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Working With Interest and Charges - Posting

The accrued interest and charges are billed or invoiced at regular frequency to the customer.  The bills generated on the same day can be combined. The billed amount can be capitalised to the same account or collected from another account within or external to the bank. It is possible to defer and offset the bills if required. On the scheduled date, it is possible to evaluate certain transaction rules set on the account; if the evaluated rule is satisfied or broken, the bill can be waived or a different amount can be billed as penalty or bonus paid.

Scheduling Interest and Charges 

The Payment Schedule Property Class is used to capitalise or collect or pay interest and charges. These events happen on a frequency as defined in the Pay Freq field. A bill is generated on the schedule date for the interest and charge amount. If required, the bill can be deferred for a certain period in the Defer by.

Liquidation of Interest and Charges 

On the scheduled date, during COB, account interest and charges are either capitalised, paid or received to another account.

  • When the interest accrual rule includes the last day of the interest period, the interest entry is capitalised or the Make Due Activity is executed with interest postings having value date as next calendar date.
  • When the property type is set as VALUE.NEXT.DAY, the charge entry is capitalised or the Make Due Activity is executed with value date as the next calendar date while the PL side for income or expense is booked on original value date itself.
  • When the property type is FORCE CAPITALISE, the activity or rule break charge associated with the future value dated transaction (booking and processing date as current date) is collected during the SOD process of that value date. Else, the charge is collected during the EOD process of that value date.

This account can be an arrangement account, internal account or customer account created in Accounts (AC) module.

Payment type wise settlement options are possible while collecting funds from another account. The bills are settled based on the available funds and can be retried in case of failed or partial settlement. It is possible to force settle the bills in case of insufficient funds. Likewise, Property-specific choice is possible while paying out the interest or charges to another account. It is possible to disable the settlement instructions temporarily using Payin Settlement/Payout Settlement set to No.

A sample screenshot with Payin Settlement is shown below.

A sample screenshot with Payout Settlement is shown below.

The amount billed under the same payment date can be combined and settled as a single settlement when automatic settlement with the same account is defined.

Offset Interest and/or Charges

It is possible to offset outstanding Due bill raised against a Pay bill being raised now using the ACCOUNTS– OFFSET–<Payment Rule Property Class> Activity Class. When a Pay bill is raised, the Due bill outstanding for the Property indicated is settled immediately and the remaining is paid.

It is possible to offset outstanding Pay bill against Due bill being raised now using the ACCOUNTS-OFFSET–<PayOut Property Class> Activity Class. When a Due bill is raised, the Pay bill outstanding for the Property indicated is settled immediately and the remaining is made due.

Adjust/Waive Interest or Charge Amount

The following options are available for waivers.

Early Schedule Processing of Interest Capitalisation

Early Schedule processing is the process of scheduling interest and charges on the scheduled date but earlier than the COB. This process gives flexibility to the financial institutions in dealing with inter-dependencies between the system and other existing systems in the banks ecosystem with respect to interest and charges posting.

When a financial institution enters into cash pool facility, there is a possibility that relevant account resides in different systems. In this case, each account is replicated by a mirror account in the system and all their transactions are replicated into the Temenos' system. In case the Temenos's system is responsible for Interest and Charges assessment and posting even for these mirror accounts, it is possible to configure the system to perform the interest posting through an online service instead of COB. The posting by the service is still done only on the scheduled date when opted for the early schedule processing.

To address this complexity, set Early Processing to Yes to enable mirror account product.

Consider an institution can opt for early schedule processing. If day end is scheduled at 7 PM, the institution can decide to have cut-off time of around 4 PM to run early schedule processing. After running relevant early schedule processing, required information can be furnished to the other system. Any subsequent entry posted in the Temenos' system with the same day value between 4 PM and COB initiation results in an interest adjustment.  

The scheduled activity to Make-Due Schedule or Capitalise Schedule is triggered immediately on running the AA.INTRADAY.PROCESS service and dropped from the scheduled activity. The interest entry is capitalised or Make Due Activity is executed with interest postings having value date as next calendar date.

When an account is enabled for early schedule processing and online accrual processing, then the online processing of accruals and interest rate change are handled by the Intraday service (AA.INTRADAY.PROCESS) for those accounts. In this case, the user must run the Intraday Process service everyday. The Pre Cob Check field of the record in TSA.SERVICE for the AA.INTRADAY.PROCESS service, must be set to Yes when early schedule processing is enabled.

AR Capitalisation - EOD or SOD

  • Back dated interest adjustment is a configurable option, as a substitute for the standard AA Reverse and Replay functionality.
    • Unlike Reverse and Replay (which reverses and re-books entire amount), any adjustments to interest in previous periods as a result of back dated transactions or rate change etc, are re-assessed and posted on the Next Capitalisation date. Only the difference amount is posted as one entry per Interest Property, per period affected (in case the back dated transaction goes across more than one interest period)
    • Where the AA Scheduled Capitalisation of Interest is in SOD (Start of Day), this Adjustment at Next Cap poses a problem as it effectively happens on the first day of next month thereby not reflected in the previous month’s EOM (End of Month) GL.
  • This section describes the key features that has to be considered during Implementation with respect to interest processing in AA for Accounts functionality and the differences in behaviour based on certain factors such as COB stage, accrual rules and attempts to provide clarifications for common implementation questions on which mode to choose.

Accrual Rule

  • Dictates whether to include First Day, Last Day or both Days of the Period when calculating or posting the interest.
    • In a Monthly interest period for the month of May 2018,
      • First means interest is calculated from May 01 – May 30
      • Last means interest is calculated from May 02 – May 31
      • Both means Interest is calculated from May 01 – May 31
  • For current and savings accounts, the interest for both first and last day of the period is included when calculating interest.

Correlation of Accrual Rule and Capitalisation Stage

  • When the system capitalises the interest, during the Close of Business (COB) stage has a correlation with the Accrual Rule setup in terms of getting the required results from the system.
  • It is possible to have the interest capitalisation on Accounts at SOD of the COB or EOD of the COB process.
    • Where the capitalisation is done in SOD, the Booking Date and Value Date of the Capitalisation entry remains same.
    • Where the capitalisation is done in EOD, the Booking Date is the same day while Value Date is Booking Date + 1C.
  • An Interest Period is deemed closed when it is capitalised. Consider an account is opened on May 01, with Capitalisation as End of Every Calendar month. The Interest Period is deemed closed on May 31. The key difference in setup to achieve the required results are shown below:
    • In an SOD Capitalisation, setting Accrual Rule to Both yields wrong results because it does not consider the subsequent online transactions.
      • For example, if Capitalisation happens on May 31 and if it is set to include May 31 interest as well, it’s based on the May 31 starting balance and not closing balance. Any subsequent movements during May 31 are not considered for interest adjustment.
      • However, to achieve the required results in a SOD Capitalisation, the setup pays interest on the first day of next month and sets Accrual Rule to include only the First day.
      • It means, interest capitalisation is configured to happen on June 01 (the system considers the period as 01 May – 01 Jun but because the Accrual rule is set to First, it includes interest for 01 May – 31 May).
      • The Booking Date and Value Date of this Capitalisation entry is 01 June.
        Similarly, the June 01 interest is included in the June Interest period, and posted on July 01, and so on.
      • Statement generated on May 31 does not include this interest.
    • In an EOD Capitalisation, setting Accrual Rule to Both, yields the required results with the interest being capitalised at EOD of May 31. Because the capitalisation happens at EOD, the system raises this capitalisation entry with a Value Date +1C (here, June 01)
      • The Interest Payable/Receivables for the month of May is reported as Capital in the balance sheet on May 31.
      • Customer statement generated on May 31 shows this interest capitalised.

Illustration of SOD and EOD Capitalisation in Accounts.

  1. Capitalisation SOD
    1. Capitalisation Stage: SOD of COB
    2. Accrual Rule: First
    3. Capitalisation Date: first day of every month
  2. Capitalisation EOD
    1. Capitalisation Stage: EOD of COB
    2. Accrual Rule: BOTH (first and last day inclusive)
    3. Capitalisation Date: Last day of every month
    4. Changing from SOD to EOD of COB means changing the Capitalisation date to be End of the month – factors such as customer impact has to be considered.

Interest Capitalisation in SOD of COB

Interest Capitalisation in EOD of COB

April 20-  Bal $1,000 April 20-  Bal $1,000
April 20 – April 30
  • The system accrues interest on daily basis for the balance of 1000 and this is posted to PL.
  • This is reported in daily General ledger(GL).
April 20 – April 30
  • The system accrues interest on daily basis for the balance of 1000 and this is posted to PL.
  • This is reported in daily General ledger.
April 30 - COB
  • During EOD process, accrued interest till April 30 is already reported in GL.
  • During SOD Process (May 1), interest and charges are capitalised with Booking date May 1 and Value Date May 1.
April 30 - COB
  • During EOD process, accrued interest till April 30 is already reported in GL.
  • During EOD Process (April 30), interest and charges are capitalised with Booking date April 30 and Value Date May 1.
GL for April 30 contains the Interest and Charges Capitalisation entries.
May 1 - COB
  • During EOD process, the accrued interest for May 1 with the account balance is reported in GL.
  • GL for May 1 contains the Interest and Charges Capitalisation entries.
May 1 - COB
  • During EOD Process, the accrued interest for May 1 with the account balance is reported in GL
May 15
  • A back value dated Credit transaction 500 is posted with
    • Book date May 15
    • Value Date April 20
  • No further balance movement until May 31.
May 15
  • A back value dated Credit transaction 500  is posted with
    • Book date May 15
    • Value Date April 20
  • No further balance movement until May 31.
May 15 onwards

The interest accrual is for the balance of $1500 and the same reflects in PL.

May 15 onwards

The interest accrual is for the balance of $1500 and the same reflects in PL.

May 15

The system selects the account for pending adjustment.

May 15

The system selects the account for pending adjustment.

May 31  – COB
  • During EOD process, the accrued interest till May 31 is reported in GL. (The back dated adjustment would not be included as the Next Cap date is June 1)

During SOD Process (June 1)

  • The system identifies the pending adjustment, recalculates the interest from April 20 to April 30 and posts the adjustment entry with book date June 1 and Value Date May 1.
  • The system also recalculates interest from May 1 to May 31.
  • The system posts Interest and Charge Capitalisation entries book date June 1 and value Date June 1.
May 31  – COB
  • The system identifies the pending adjustment, recalculates the interest from 20th April to April 31 and posts the adjustment entry with book date May 31, Value Date May 1.
  • The system also recalculates interest from May 1 to May 31.
  • The system posts Interest and Charge Capitalisation entries book date May 31 and value Date June 1.
  • The GL report contains the recalculated interest for April and May.

During SOD Process (June 1)

  • Nothing related to the interest adjustments is processed.
June 1 - COB
  • EOD process system calculates accrual interest for June 1.
  • The GL report contains the recalculated interest for April and May.
June 1 - COB
  • EOD process system calculates accrual interest for June 1.

 

Invoicing Capitalise Bills due to Insufficient Funds

During a back dated rate reduction, if interest capitalisation results in a negative balance in the savings account due to insufficient funds, an Invoice balance bill is generated for the delta amount, which can be settled using appropriate Settlement Instructions.

Interest Capitalisation Process with Restrictions

While capitalisation processing and in a Pay situation, if the nominated account has a posting restriction, the Transaction Cycler is triggered to retry the process. Based on system configuration in the RC setup, the system retries the posting, the nominated number of times and if the posting restriction has been lifted, the transaction is completed.

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Published on :
Tuesday, May 28, 2024 3:47:10 PM IST