Loan Loss Provisioning

Overview

A loan loss provision is an expense that is set aside to cover the losses incurred from the unrecovered or defaulted loan repayments. This is known as Loan Loss Provisioning.

In the cases where borrowers default on their repayments and the financial institutions are unable to recover a part of or the full amount, the financial institutions need to make appropriate provisions for the losses incurred due to the defaulted payments.

CL Loan enables you to determine the loan loss provision amount for each lending product by configuring it as a percentage of Principal Remaining or Loan Balance for the defined delinquency intervals. So far, the loan loss provision was being done for all the contracts together, and a single accrual entry used to be created for all of them. But, with the Hydrogen release, the loan loss provision is performed for each of the contracts individually, and an accrual entry is created for each of them. The provision of all the contracts that are delinquent is performed by running the Loan Loss Provision Job. Once the job is completed, the provision amount is calculated, and an accrual entry of the type Provision is created.

Note:

The loan loss provision is performed only on the current system date. Backdated and future based provisions are not supported.

Key Concepts

Loan Loss Provision Job

There is no specified time for running the Loan Loss Provision Job.
This job is executed on the contracts with the status as Active - Bad Standing. This job is also executed on the contracts with the status as Active - Good Standing or as Closed - Obligations met, if the Provision Amount is greater than 0.
On running this job on the contracts with the status as Closed - Obligations met, the Provision Amount defaults to 0 irrespective of the status of the Zeroise Provision Amt On Good Standing flag.
If the status of a contract is Active - Marked for Closure, then the Loan Loss Provision Job does not execute the contract.

Provision Amount

This is the amount set to recover losses when a borrower defaults on a repayment or the repayments.
The provision amount is calculated as a percentage of the Principal Remaining or the Loan Balance, based on the value of the Provisioning On field.

Provision Amount = (Provision Percentage * Principal Remaining or Loan Balance)/100.

Provision Percentage

This is the percentage defined by the financial institutions to calculate the provision amount either on the Principal Remaining or the Loan Balance for a contract that is delinquent. This percentage is associated with the delinquency intervals.Example:For delinquency interval 1-30, the provision percentage is 10 and for 31-60, it is 20. So, if a contract is delinquent for 20 days, the provision amount is calculated as 10% of the Principal Remaining or the Loan Balance.

Delinquency Interval

This is a range of days specified by the financial institutions that identify the number of days by which the payment on the contract is overdue.Example:If Days Past Due for a contract is 2, then the contract is delinquent by two days and falls in the 1-30 delinquency interval.

Days Past Due

This is the number of days by which a contract is delinquent. This is calculated when a borrower has not made the payment.Example: If the last bill payment date of the bill that is not paid is April 1, 2013, and the current system date is May 1, 2013, then the Days Past Due is calculated as 30. And the delinquency interval for the contract is 1-30.

Days Past Due = Current System Date - Due Date of the Unpaid Bill.

Zeroise Provision Amount On Good Standing Flag

If this flag is enabled, then the Provision Amount is set to 0, and an accrual transaction is created of a negative value of the previous provision amount when the status of the contract is changed from Active - Bad Standing to Active - Good Standing. Example: A contract is in Active - Bad Standing, and the provision amount is $1,000. Once the contract is moved to Active - Good Standing, an accrual transaction of $-1,000 is created.
If the flag is disabled, then the Provision Amount remains the same when the status of the contract is changed from Active - Bad Standing to Active - Good Standing.

Accrual Entry

An accrual entry of the type Provision is created on the Transactions tab when a contract is provisioned. The only exception to this is when the provision amount is calculated as 0, where no accrual transaction is created for the contract.

Note:

The accrual amount can also be negative.

No accrual entry is created for a contract with the status as Mark as Closure.

Accrual Amount = ((Principal Remaining or Loan Balance) * Loss Percentage for that Delinquency Interval/100)- Previous Provision Amount.

Calculate Loan Loss Provision Amount

Prerequisites

The following are the prerequisites to calculate the provision amount for a contract:

The Provision Amount field is added to the Loan Account layout.
The Provisioning On field is added to the Lending Product layout.
The loan loss provisioning setup is configured with the provision percentages for the delinquency intervals.
A contract is created for the mentioned product type with the Provisioning On field selected as Principal Remaining or Loan Balance.
The contract is in the delinquent state.

Steps

Perform the following steps to calculate the provision amount for a contract:

Log in to your Salesforce account.
Click the App Launcher .
Search for CL Loan, and then click it.
Go to Servicing Configuration > Run Batch Jobs.
In the Select Job for Process section, select Loan Loss Provision Job, and then click Next.
To run the job, click Run.
The Provision Amount is now calculated for the contract, and an accrual transaction is also created.
To view the Provision Amount, on the CL Contracts tab, select the required CL Contract ID.
To view the accrual transaction, go to Transactions > Accruals.
An Accrual Entries of Type Provision is created.

Set Provision Amount to Zero

You can default the provision amount to zero when the status of a contract is changed from Active - Bad Standing to Active - Good Standing by enabling the Zeroise Provision Amt On Good Standing flag.

Prerequisites

None.

Steps

Perform the following steps to enable the Zeroise Provision Amt On Good Standing flag:

Log in to your Salesforce account.
Go to Setup > Setup.
In the Quick Find box, search for custom settings, and then click it.
For the Org Parameters label where the Namespace Prefix is loan, click Manage.
Click Edit, select the Zeroise Provision Amt On Good Standing checkbox, and then click Save.

Example

A contract is created with the following terms and conditions:

Loan Amount	$10,000
Loan Disbursal Date	March 1, 2013
Loan Interest Rate	15%
Bill Payment Date	April 1, 2013
Provision On	Principal Remaining
Delinquency Interval (in days)	0	1-30	31-60	61-90	91-180	181-365	>365
Provision Percentage	0	10	20	25	30	35	40

Scenario 1

Let's assume that the borrower has failed to repay the bill amount in the first 30 days of the bill payment date. On any date between April 2, 2013 and May 1, 2013, the following actions take place on the contract:

The status of the contract is changed to Active - Bad Standing.
The Days Past Due is calculated.
For example, on April 30, 2013, the Days Past Due is calculated as 29.
The contract is delinquent and falls in the second delinquency interval, which is 1-30.

On running the Loan Loss Provision Job on any date between April 2, 2013 and May 1, 2013, the provision amount is calculated as $((10*10,000)/100) = $1,000, and an accrual transaction of $1,000 is created, as depicted in the following image:

Scenario 2

Let's assume that the borrower has not paid the bill amount in the first 30 days of the bill payment date and is failed to repay the bill amount even after 31 days of the bill payment date. On any date between May 2, 2013 and May 31, 2013, the following actions take place on the contract:

The status of the contract is changed to Active - Bad Standing.
The Days Past Due is calculated.
For example, on May 2, 2013, the Days Past Due is calculated as 31.
The contract is delinquent and falls in the third delinquency interval, which is 31-60.

On running the Loan Loss Provision Job on any date between May 2, 2013 and May 31, 2013, the provision amount is calculated as $((20*10,000)/100) = $2,000. In Scenario 1, for the first 30 days, the provision amount is calculated as $1,000 and an accrual transaction is created for the same amount. Now, the accrual transaction is created for the difference amount that is $(2,000 - 1,000) = $1,000, as depicted in the following image:

Scenario 3

Let's assume that the borrower has not paid the bill amount in the first 16 days of the bill payment date. On any date between April 2, 2013 and Apr 17, 2013, the following actions take place on the contract::

The status of the contract is changed to Active - Bad Standing.
The Days Past Due is calculated.
For example, on April 17, 2013, the Days Past Due is calculated as 16.
The contract is delinquent and falls in the second delinquency interval, which is 1-30.

On running the Loan Loss Provision Job on any date between April 2, 2013 and April 17, 2013, the provision amount is calculated as $((10*10,000)/100) = $1,000, and an accrual transaction of $1,000 is created for the contract, as depicted in the following image:

On April 18, 2013, the borrower makes a payment of the outstanding bill, and then the following actions take place on the contract:

The Principal Remaining is decreased from $10,000 to $9,125.80.
The status of the contract is changed from Active - Bad Standing to Active - Good Standing.
The Days Past Due is calculated as 0.

On running the Loan Loss Provision Job, the provision amount is calculated as $((0*9,125.80)/100) = 0, and an accrual transaction is created for the difference amount that is $(0 - 1,000) = $-1,000, as depicted in the following image: