Floating Rate Index

Overview

The interest rates can be fixed or be variable for the term of a loan contract. The variable rates of interest also known as the floating interest rates are calculated based on the Floating Rate Index. This index is determined by a regulatory body. You can set up the floating rate index with different rates for different date ranges, and specify the margin rate at the lending product level, to arrive at the applicable floating interest rate.

Floating Interest Rate =  Floating Rate Index + Margin Rate

Create a Floating Rate Index

To create a Floating Rate Index, perform the following steps:

1. Log in to your Salesforce account.

2. Click Servicing Configuration.

3. Go to Product > Product Management.

4. Click Floating Rate Index.

   The Floating Rate Indexes page is displayed.

5. Click Define New Floating Rate Index.

   The New Floating Rate Index page is displayed.

6. Specify the Floating Rate Index Name. For example, FREducation.

7. Select the Active checkbox to enable the floating rate index to be included in the lending product definition. 

8. Click Save. The floating rate index is created and the Floating Rate Index Detail page is displayed. 

Associate a Floating Rate Index to a Lending Product

While creating a lending product, associate a floating rate index with it. This rate gets defaulted to all the contracts associated with the lending product, but can be modified at the contract level.

Assign Rate to a Floating Rate Index

To define the rate for the Floating Rate Index, perform the following steps:

1. Click the Related section on the Floating Rate Index page.

2. In the Floating Rate section, click New.

   The Floating Rate page is displayed.

3. Specify the details as explained in the following table and click Save:

   Field Name	Description and Action
   Active	To make the floating rate active and hence usable in interest calculations, select this check box.
   Rate Percentage	This is the rate of interest that is applied to contracts of the lending product that the floating rate index is attached to. You can specify a negative floating rate. For more information on negative floating rate, see Negative Floating Index Rate.
   Effective From	This specifies the date from which the rate given in the preceding step is valid. Only one floating rate index can be defined for a given date. If you provide a date for which a floating rate already exists, an error message is displayed.Example: The following two floating rate indexes are defined: On March 1, 2013, the rate percentage is 10. On April 1, 2013, the rate percentage is 15. So, the rate percentage of 10 is effective from March 1, 2013 until March 31, 2013, and the rate percentage of 15 is effective from April 1, 2013, until the next effective from date is specified. Note: To avoid overlapping of dates, do not specify the Effective To date.

   Similarly, you can create multiple rates for different date ranges. This creates a Floating Rate assigned to the Floating Rate Index as depicted in the following image example:

   Floating Rate Created

   As highlighted in the preceding image, on clicking the Submit Reset Process button, the floating rate is applied to all the contracts to which this floating rate index is attached. 

   Note:

   For more information, see Apply the Floating Interest Rate.

Change a Floating Rate Index

The  Floating Rate Change Action can be of two types:

• If you select Keep Same Payment Amount, the last payment amount is adjusted.

• If you select Change Payment Amount, the last payment amount is changed.

Apply the Floating Interest Rate

You can apply the floating rate interest to a floating rate index both manually and automatically.

Apply the Floating Interest Rate Manually

Steps

To apply the rate to a regular loan, perform the following steps:

1. After assigning the floating rate to the floating rate index, ensure that the system date falls between the start and end date of the selected floating rate.

2. Click the required rate.

3. Click Submit Reset Process to change the Reset Process Status to Completed.

   Submit Reset Process

   This runs the Floating Rate Loan Reset Job.

4. On the Confirmation Page, click Confirm.This applies the floating rate to all the contracts to which this floating rate index is attached. 

Resetting the Floating Interest Rate

When the floating rate changes as per the date range you specify, the Submit Reset Process job revises the current interest rate on all lending products and contracts that use the given floating rate index, and payment schedules are regenerated. However, if you manually change the interest rate, you can run the Submit Reset Process job on an ad-hoc basis from the Floating Rate Index Detail page. In the case of LOC products, the floating rates are assigned using batch jobs.

• Once Submit Reset Process is run for a given rate, it cannot be re-submitted.

• Also, you cannot delete a floating rate record once the relevant job is executed.

• On the Floating Rate Index Detail page, click Submit Reset Process.

The Submit Reset Process Job is run and the following actions take place:

1. All the loan contracts tied to the floating rate index of that rate are identified.

2. The current index rate and the interest rate on the loan are updated.

3. The repayment schedules are generated. 

4. The current payment amount is updated. Other transaction of the type Index Rate Change for the loan contracts, is created.

Perform the following steps to reset the floating interest rate: 

1. On the Floating Rate Index Detail page, click Submit Reset Process. The process details are displayed, such as the process status, start and end time, and the job ID.

Apply the Floating Interest Rate Automatically

While creating a lending product or a contract, in the Floating Rate Revision Frequency list, select the frequency at which you want the system to check if the Floating Rate Index has changed. If the Floating Index Rate changes, the new rate is applied for interest computations and new bills are generated accordingly.

Floating Rate Revision

• If the Floating Rate Revision Frequency is selected as None, then the interest rate does not change automatically until the Submit Reset Process job is run.Example: Rate 1=10%, Start from: 1-Mar-13Rate 2=12%, Start from: 1-May-13On May 1, 2013, the interest rate is still 10%. Run the Submit Reset Process job on May 10, 2013. The interest rate is changed to 12%.

• The Floating Rate Revision Date is set to maximum, December 31, 3000, if the Floating Rate Revision Frequency is selected as None.

• Floating rate revision does not continue on its own post maturity. This means that the floating rate does not change automatically after maturity and requires manual intervention. A manual intervention such as restructuring, or changing the maturity date. For example, say a contract is created with the following terms and conditions:

  Contract Start Date	January 1, 2020
  Floating Interest Rate	12%
  Term	12
  Maturity Date	December 31, 2020

  After the rate revision in the last quarter of the contract life, that is, on December 1, 2020, the Floating Rate Revision Date gets updated to the maximum date, December 31, 3000, and as a result, the floating rate revision does not continue even if the contract is still not paid off.

  In other words, if a contract has breached the maturity date, the system does not decide the future of the loan on its own. There has to be a manual intervention to decide the next steps on the loan. Ideally, if the lender expects the loan to function with or without maintaining delinquency after the maturity date, it is a normal practice to restructure or reschedule the loan at that point, thus allowing the user to either set up the rate revision dates again, or extend the maturity date of the loan, or change the future expected payment structure of the loan (as would have been agreed with the borrower). At that point, the schedule would ideally be regenerated on the outstanding loan balance.