Interest Calculation Posting process Current method used by Mifos

Interest Calculation Mifos supports three types of interest calculation: flat interest rate [EWI] declining balance [EWI] & declining balance interest with equal principal installments [Simple declining balance interest method] All the interest calculation are done during application creation and a schedule with due dates and Principal, Interest, fees paid on those days are created upfront in the system for future usage. Mifos does not calculate interest dynamically based on payments made during loan term.

Example of Loan schedule Loan Amount 1000 Interest [Flat – 10%] 100 Total 1100 Loan Term 10 Weeks Processing Fees [Upfront] EWI 110 Disbursement Date 10/01/2009 Loan Schedule Installment no Due Date PrincipalDue Interest Fee Penalty 1 17/01/2009 10 2 24/01/2009 3 31/01/2009 4 07/02/2009 5 14/02/2009 6 21/02/2009 7 28/02/2009 8 07/03/2009 9 14/03/2009 21/03/2009

Payment Posting in Mifos Loan installment = Principal + interest + Fee + Penalty Posting Order in Mifos : Penalty Fee Interest Principal Installment #1 Installment #2 Installment #3 = Penalty Fee Interest Principal = Penalty Fee Interest Principal =

Payment Scenario – 1 Normal Ontime payments of installments on due dates: The Mifos payment posting order works fine and is same as in accounting standards Penalty Fee Interest Principal Installment #1 Installment #2 Installment #3 = Penalty Fee Interest Principal = Penalty Fee Interest Principal =

Payment Scenario - 2 Partial Payment of an installment: Example lets take a installment split as follows: If Rs. 70 is paid, then Penalty Fee Interest Principal Payment = Penalty 5 Fee Interest 10 Principal 100 Installment 120 = Penalty 5 Fee Interest 10 Principal 50 Payment 70 =

Payment Scenario - 3 Excess Payment than an installment amount on due date of installment #1 say: if installments are as follows: If Rs. 140 is paid, then the current working scenario is If Expected scenario as per accounting standard is We expect excess amount should be adjusted to the principal first and the interest should be recalculated on the remaining principal only for the next installment . Penalty Fee Interest 20 Principal 100 Installment # 2 120 = Installment # 1 Penalty Fee Interest 20 Principal Installment # 2 = 100 Installment # 1 120 Penalty Fee Interest Principal 20 Installment # 2 = 100 Installment # 1 120

Payment Scenario - 4 = = = = = = Say if 3 installments are in arrears, If Rs. 250 is paid, then the current working scenario is the expected scenario as per accounting standard is as follows: Penalty 5 Fee Interest 10 Principal 100 Installment # 2 120 = Installment # 1 Installment # 3 120 = Penalty 5 Fee Interest 10 Principal 100 Penalty 5 Fee Interest 10 Principal 100 Installment # 2 120 = Installment # 1 Penalty 5 Fee Interest Principal Installment # 3 10 = Installment # 2 110 = Installment # 1 120 Penalty 5 Fee 5 Interest 10 Principal 100 90 = Installment # 3 20

Over Due Interest Calculation Over View: If any installment is not collected on the due date then it becomes overdue. Due to the delay in paying the installment, Client will have to pay additional interest on the principal overdue for the delayed period and also additional interest on the interest amount not paid on time. Current Scenario: Mifos does not calculate any additional interest on the overdue principal / interest. Expected: Mifos must be able to calculate the additional interest on the each overdue installment every day end and add them to the interest recievable of each installment and track them separately in mifos. When a payment is made, apply the same rule as explained before.

Alternative Solution – by GK & Sungard A tool which actually sits next to mifos independently and at the end of the day runs a batch process in which it identifies all the installments which are due but not paid/partially paid and calculates additional interest /penalty based on the definitions [configurations] and adds them to the penalty field of the first overdue installment of the loan account. By doing this, we achieve 1. As mifos does penalty posting first before going to other heads, the following flow is achieved: Penalty for the entire period -> Additional Interest for the entire period -> Overdue Interest[of that EWI] -> Principal overdue [of that EWI] -> Overdue Interest[of next EWI] -> Principal overdue [of next EWI] And so on…

Configurable Options: Percentage of additional interest to be charged per month Whether additional interest is on principal overdue only or the complete installment overdue Fixed penalty on the overdue installment Grace period and holidays Time of the batch job to be run. One time run for all existing overdues Daily run

Changes to be done in mifos 1. Posting order change in overdue loan payments: From: To: Penalty 5 Fee Interest 10 Principal 100 Installment # 2 120 = Installment # 1 Installment # 3 Installment # 2 110 = Installment # 1 120 Installment # 3 20 Penalty 5 Fee Interest 10 Principal 100 90

Changes to be done in mifos 2.Posting order change in excess payments for normal loans: From: To: Penalty Fee Interest 20 Principal Installment # 2 = 100 Installment # 1 120 Penalty Fee Interest Principal 20 Installment # 2 = 100 Installment # 1 120