As the pandemic relief, RBI introduced the loan moratorium from 1st March 2020 to 31st Aug 2020 to help businesses and individuals. Interest on the loans will keep getting accrued, but a borrower will not be tagged as a defaulter for non-payment.
“All Urban Cooperative Banks/ State SCoperative Banks/ District Cooperative Banks, All All India Financial Institutes, and All Non-Banking Financial Companies to be guided by provisions of the scheme take necessary actions within the stipulated timeline “- RBI
Challenges
Bankers Realm Core Microlending solution (BR.NET) works on account by account restructuring with interest due as on the date of capitalization.
Based on the first circular, a blanket moratorium for April/May and RBI Moratorium (1st March 2020 to 31st May 2020) was to be provided for all standard Loan Accounts – for this, a process needed to be established in bulk which was not feasible to execute for each account.
We had prepared a “Process Note” and circulated it on the 1st of April to all our clients, explaining the solution to them one by one.
As BR.NET is an Installment Schedule based system, interest Accrual and recovery was depended on it. Any change in the data would have hampered the basic functioning of the system. Interest accrued during this period was receivable in the future, it could not be included in the instalment schedule, and was needed to be capitalized at the end of the moratorium period.
On 23rd May 2020, RBI issued another circular wherein the moratorium was extended by three more months, i.e. up to 31- Aug-2020, Before this circular, moratorium capitalization was scheduled on 31st May 2020, this extension of moratorium period called for a change in strategy for 31st May 2020, and future period i.e. 1st Jun 2020 to 31st Aug 2020.
A new script was prepared for processing moratorium at month-end from Jun-20 onwards. Pre-closure or maturity Loan Account during this period was provided with options for collections before capitalization.
Accommodating customized solutions based on two circulars at two different times compelled us to change strategies, demanding extra time and effort. Few Customers decided to go ahead with moratorium Interest capitalization on 31st May 2020 and to capitalize on every month-end and if the instalments were unpaid, same would continue till 31st Aug 2020. This called for individual customization based on different decisions by each customer which made moratorium interest calculation a very complex process.
Solutions
1st RBI Circular Solution on 27th Mar 2020 had the following objectives.
- Providing blanket moratorium for unpaid instalment from 1st March 2020 and Apr/May 2020 instalment.
- Ensuring March Month interest earnings does not drop, even after unpaid instalment Interest accrual on the due date are reversed after the moratorium.
- Moratorium Interest is included in Instalment Schedule with 20th June 2020 due
- Month-end broken period interest accrual for March, April & May was taken care with the above
- After moratorium interest capitalization, the following were provided.
- New instalment amount would be calculated on revised POS
- Future instalment interest would be calculated on revised POS
- No Recalculation of Interest – Moratorium would be recovered in Last few instalments
- The Loan tenure would be extended with the same Installment Amount.
- Scripts were developed with the above functionalities within a short period and QA Team started testing the solutions simultaneously. The solutions were developed with parameterization to take-care of the different moratoriums.
- A task team was formed to coordinate with a set of clients, who would discuss and configure the required functionalities by executing the script in UAT and sharing the output with clients for verification.
- Moratorium Interest would be recalculated on 31st May 2020 and it should be capitalized with the future instalments scheduled to be redrawn based on the configurations (Same EMI and Extend Tenure, Interest Recalculation).
- For Future months, Instalments would be kept on scheduled due dates, with the following action to be taken during the Month-end.
- Unpaid instalment would be pushed to next month due
- Interest Receivable to be
- Excess Installment Amount paid during the month would be adjusted by preponing the Installment (1, 2 or 3 based on the payment amount).
- Calculation of the Moratorium interest for May-20 and keeping Moratorium Interest table for the purpose mentioned above
- Above 3 steps had to be executed on 31st May 30th Jun & 31st Jul 2020.
- Recalculation of the moratorium interest on 31st Aug 2020 and capitalization to be done.
Learnings
- Flexibility: System should accommodate sudden changes or urgent requirements from Regulatory / Statutory / Nodal Agencies. Moratorium provided during COVID-19 Pandemic period is going to be a regular feature in the future days to come, BR.NET has been added with a feature of providing moratorium and capitalize interest whenever it is required.
- Multiple Moratorium Interest Capitalizations during Loan tenure: Many Operational and Finance Reports were not showing correct Loan Balance after capitalization. Those had to be identified and the script was needed to be modified to include Interest capitalized for one or more time during the Loan Tenure.
- Dependency on Installment Schedule: Instalment schedule is the main component in BR.NET – for DPD, Overdue calculation, calculating Principal and Interest due were recovered for any specific period. The dependency on the Instalment schedule had to be avoided to handle Loan Accounting process in future.
Even after multiple changes in strategies and solutions, the development team kept up with the pace and implemented necessary features in a short period, along with testing, and the release for UAT.
Author: Venugopala K | Head of Solutions, Asia
Venu is a veteran of the Banking, Logistics and MFI domain with over 30 years of corporate experience, with the last 15 years at Craft Silicon. Solutions, design and implementation are his forte and he has integrated design & implementation to best serve the business needs. Venu has contributed extensively to the growth of BR.Net.
One Response
Excellent Insights!!