Daily Deposit Interest Calculation Standardisation
33-41 LOW ER MOUNT STREE T
DUBLIN 2
Standard for Daily Deposit
Interest Calculation
Requirements Specification
Issued:
May 2007
Updated:
February 2008
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Contents
Contents ............................................................................................................................. 2
Introduction ........................................................................................................................ 3
Deposit Interest Calculation Standard ............................................................................. 4
Processing Requirements ................................................................................................. 5
Clearing of Funds ............................................................................................ 6
Bounced Cheque and Unpaid Direct Debit Treatment ................................. 8
Appendix 1 – Worked Example .................................................................... 11
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Introduction
Deposit accounts offered by credit unions are typically demand deposit accounts.
Many credit unions do not offer these accounts to their members. The most
common type of deposit account currently offered by credit unions is that which
typically calculates deposit interest in the same way that dividend is calculated on
members shares. Other credit unions utilize a variable deposit interest rate to
calculate the return. Currently there is no standardisation across the credit union
movement in respect of deposit interest calculations. This document specifies
requirements in respect of deposit interest calculations for variable interest rate
deposit accounts.
Minor accounts offered by credit unions in Northern Ireland to under 16’s are
considered to be deposit accounts as such members, under legislation, are not
entitled to hold shares. However, the processing of such deposit accounts is in
line with the processing of regular share accounts and so for the purpose of daily
interest calculations are treated as share accounts accruing dividend points on a
daily basis. See Standard for Daily Accumulation of Dividend Points for Dividend
Calculation for more details.
The purpose of this document is to specify requirements for the calculation
of deposit interest on a daily basis for variable interest deposit accounts.
The Irish League of Credit Unions proposed a motion to BDM 2007 to require all
credit unions to adopt and implement this standard by 1/10/2007 and bring credit
unions more in line with industry norm interest calculations today. This motion
was passed overwhelmingly by the movement.
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Deposit Interest Calculation Standard
The proposed standard suggests that deposit interest is calculated on a
daily basis in the same way as loan interest is calculated. Deposit interest
payable (accrued) to the member is calculated daily and lodged to the
members deposit account on an annual basis.
[Int. Payable=(Current Dep Bal. x No. Days x Int. Rate)/(No. Int. Days in Yr x 100)]
The resulting interest payable is rounded in accordance with normal
rounding rules. By performing the full calculation in a single formula
calculation and rounding at the end this minimises rounding errors. For
example with a deposit interest rate of 3% and a deposit balance of
£/€981.10, deposit interest for 4 days is calculated as follows:(981.10 x 4 x 3.0)/(365 x 100)= 0.32255342465.
This is rounded to €/£0.32.
Note:- Deposit interest is capitalised on an annual basis at 30 th
September. ie deposit interest paid in respect of the year closed-off is
added to the year end deposit balance before the new financial year
starts.
Unpaid Deposit Interest due is recorded and accumulated following
transactions on members accounts. These unpaid deposit interest
amounts are added to calculated daily interest accrued values to give
Total Deposit Interest Payable to the member as follows: [ Total Dep Int. Payable = Dep. Int. Accrued + Unpaid Dep. Int. ]
See worked example in Appendix 1.
Note: The remainder of this report refers only to the calculation of
Deposit Interest Accrued, however Total Interest Payable is
obtained using the above formula.
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Processing Requirements
Deposit interest payable is calculated on a daily basis and posted to members
deposit account balances annually during the normal end-of year process at 30th
September.
Req 1.0 Daily Deposit Interest Calculation
The system must calculate Deposit Interest Payable on a daily basis
using the following formula:
[Int. Payable=(Curr. Dep Bal. x No. Days x Int. Rate)/(No. Int. Days in Yr x 100)]
Req 1.1 Deposit Interest Calculation Rounding
The systems interest calculation must be rounded as follows: If
greater than or equal to x.xx5, round up to the nearest cent/pence. If
the interest calculation is less than x.xx5, round down to the nearest
cent/pence.
Req 1.2 Total Deposit Interest Payable
The system must calculate the Total Deposit Interest Payable by
adding the unpaid interest accumulated up to the last transaction or
incident on the members deposit account to the interest calculated
for the period since the last transaction or incident on the members
deposit account as follows: [ Total Dep Int. Payable = Dep. Int. Accrued + Unpaid Dep. Int. ]
Req 1.3 Leap Year APR Calculation
The system must calculate interest for a period in a leap year using
the day count formula (Actual/366). Where there is a crossover
interest calculation period from a leap year to a normal year or from
a normal year to a leap year, the interest calculation must be done
for the old and new years separately. The two un-rounded interest
payable amounts must then be added together and rounded after the
addition using normal rounding rules as defined above.
Req 1.4 Interest Rate Changes
When the deposit interest rate changes within an interest calculation
period, the system must calculate the interest calculation for the
period at the old and new interest rates separately. The two unPage 511
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rounded interest payable amounts for the different interest rate
periods must then be added together and rounded using normal
rounding rules as defined above.
There are occasions when a member wishes to close their deposit account midyear before interest has been posted.
Req 1.5 Deposit Account Close-Off
The system must force posting of the unpaid deposit interest
payable to accounts before the final close-off process for the deposit
account. This must result in a deposit interest payable transaction
being created for the total amount of unpaid deposit interest due to
the member in respect of their account. The deposit interest payable
amount must then be transferred to the current deposit account
balance to give the close-off balance to be withdrawn before the
account is finally closed.
Req 1.6 Annual Posting of Deposit Interest Payable
The system must accumulate the deposit interest payable daily on
members deposit accounts and post the interest payable to effect
member balances during the normal end of year process at 30th
September. This end of year process must create interest payable
transactions for the total amount of unpaid deposit interest payable
to each member and must automatically transfer these individual
amounts to effect respective member deposit balances.
Clearing of Funds
Systems and processing must be in place to manage uncleared as well as
cleared funds in accordance with each individual credit union policy.
Consider the situation where a member cheque is received as a deposit
lodgement and subsequently posted against the members deposit account. The
funds associated with cheque received by the credit union may not be cleared by
the banking system for up to 5 days. During the cheque clearing period the credit
union may not be earning deposit interest from their bank in respect of these
funds. The credit union may or may not want to effect the lodgement to the
members deposit balance until the funds have been cleared by the banking
system. Immediate posting of uncleared funds at the credit union will lead to a
deposit interest entitlement for the clearing period before the credit union
receives value for the lodgement made.
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Heretofore from a deposit interest calculation point of view, most credit unions
did not distinguish between cleared and uncleared funds as deposit interest was
typically based on a average monthly balance. This calculation frequency and
basis allowed sufficient time for cheques and other funds to be cleared by the
banking system.
With daily deposit interest calculation, credit unions must decide whether or not
they are willing to pay the additional deposit interest cost to members in respect
of members lodging uncleared funds to their accounts.
It is recognised that some credit unions will process cleared and uncleared funds
in the same manner though others may not. If the policy of a credit union is to
treat uncleared funds differently to cleared funds then the credit union IT
processing system must be capable of managing uncleared funds in accordance
with policy.
Req 2.0 Cleared and Uncleared Funds Tracking
IT processing systems must be enabled to identify, track and
manage cleared and uncleared fund transactions.
Credit unions typically offer a standing order loan repayment or lodgement option
to their members in respect of lodgement of funds. In this case funds are
transferred electronically from the members bank account to the credit unions
bank account. Credit unions receive notice of these lodgements(cleared funds)
through their Internet Business Banking package supplied by their bank or
through bank statements received.
Req 2.1 Standing Orders and Exceptions Posting
Following funds received by the credit union to their bank account,
the system must lodge cleared funds in respect of member payments
to credit union bank accounts and these must be posted to the
destination member accounts no later than next day Queries in
respect of unapplied credits must be reported on and followed up the
same day the query arises.
Req 2.2 Funds Clearing Periods
The credit union IT system must record the number of days required
to clear funds in respect of the transaction types to be processed.
These “number of days” values will be used by the IT system in
automatically clearing member funds. When the clearing period for
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funds has elapsed, un-cleared funds must then be processed as
cleared funds
Req 2.3 Same Treatment for Cleared and Uncleard Funds
If credit union policy suggests that there is no special treatment for
transactions containing un-cleared funds, then the system must
process such transactions as if the funds were cleared funds
Req 2.4 No Funds Value for Clearing Period
If credit union policy suggest that members will not receive value for
their funds lodged for the clearing period then un-cleared funds
transactions will only be posted and effected to member account
balances next day following the completion of the specified clearing
period for that transaction type. This applies to funds received by
cheque and electronically
Bounced Cheque and Unpaid Direct Debit Treatment
Systems must be capable of efficiently processing the cancellation of bounced
cheques or unpaid direct debit lodgements in accordance with credit union policy.
System must also provide for controlled and automated processing of unpaid
deposit interest adjustments where applicable in respect of lodgements of
uncleared funds.
Req 2.5 Reversal of Bounced Cheques and Treatment of Unpaids
If credit union policy suggest that funds value will be given to
members except for the clearing period in respect of bounced
cheques or unpaid direct debits, the IT processing system must
automatically re-adjust the unpaid deposit interest in respect of
necessary transaction reversals as a result of such bounced
cheques or electronic unpaid direct debits. In these cases the
system must calculate the Deposit Interest Payable in accordance
with this standard as follows: [Dep Int. Adj.={Sum(Adjusted Daily Dep Bals for Cancellation Period x No. Days) x
Int. Rate}/(No. Int. Days in Yr x 100)]
[ Corrected Dep Int.= (Unpaid Dep Int. + Dep Int. Adj.) ]
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A worked example is shown in Appendix 1 involving a lodgement of £/€100 made
on 21/9/06 by cheque. The deposit interest payable on 21st was £/€0.85.
Deposit interest continued to accrue on £/€1,150 for two days - 22nd and 23rd.
Notification was received that the cheque lodgement made on 21st bounced. A
deposit interest adjustment correction was made to offset the bounced cheque
lodgement posted two days earlier. A transaction reversal was also effected on
23/9/06. The corrected deposit interest payable is calculated as follows: Dep Int. Adj= {(1150+(-100)) x 2 x3}/(365 x 100) = 0.17260273972
As this is a currency amount it is rounded to £/€0.17 in accordance with rounding
rules.
Corrected Dep Int.= (0.85 + 0.17) = £/€1.02
The corrected Deposit Interest Payable on 23/9/06 following reversal of the
bounced cheque lodgement is £/€1.02.
Similarly, the corrected Deposit Interest Payable on 28/9/06 in respect of the
reversal of a withdrawal is calculated as follows: Dep Int Adj= {(900+200-50) x 1+ (900+200) x 2} x 3/(365 x 100) =
0.26712328767
As this is a currency amount it is rounded to £/€0.27 in accordance with rounding
rules.
Corrected Dep Int.= (1.19 + 0.27) = £/€1.46
The corrected Deposit Interest Payable on 28/9/06 is £/€1.46.
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Further Information
Should you have any queries or require further information in relation to
implementing the new standard interest calculation basis contact the League
Name:
Joe Timmons
Email:
jtimmons@creditunion.ie
Telephone:
+353 1 6146968
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Appendix 1 – Worked Example
Deposit
No. of
Interest
Deposit Days
calculatio Deposit
Balance Interest n today
Interest
(Start of Payable (Start of calculation
Date
Day)
Today
day)
yesterday
0.00
0
Sep-11
12 1,000.00
1
0.08
0.00
13 1,000.00
2
0.16
0.08
14 1,000.00
3
0.25
0.16
15 1,050.00
1
0.34
0.25
16 1,050.00
2
0.42
0.34
17 1,050.00
3
0.51
0.42
18 1,050.00
4
0.60
0.51
19 1,050.00
5
0.68
0.60
20 1,050.00
6
0.77
0.68
21 1,050.00
7
0.85
0.77
22 1,150.00
1
0.94
0.85
23 1,150.00
2
1.04
0.94
24 1,050.00
1
1.11
1.02
25 1,050.00
2
1.19
1.11
26
850.00
1
1.26
1.19
27
900.00
1
1.33
1.26
28
900.00
2
1.41
1.33
29 1,100.00
1
1.55
1.46
30 1,100.00
2
1.55
1.64
1
0.09
1.64
Oct-01 1,101.64
2 1,101.64
2
0.18
0.09
3 1,101.64
3
0.27
0.18
4 1,101.64
4
0.36
0.27
5 1,101.64
5
0.45
0.36
6 1,101.64
6
0.54
0.45
7 1,101.64
7
0.63
0.54
8 1,101.64
8
0.72
0.63
9 1,101.64
9
0.81
0.72
9 1,102.45
0
0.00
0.63
9
0
0.00
0.63
0.00
Unpaid
Deposit
Interest @
Deposit
Last
Interest
Txn(included
payable Lodgement/ in Dep Int calc
for today Withdrawal today)
1,000.00
0.08
Cash lodgement
0.08
0.09
50.00
0.25
0.09
0.25
0.08
0.25
Dep Interest for 17th
0.09
0.25
0.09
0.25
0.08
0.25
0.09
0.25
0.08
100.00
0.85
0.09
0.85
0.10
-100.00
1.02
0.09
1.02
0.08
-200.00 Withdrawal 1.19
0.07
50.00
1.26
0.07
1.26
0.08
200.00
1.46
0.09
1.46
0.09
0.00
1.64
0.07
0.00
Annual Deposit
0.09
0.00
Interest Paid
0.09
0.00
0.09
0.00
0.09
0.00
0.09 Dep account closed off
0.00
0.09 mid year
0.00
0.09
0.00
0.09
0.00
0.81
0.00
0
-1,102.45
0.00
0
Interest
Adjustment
Calculation
Reversal of
chq
lodgement
made on
21st
Reversal of
withdrawal
made on
25th
Total Dep Interest due to
member on 9th Oct
Deposit Interest Calculation Formula. Interest rate used is 3%, No of days is 365
[Int. Payable=(Current Dep Bal. x No. Days x Int. Rate)/(No. Int. Days in Yr x 100)]
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