Overdraft Products
  • Updated on 04 Jan 2019
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Overdraft Products

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Deposit Products of Current Account type have an option to Allow Overdrafts and define the overdraft conditions. If you select this option - accounts created under this product will allow for withdrawals beyond 0, i.e. the balance can be negative up to a certain limit.

When the account goes negative, the interest starts being charged on that account instead of added.

Overdraft Setup

In the New Deposit Product view for Current Account product type, there are 2 sections affecting setup for Overdrafts:

Setup 1 -  ‘Interest Rate’ section

This section refers for the most part to the positive (credit) interest application on current account products, apart from the “When is the Interest Paid Into the Account?” setting which impacts both positive (credit) interest and negative (debit) overdraft interest application frequency. If no interest application frequency is selected here, overdraft interest will not be applied to the account, only accrued.

If you don't want to pay positive (credit) interest on overdraft accounts, you can enter 0 in the field for interest rate. With this setup, the accounts created under this product will not pay any interest to your clients and only negative interest will be charged in case the account balance goes below 0 (as per the be settings defined in the ‘Overdraft Conditions’ section).

Setup 2 - ‘Overdraft Conditions’ section

If overdrafts are allowed for the product, the following settings become available:

Interest Rate Source

Two sources of interest rates are supported for Deposit Products allowing Overdrafts:

  1. Fixed Interest Rate - remains fixed for the entire term of the loan.
  2. Index Interest Rate - a floating interest rate, also known as a variable rate. It is calculated as a sum of a reference (benchmark) index interest rate and a specified spread (margin). As a result, the index interest rate will change together with changes in the reference (benchmark) index interest rate.

If the "Index Interest Rate" option is chosen, additional fields will become available:

  • Index source - here you can choose the source of your index rate from a predefined drop down list
  • Interest Spread constraints - to define constraints of spread that will be added to the reference index rate (default, minimum and maximum)
  • Interest Rate Review Frequency - how often should the overdraft interest rate be updated (reviewed)

You can find more details and examples of overdraft interest rate calculations in Overdraft Interest Calculation.

Please Note
Regardless of the chosen source, the rate defined for overdraft products is always a daily rate.

Max Overdraft Limit

Maximum Overdraft Limit is a maximum negative balance that the current account can reach. No withdrawals will be possible if the account balance goes down to this limit.

Please Note
The limit for the overdraft defined here refers only to principal. So this is the limit a client can withdraw, but the accounts balance can go below this limit in case there are any fees or interest posted.

Days In Year

Two day count methodologies are supported in Mambu for Overdraft products: Actual/365 Fixed (365 days) and 30E/360 (360 days). You can find more details about calculations in Interest Calculation Methods in Deposit Accounts.

Accounts managed under Credit Arrangements (Lines of Credit

In this section you can decide if accounts created for this product can be managed in a line of credit or not. Under “Accounts Managed under Credit Arrangements (Line of Credit)” setup you will find the following options:

  1. Optional (default) - accounts created on this product can be managed in a line of credit, but it’s not required to have them in lines of credit
  2. Required -  the account can’t be approved if it’s not associated with a line of credit
  3. No -  accounts for this product are not allowed to be managed in lines of credit

You can read more in our article about Working with Lines of Credit.

Overdraft Conditions section with many options to choose from.

Technical Overdraft

Technical overdrafts allow funds to be withdrawn from an account beyond the agreed overdraft limit. Technical overdrafts for deposits can be enabled on the product level and will apply for all accounts created under that product.

Please Note
Once technical overdrafts were enabled for a deposit product, they can only be disabled if no accounts were yet created under that product.

Technical Overdraft Interest Rate

The interest rate configuration for technical overdrafts is carried forward from the interest rate setup of the products authorized overdrafts. If an interest rate is set for authorized overdrafts on a deposit account, then the same interest rate would be applied to any technical overdraft.

Allow Overdraft and Allow Technical Overdraft options checked under Overdraft Conditions section

Conversely, if no interest rate is set for authorised overdrafts on the deposit account, then Mambu would not apply any interest on technical overdrafts.

Allow Technical Overdrafts option checked under Overdraft Conditions section.

Technical Overdraft Accounting

The accounting rules for technical overdrafts are carried forward from the applied accounting methodology ('Cash' or 'Accrual') on the products authorized overdrafts. If an accounting methodology was selected with appropriate General Ledger (GL) accounts for authorised overdrafts, then the same accounting rules would apply to technical overdrafts.

Accounting Rules section with Cash Methodology selected.

Please Note
If authorised overdrafts were disabled for a deposit product whilst allowing for a technical overdrafts, then the accounting methodologies ('Cash' or 'Accrual') would nevertheless require the definition of appropriate GL accounts for overdrafts.

Accounting Rules section with Accrual Methodology selected.

Please be aware
Journal Entries will sum both the authorised overdraft and technical overdraft interests as well as amounts.

You can read more in our article about Accounting Setup.

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