Floating Interest Rate Loans

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. 

This feature will bring Mifos X closer to a true bank and real-life financial institutions and not restrict its usage to micro-finance scenarios where interest rates are fixed during the tenure of the loan account.

a)      If Floating Interest Rate is false, then changes to Base Lending Rate will not impact existing loans, but will impact new loans (depending on the disbursal date of the loan)

b)      Floating Interest Rate will be applicable only for Diminishing balance based loans with interest recalculation.

c)       For a loan with Floating Interest Rate, Interest for each instalment will be computed based on floating interest rate applicable on the instalment due date.

d)      If the Floating Interest Rate change OR the Base Lending Rate change occurs between two installments, then the interest for the next instalment will be calculated based on the exact date of change. For example:

        10^th Installment – 12^th March 2015

        11^th Installment – 12^th April 2015

        Base Lending Rate is 9% per annum

        On 1^st April Floating Interest Rate changes from +1.5% to +1.75%

        Outstanding balance is 20,000 on 12^th March 2015. Interest will be computed as follows:

        Interest till 1^st April = (20,000 * 10.50% * 20/365) + (20,000 *10.75% * 11/365)

        i.e. interest computed with old rate for 20 days and then interest computed with new rate for the remaining 11 days.

e)      Audit Trail has to be maintained and displayed to user for:

• Base Lending Rate changes

• Loan Product Interest Rate changes

• Account Level Interest Rate changes

Attributes for Base Lending Rate:

Attributes for loan products:

The following new permissions need to be added:

                SET_BASE_LENDING_RATE

New screens for maintaining (listing, adding, editing and deleting) period-wise Base Lending Rates. This will have the following fields:

                From Date

                To Date

                Base Lending Rate (99999.99999%)

Also, screen needed to view Base Lending Rate modifications with date-time when the change was done and the user who did this change.

a)      Loan Product screen to be modified to collect the additional four attributes.

b)      Also, a link needed to view Loan Product Interest Rate modifications with date-time when the change was done and the user who did this change.

c)       For loans that are linked to Base Lending Rate, Loan Account screen to be modified to display the Base Lending Rate and the Differential Interest Rate that is applicable for the loan

d)      For loans that have Floating Interest Rate, Loan Account screen to be modified to display the period-wise - Base Lending Rate and the Differential Interest Rate that is applicable for the loan. It would be logical to show this in a separate tab on the loan account page.

None specific to the Base Lending Rate or Floating Interest Rates.

Interest accrual, interest recalculation jobs should automatically use the business rules mentioned above for interest calculations. 

None

TBD

The following exception scenarios are to be handled:

a)      Gaps identified in periods when providing Base Lending Rates – “There is no Base Lending Rate provided for the period of 01-Jan-2014 to 20-Jan-2014”

b)      Gaps identified in periods when providing Floating Interest Rates” for a loan product – “There is no Interest Rate provided for the period of 01-Mar-2014 to 05-Mar-2014”

c)       When creating or approving a loan account, Mifos is unable to find an interest rate relevant for the loan’s disbursal date – “No relevant Base Lending Rate or Floating Interest Rate provided for the disbursal date of 01-Mar-2001” 

No specific new reports needed for this functionality.

New APIs needed for maintaining the Base Lending Rates

New API needed for fetching audit trail for changes to Base Lending Rates

Loan Product APIs to be modified for accepting new parameters relevant for Base Lending Rate and Floating Interest Rate

Loan Product APIs to return the audit trail (when needed) of interest rate changes

Loan Account APIs to be modified for getting Base Lending Rate and getting the Floating Interest rates that are applicable for this 

Loan Product APIs to return the audit trail of interest rate changes

For existing loan products and loan accounts the following will be the default values:

      Interest rate linked to Base Lending Rate? - False

      Floating Interest Rate? – False

This will ensure that existing loan products and loan accounts will not be impacted.

Below is a list of questions to be addressed as a result of this requirements document:

TBD

New APIs would be exposed thru which Floating Interest Rate schemes can be created/updated/deleted(inactivate).

{                                
        floatingRates: [
                {
                        floatingRate: {
                                id:        [long],
                                name:        [string],
                                isBaseLendingRate:        [boolean],
                                isActive: [boolean],
                                ratePeriods:[
                                        {
                                                ratePeriod: {
                                                        id: [long],
                                                        fromDate: [date],
                                                        interestRate: [decimal],
                                                        interestRatePeriodEnum: [smallint],
                                                        isDifferentialToBaseLendingRate: [boolean],
                                                        isActive: [boolean]
                                                }
                                        }
                                ]
                        }
                }
        ]
}

Any number of floating rate schemes can be created. But they would fall under one of the 3 types explained below. An example illustration is given far down below.

• This is a unique floating rate scheme identified by isBaseLendingRate attribute

• There can be only one Base Lending Rate for an organisation at any given time

• Will have its own period and interest definition

• Loan Products that wants to re-use Base Lending Rate periods with only a differential rate added on top of it should link to this type of scheme

• Floating rate scheme dependent on Base Lending Rate

• Can define its own Floating rate periods (independent of Base Lending Rate)

• Interest rate specified is differential of Base Lending Rate as of start date of the given period (attribute ratePeriod.isDifferentialToBaseLendingRate will be true)

• Cannot exist without a Base Lending Rate already defined

• Loan Products that wants to use a differential rate on top of prevailing Base Lending Rate but with their own time periods should link to this type of scheme

• Floating interest rate scheme with own rate and period

• Not dependent on Base Lending Rate

• floatingRate.isBaseLendingRate and ratePeriod.isDifferentialToBaseLendingRate attributes will be false

• Loan Products that wants to define an independent floating rate and time periods should link to this type of scheme

• New Button under "Admin > Products" by name "Floating Interest Rates"

• New screen that lists all the "Floating Interest Rates" schemes along with "Create" button.

• New screen to Create Floating Interest Rate

• New Screen to View Interest Rate and Applicable Periods along with "Edit" button

• New Screen to Edit Floating Interest Rate

• Interest Rate periods can be added/updated/modified only with a future start date

• Only one Base Lending Rate type of scheme at any given time

• Differential to Base Lending Rate type cannot be created without Base Lending Rate already defined

• interestRatePeriodEnum attribute for Differential to Base Lending Rate type will be same as Base Lending Rate

• Base Lending Rate cannot be inactivated when there is any Differential to Base Lending Rate type active

Following new tables would be added

Following additional attributes will be added to /mifosng-provider/api/v1/loanproducts list/add/update APIs