[Mifos-users] Interest Recalculation and Repayment Strategies

[Binny Gopinath Sreevas]

All Mifos users / developers,

 

This mail is mainly for Mifos users and specialists – still copying developers to get any possible inputs as I am blocked on this.

 

We are working on developing the True Declining Balance based interest calculation (or Interest Recalculation) and interest compounding features in Mifos. This means that if the customer pays in advance or repays extra then the customer gets charged lesser interest in the coming installments (than what was originally computed in the repayment schedule). Similarly, if customer does not pay or payment is delayed, then there is an additional interest that is expected from the customer. The interest can be compounded (added to principal) too if payment is delayed beyond a certain period.

 

The existing feature of Repayment Strategy defines the order in which payments are applied – examples

§  Mifos Style: penalties first, then fees, then interest and then finally principal

§  Interest Principal Penalties Fees Order: interest first, then principal and finally fees/penalties

§  Early Repayment: interest first, then principal and finally fees/penalties, and any overpayments are applied only to future principal

Etc.

 

I think that Interest Recalculation and some of the Repayment Strategies may not work well together whenever there is an advance-payment (or any over-payment beyond current dues and over-dues). Two sample scenarios below:

Scenario 1: “Early Repayment” strategy and Interest Recalculation – works well together – as all over-payments are allocated to future principal only, hence interest recalculation for future installments is straight-forward.

Scenario 2, Repayment Strategy is “Interest Principal Penalties Fees Order” and Interest Recalculation is to be supported at the same time – now, when an over-payment is made by customer – then it gets complicated:

§  Future installments’ interest amount changes depending on the principal amount applied from the over-paid amount

§  As per the Repayment Strategy, interest needs to be collected first to decide what amount gets applied to the principal

 

I am looking for inputs on the following:

 

a)      From Mifos users/specialists, I am interested to know if your organization/clients supports Interest Recalculation and if yes, then which Repayment Strategy they would like to follow?

b)      Is there a need to have Interest Recalculation to be supported for all repayment strategies. OR do we restrict Interest Recalculation only for certain Repayment Strategies (then which Repayment Strategies should support Interest Recalculation)?

c)       If Scenario 2 above is to be supported, where “Interest Principal Penalties Fees Order” and Interest Recalculation is to be supported for the same loan product, how should interest be computed and how should the the over-paid amount be split between interest/principal/fees/penalties?

 

Thanks
Binny

 

[AMIT JAIN]

Hi Binny,

Please note an amortization is only an idea for charging of interest from EMIs.

Real fact is.

1. Interest calculation is always based on annual.

2. Declining balance means as soon as you received money than your principle should decline obviously,but also the interest part will be on decline. Means now your principle is less than the earning of interest will be less.

But now your question when did you do that, its simple

Calculation of an Interest

An interest should be compute on daily outstanding balance ( Outstanding Principle Balance X Rate per annul / 365 days ) will called as "Product"

Application of an interest in account.

Its depends on the company to company but in India the guidelines for application of interest is month end basis.

means a sum of "Products" should charge at on the last day of month (in case of regular account) Or forcefully charged in case of prepayment.

Example

				Rate	26%
Date	Narration	Out	In	Balance out	Product
25-6-2014	Loan Disb	10000	0	10000	7.12
26-6-2014			0	10000	7.12
27-6-2014			0	10000	7.12
28-6-2014	EMI REC		500	9500	6.77
29-6-2014			0	9500	6.77
30-6-2014	INTEREST APP	41.67		9541.67	6.80
1/7/2014		0	0	9541.67	6.80
2/7/2014				9541.67	6.80
3/7/2014	FORCE INTT APP			9541.67	6.80
3/7/2014	INTEREST APP	20.39		9562.06
3/7/2014	AMOUNT DEPOSIT		9562.1	0

No matter what was the amortization.

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AMIT JAIN | E.D | Digamber Finance (Chota Loan Bade Sapne) | +919414041821 |

[Binny Gopinath Sreevas]

Hi Amit,

 

Agree with you that in many banks/financial institutions in India, interest is calculated on daily outstanding balance and is applied on the last date of the month. And any extra-payment is always a repayment of the principal.

 

My question is –

Are there other practices that are followed (across the world – since Mifos is used globally as well as in India) – where any extra payments are adjusted towards future interest first and at the same time future interest for the customer reduces due to this extra payment? If yes, then in such cases – how exactly is the next and future installments’ interests calculated and how is the extra payment apportioned between principal and interest?

 

Thanks
Binny

[AMIT JAIN]

Hi binny,

Although it is not a real way to treat a loan but it might me useful to you.

http://en.wikipedia.org/wiki/Balloon_payment_mortgage

http://www.mycalculators.com/ca/loancalculatorballoonm.html

As others are more concentrate on the amount of interest which they do not want to loose in case of early payment and for delayed they charge penalty.

But the right way is to charge interest till principle ends.

I hope mifos will more concern on real calculations of interest.

Regards

AMIT

[Sander van der Heyden]

Hi Binny,

Apologies for the delay in my response, I am currently away on holiday.

As the ones who came up with the Early Repayment Strategy, this was something we used to have the flexibility to reduce clients interest before we had the support for true declining balance products. And I therefore think that it does exactly what we would anticipate the new situation to do as well, essentially making it useless for the Declining Balance products. I agree with you that we should think about linking up the repayment strategies to the different product types (declining, true declining, flat) so that we avoid potential collusions when processing payments.

When you process the payments for true declining balance products the first step would be (when you get to the interest component in the strategy) to calculate exactly how much interest is due at that date. This accounts for both the situation of on-time and late-payment (as late payments would calculate exactly to the date of today what was owed according to the agreed rate for the loan). This outstanding interest then gets paid off (if enough funds available), when the payment strategy gets to that step. After the interest is paid off, it is considered 0 for any other payments on the loan (now pre-payments). Any excess payments will follow same payment strategy logic and will only be allocated to principal and fees/penalties (if applicable). At the end of the processing you will have a new amount of outstanding P left for the loan, and can therefore calculate the new amount of I that is due for the remainder of the loan. This can then be evenly spread over the loan or possibly reduced at the end (not sure what the best practice is here). 

Hope this helps you a bit, feel free to reach out if you have any further specs you want us to have a look at. 

Thanks,

Sander

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