This module will not be further enhanced. Support is limited to defect fixing only.

Introduction to Lending Compliance

This module covers the Indian-specific functionality and model configuration for lending products. Also, it covers the regulatory requirements, as set out by the Reserve Bank of India, which:

• Puts a cap on the number of times a loan can be rolled over to a new loan.
• Percentage of working capital requirement for a credit facility.
• The charging of penal interest regulations with respect to loans granted to a specific sector.

Click here to understand the terms and abbreviations used in this module.

Minimum Tenor and Working Capital

As per the regulatory guidelines defined around the controls that are required for large borrowers, the bank needs to have a minimum tenor check on the loans for these borrowers.

Large borrowers are identified from the Central Repository of Information on Large Credits (CRILC).

As per the Reserve Bank of India (RBI) guidelines, the regulation doesn’t allow the banks to disburse any working capital purpose loans for a tenor of less than 7 days for large borrowers. This validation is built in the system during loan disbursements and amendments to ensure that the loans are not having a tenor of less than 7 days. The guideline also restricts any prepayment, partial or full, on loans before the completion of the 7 days from the loan start date.

The CUSTOMER application is used to facilitate the identification of the large borrower, through the Vis Type field.

The ENQ.CUSTOMER.DETAILS.IN enquiry will fetch the details of the Customer ID by giving the input as the Legal ID. The output will display the Customer ID, Short Name, and current Sector of the customer along with a drill-down which will open to the CUSTOMER,LARGE.BORROWER version for updating the sector of the customer. It is mandatory to input a value in the Vis Type field, if not, an error will be displayed.

The ENQ.LARGE.BORROWER enquiry is used to fetch the details of the customers that are classified as large borrowers in the system. The output will display all the Customer ID with the Vis Type field defined as large borrower along with the Short Name and Sector of the customer and a drill-down which will open to the CUSTOMER,LARGE.BORROWER (classify, remove large borrower) version, where the user will be able to remove the large borrower type defined in the Vis Type field and make the field blank.

Penal Interest

The Reserve Bank of India (RBI) requires banks to provide a specified portion of the bank lending budget to a few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education, and other low-income groups, and weaker sections. This is essentially meant for the all-around development of the economy.

Every bank in India is given targets and sub-targets for lending under the priority sector.

In the case of loans given to borrowers under the priority sector, no penal interest is charged for loans that have the principal amount up to INR 25000.

The penal interest can be levied for reasons such as default in repayment, non-submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, the incentive to service the debt, and due regard to genuine difficulties of customers.

This functionality allows the user to configure and capture the classification of a loan under the priority sector category, to prevent charging penal interest for the principal amount up to 25000 rupees.

Foreign Currency Advances

Foreign currency advances refer to advances that would help for financing commercial operations abroad. Usually, these advances are granted to exporters for the purchase of raw materials and also for marketing and promotional activities for their exports. Advances are repaid after due receipt of foreign currency linked to the contract. The funds raised through foreign currency advances are used following the company’s need in various foreign currencies.

The exposure related to the foreign currency advances needs to be captured and monitored in the system.

The new version of the LD.LOANS.AND.DEPOSITS application allows the bank to extend the foreign currency loans while complying with the norms laid out by the regulatory for such advances that are above 10 million USD. Also, this version facilitates marking if a particular loan is hedged or not. If the loan is hedged, the corresponding FOREX transaction, treasury contract currency, and treasury contract amount can also be captured.

The system facilitates the generation of the report so that, every month, the bank can monitor and review the unhedged portion of the foreign currency exposures of their customers whose total foreign currency exposure is relatively large.

The Foreign Currency Advances functionality allows the bank to:

• Extend the foreign currency loans above USD 10 million by adhering to the policy of their boards with regard to hedging of such foreign currency loans.
• Monitor every month and review the unhedged portion of the foreign currency exposures of their customers, whose total foreign currency exposure is relatively large.

Loan Rolled Over

The term rollover refers to the practice of extending the due date of a loan.

India regulation restricts loans to roll over or extend maturity without repayment more than twice for a specific category of loans. There is an error preventing any more rollovers. As per the regulatory guidelines defined for rollover short-term loan contracts, the number of times a loan contract can be rolled over is 2.

This functionality allows banks to track and restrict rollovers for customer loan contracts created under the short-term loan product as per the regulatory circular and also allows users to repay past-due loans.

If there is an error when the rollover is performed and a reversal needs to be done, there won’t be an increase in the rollover count. If the error requires an amendment then the bank will be able to amend without increasing the rollover count.

For tracking the number of rollovers, banks have an option to store the date of the rollovers and the associated count of the rollovers. The count calculated by the system for the rollover transactions is not editable at the user level.

Also, this functionality allows users to link the rollover of the loan (created as a new contract) to a previous contract. Different kinds of rollovers are possible. The following are some examples of typical rollover requests:

• Straight rollover: Only the term of the contract is extended.
• Decreased value rollover: Part of the outstanding principal is adjusted using prepayment and the outstanding balance of the contract is rolled over to a new maturity.
• Increased value rollover: The rollover is executed with an increase in the outstanding principal of the contract.

NPA Validations and Calculations

This functionality allows banks to classify, monitor, and manage the lifecycle of the accounts and non-performing assets as per the Reserve Bank of India’s (RBI) regulations. The assets are classified as follows:

• Special mention account (SMA), up until 90 days, classified as SM0, SM1, and SM2.
• Non-performing asset (NPA) with various categories, such as NPA-substandard, and NPA-doubtful and loss, beyond 90 days.

Reserve Bank of India’s (RBI) has two high-level asset classifications, the special mention account (SMA), up until 90 days, classified as SM0, SM1, and SM2, and beyond 90 days, classified as NPA with various categories, such as NPA-substandard, and NPA-doubtful and loss.

A non-performing asset (NPA) is a loan or an advance for which the payment remains overdue for more than 90 days.

The past-due assets are classified based on their ageing lifecycle and the recoverability quality of the asset. There are two specific stages of the classification, special mentioned account stages (SMA) and non-performing asset (NPA) stages. The SMA stage is at a facility or asset level while NPA is at a borrower level.

All assets will be classified as NPA if any other facility offered to the customer moves to the NPA status. A non-performing asset (NPA) is a loan or an advance for which the payment remained overdue for more than 90 days. After this period, the bank will access the asset classification of the loans and advances based on ageing requirements of the dues and respective provisioning as per the Reserve Bank of India’s (RBI) regulation.

The asset classification based on the overdue days is achieved using the EB.RULES.VERSION application, and using the PV.LOAN.CLASSIFICATION, PV.MANAGEMENT and PV.PROFILE applications.

Based on the risk classification, the provision amount is calculated based on the base amount and predefined percentage.

Complying with the latest RBI regulations, income recognition must be objective and based on the record of recovery.

This functionality allows banks to reverse the interest already charged and not collected by debiting the Profit and Loss (P&L) account and stop the further application of interest for an account turning NPA.

However, banks may continue to record such accrued interest in a memorandum account (interest suspense account) in their books, as follows:

• When the account becomes substandard due to no credit or not adequate credit to cover the interest debited, apart from suspending the future interest, the portion of the interest that remains unrealised will be transferred from the P&L account to the interest suspense account.
• When the account gets upgraded as a standard asset due to recovery of the entire overdue amount, this interest portion should be credited back to P&L from the Interest suspense account.
• When the accounts receive partial credit, the credit from the suspense account to the P&L account has to happen to the extent of repayment made.

Using this functionality, the system will update the classification status in the account application to facilitate flow to downstream systems, automatically propagate the customer classification across all his accounts and suspend the interest for all the accounts of the NPA customer, including the standard assets. DPD calculation and ageing will be enabled for out-order accounts, too.

Currently, the account specific classification status is updated in the PV.ASSET.DETAIL application, but there are no movement entries in the system to track them and send it as accounting events to the downstream GL system. With this functionality, the movement entries for the status change, in each account are to be sent to the downstream GL system.

The classifications and (or) status changes are captured in the AA account applications, which invariably help to trigger the movement entries in Temenos Transact through the CONSOLIDATE.COND setup.

At present, during the asset classification, the specific accounts are classified, and the worst status gets updated for the customer. For example, customer A has three accounts, and the first account turns to Substandard. Even though his other two accounts are Standard, the customer status is updated with the asset class as Substandard (the worst status). However, the 2nd and 3rd accounts will maintain their classification status as Standard. This functionality enables banks to automatically extend the worst classification to all their accounts and suspend all such accounts where the worst NPA classification is updated for the customer.

New fields have been introduced as part of this functionality to the INLEND.AA.PARAMETER application, to configure the interest suspense internal account and AC.INWARD.ENTRY records.

New fields have been introduced as part of this functionality to the AA.PRD.DES.ACCOUNT application, to store the actual asset classification of the loan contract and the worst classification of the contract at the customer level.

The INLEND.NPA.OVERDRAFT.LIST enquiry has been introduced as part of this functionality to display the details of the INLEND.NPA.OVERDRAFT records.

Loan Validations

The priority sector lending is an important role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to a few specific sectors like agriculture and allied activities, micro and small enterprises, individuals, students for education, and other low-income groups and weaker sections. This is essentially meant for the all-around development of the economy. Every bank in India is given targets and sub-targets for lending under the priority sector.

The priority sector lending comprises different categories such as agriculture, micro-enterprises, education, housing, social infrastructure.

This functionality allows banks to not charge penal interest for loans to borrowers under the priority sector up to 25,000 RS.

Foreign currency loans above USD 10 million, will be extended by banks only based on a well laid out policy of their boards with regard to hedging of such foreign currency loans. The system will ensure that suitable warning messages are triggered and access control provided for such scenarios for restricting loans above USD 10 million if the foreign exchange is unhedged only under specific approval.

Further, this is done excluding the following:

• Where the Forex loans are extended to finance exports.
• Where the Forex loans are extended for meeting forex expenditure.

This functionality also allows banks to mark the foreign currency loans that are hedged.

The RBI regulation directs the banks on past due assets based on their aging life-cycle and recoverability quality of the asset. Based on the regulations, there are two specific stages of classification: Special Mentioned Account stages (SMA) and NPA stages. SMA stage is at a facility or asset level while NPA is at a borrower level (all assets will be classified as NPA if any other facility offered to the customer moves to NPA status).

NPA include provisioning of various stages, suspending accrual, reversal of income, memorandum account management, and reclassification.

This functionality also allows banks to restrict the number of times a loan can be rolled over, to support straight rollover, decreased value rollover and increased value rollover.