Hi Vinayak,
To answer your questions:
1) The decision whether to use Cash based or Accrual based accounting is
purely based on your organization's policies and you will need to take the
decision based on discussions with your accountants or finance persons -
Cash based - interest income is recognized as an income (i.e.
accounting entries for income is passed by the accounting module) only when
cash is received on the repayment i.e when customer makes a repayment. And
not when the installment is due. Example: On an installment that is not
paid by the customer, the income is never accounted. For a late payment -
the income is accounted only on the payment date and not on the due date.
Periodic Accrual - Interest income is recognized on due date and
accounting entries for income are made by the accounting module along with
a receivable (asset) also being increased. On the payment date (could be
the same as or after due date), the receivable is reversed and loan
portfolio is decreased.
Upfront Accrual - All interest (full interest for the entire
period of the loan) is accounted upfront. I am not sure which countries
would follow such an approach, but to me, this does not seem to be a
standard way of accounting. Example: a loan given at the end of a financial
year, will have all income accounted in the financial year - whereas all
collections may happen only in the next financial year.
2) Fineract allows backdated transactions, provided you do not "close" your
accounting. Assume that installment is due on 7th - and you the company
informed you of the payments only on 10th and today is the 12th. You could
still make an entry in Fineract for the 7th. If you had done an "accounting
closure" for the 8th - then system will not allow you to do transactions
prior to 8th. For the loan product - you could set up a grace period
("Number of days a loan may be overdue before moving into arrears" - of say
7 days or 10 days) - so that the loan is not shown as In Arrears on 8th and
is shown as arrears only after the grace period expires.
3) If you are manually applying late fees, then yes you should backdate the
fees. If you are allowing Fineract to calculate and apply automatically - I
do not believe there is a way to give a grace period for overdue charges.
So in the above example - the overdue charges may get applied on 8th. I am
not entirely certain on this - you may need to test this behavior in
Fineract to see if Overdue Charges take into consideration the Loan Product
level Grace Period. So the charges may need to be manually reversed if you
do not wish to collect the overdue charges. I have found it hard to use the
overdue charges for various business scenarios. Hence, please test various
scenarios before using in production.
Hope this helps.
Thanks
Binny
On Wed, May 27, 2020 at 10:15 PM Vinayak Javaly <[email protected]> wrote:
> Hello. I'm working for a company in an emerging market that offers salary
> loans to employees through their employers. I'm looking for guidance on
> best practices on setting up Fineract for this use case.
>
> Here's our scenario:
> 1) My company disburses the loan amount to the borrower (company employee)
> directly.
> 2) The employer deducts the appropriate repayment amount from the
> employee's salary on their payroll cycle.
> 3) Sometime after the payroll cycle, the employer sends us the sum of all
> these payroll deductions and a statement listing each employee's payroll
> deduction amount. If the employee has left this company, this information
> is also passed to us.
>
> These are the types of questions I have:
>
> 1. Should I use cash accounting or accrual accounting (periodic or
> upfront) for the loan product?
> 2. Since we do not find out if a borrower has made a loan repayment on
> its due date, how should we handle this time lag? Should I set a grace
> period in the loan product to the number of days before I expect the
> employer to send the funds and repayment info?
> 3. If a loan repayment is missed, should I back-date the late fee
> charges?
>
> If it's easier to speak about this, I'd be happy to have a call.
>
> Thanks in advance.
>
> Vinayak
>
