Past Due Loan

In a loan contract, if the customer fails to make the payment on/before the Maturity date, it becomes Past Due. Past due bills normally incur late fees and charges with a higher rate of interest. Financial contract becoming past due/over due will invariably affect the credit rating of the customer/borrower as payment activity usually accounts for largest portion of a credit scoring methodology.

Depending on the policies of the banks, some might immediately report a past due contract as delinquent and start charging late fees. Whereas, some banks might still provide a grace period, within which a loan can be repaid without any late fees, thereby not impacting the customer's credit rating.

Therefore, it is absolutely necessary for some of the banks to monitor the past dues, minimize the risk by categorizing past due stages and charging late fees.

Once a loan becomes past due, reclassification of the same becomes important, not only from regulatory requirement perspective but also to mitigate the risk of loan becoming delinquent. Reclassification is defined by the ageing of the loan contract. DOKA-NG handles reclassification from transactions Maintaining Entities and Maintaining Entity Groups. Past due status of a loan contract is defined when it crosses the defined number of days in these setup.

Currently past due functionality is enabled only for the Loan module and is not yet available for the Advance module.

Past due stages can be defined separately for each type of loan or as a whole for all types of loans. Also, it can be set to be applicable at each entity level or also at group level. If a local/individual setup exists, it takes precedence over the group/whole level.

More details on the reclassification stages/status:

• Grace Days: This is a set length of time after the due date, during which payment maybe made without any late fee. This is to provide an opportunity to the customer to make the payment before the loan classifies into its further stages. Note, this is an optional stage and if required, bank could skip this stage.

• Past Due Days: This is the stage at which the contract technically becomes overdue/past due. From this day the 'Late fee/Penalty' will be charged to the customer and the normal commission accrual will be stopped. However, the calculation period for the Late fee/Penalty will start from the actual maturity date. Example: Loan maturity is 01.November and loan becomes overdue. If Grace period is defined as 1 day, the customer could repay the loan within 02.November without any late fee. However, failing so, the late fee calculation will start from 01.November. This stage is handled through Past Due Loan.

• Non Performance Days: After the loan becomes overdue/past due for a certain number of days, it becomes doubtful to be recovered and therefore reclassified as 'Non Performing'. Reclassification implies that the liability type becomes different. This is done through Liability Adjustment transaction. Also, from this stage, the Late fee accrual calculation is stopped and any outstanding fee/commission is set to pool. This is also an optional stage. If the bank decides, it could skip this stage.

• Interest Capitalized: When a loan contract becomes past due, user could decide to add the existing outstanding interest/commission to the outstanding principle amount. This is enabled by selecting the Interest Capitalized checkbox in the parameter setup. However, the user could deselect the same at contract level.

A new transaction Past Due Loan is generated as diary from Creating a Loan. This is scheduled on the date when the contract comes to the 'Past Due days' stage. This new transaction displays the loan contract details with its outstanding principle amount and outstanding interest/commission. Option would be available for the user to capitalize the interest. The choice is defaulted from the parameter setting but the user could change the same if required. Also a new Past due interest/commission (TRCXPD) will start to be calculated and the existing Loan commission (TRCX) will be stop accruing.

This transaction Liability Adjustment is generated as diary once the loan contract reaches the 'Non Performance' stage. This stage denotes the contract has moved to a state where it is now doubtful for the bank to recover the finance/loan. Therefore, option will be provided for the user to change the liability type.

After the Non Performance stage or at any stage when the loan is still past due, based on their bank policy, the bank may decide to financially write off/close the overdue loan, as the loan could not be recovered. This can be done through Closing transaction.