Interest Amount Recalculation for Loan Accounts

As an Operations Manager, I want to define a loan product that supports interest recalculation.

When repayments are on time and for the exact due amount always, then there is usually no need for interest recalculation.

However, when repayments are either not on time or not for the due amount, then the following scenarios need to be handled:

a) Exact Due Amount is paid and

b) Only part of the Due Amount is paid and:

c) Excess of Due Amount is paid and:

For such scenarios, the exact interest amount calculation depends on following factors:

a) Days Calculation Basis:

• Actual

• 30 – here number of days will be computed as (Y2-Y1)*360 + (m2-m1)*30 + (d2-d1)

b) Number of days in a year:

• Actual

• 360

• 365

• 364

c) Rest or Frequency at which outstanding principal is recalculated – may be daily, weekly, fortnightly or monthly

At the end of every business day a batch job (Loan Interest Recalculation) will kick off which will check all active accounts for which interest recalculation is set to "true". The job then checks if there the interest calculated vs interest specified in repayment schedule matches. If yes, 

Many financial institutions have the need to re-compute interest based on actual date of repayment. This feature is a must when Mifos needs to support operations of a commercial bank.

A Daily Rest may be specified for loans of any frequency and the days in year may be:

• 365 – for all repayment frequency

• 364 – for weekly or fortnightly repayment loans

• 360 – for monthly repayment loans

A Weekly Rest may be specified for loans that are repaid weekly or fortnightly and the days in year may be 365 or 364

A Fortnightly Rest may be specified for loans that are repaid fortnightly and the days in year may be 365 or 364

A Monthly Rest may be specified for loans that are repaid Monthly and the days in year may be 365 or 360

These rules will not be implemented in the Mifos X code. But this is expected to be followed defining loan products and loan accounts. Mifos will be tested only in the above scenarios for consistent interest amount calculations.

Interest Amount Calculation will be done as follows:

Interest = Principal * Annual Interest Rate * Days Calculated / Number of Days in a Year

• Principal – Principal as per the Rest Specified

• Days Calculated – based on “Days Calculation Basis”

Other rules that will be followed:

a) When interest recalculation is turned on for a loan product, then any excess amount (over what is currently due or overdue) will be applied to the outstanding principal always. In this respect, it will override the settings for Repayment Strategy selected.

b) Any interest compounding will stop if any amount is overdue more than the number of days for the account to be treated as Non-Performing Asset (overdue_days_for_npa).

c) If there is a disbursement-time fee, which is calculated on principal+interest - then this fee amount will not be recomputed based on interest recalculations.

d) If any interest (or fee) was waived on an account - and the interest (or fee) changes due to the recalculations - then the waived amount will not be automatically changed by Mifos.

Example:

     Total Interest dues: Apr-14 - 300, May-14 - 250 and Jun-14 - 200

     Interest Waived = 300 (i.e. entire Apr-2014's interest is waived)

     Due to interest recalculation (due to a back-dated transaction), the interest amounts now change to: Apr-14 - 250, May-14 - 200 and Jun-14 - 150

     The waived amount remains as 300 (i.e. April's interest of 250  is waived and from May's interest - 50 is waived. If other behavior is needed, then user has to reverse the earlier waiver and then apply interest recalculation and then re-do the waiving with new amount).

The only situation when Mifos will automatically change the waived amount is when the total recalculated interest (or fee) due is less than the waived amount. In such a case, the waived amount is reduced to the recalculated amount.

e) If a fee is already paid and due to the recalculations if the fee is reduced (or increased), then the fee paid transaction is not altered. Any excess fees already paid in can be refunded at the end of the tenure of the loan (as then it will show that the account is overpaid). If there is an increase in fee due to the recalculations, then the additional fee can be collected.

For Loan Products and Loan Accounts

(Note: For Loan Accounts – all the below 4 attributes are inherited from Loan Product and cannot be modified for each account)