.mifosplatform.portfolio.loanproduct.service.LoanProductWritePlatformServiceJpaRepositoryImpl.updateLoanProduct(...) should be modified to validate and update loan product provision categories