Collateral Management
Collateral management is the method of granting, verifying and managing collateral transactions in order to reduce credit risk in unsecured financial transactions. Collateral management is an essential and integral part of any financial institution's risk and regulatory compliance framework. Collateral it is used to provide security against the possibility of payment default by the opposing party in a transaction.
Types of collateral:
There is a wide range of possible collaterals used to hedge credit exposure with various degrees of risk:
- Cash Collateral like Fixed Deposit, Stocks, etc.
- Real estate: Property, Land
- Other: metals, commodities, etc.
In FintechOS Banking System, Collateral Management configuration starts with guarantee types. These can be set by logging in FintechOS Studio and selecting ‘Option Sets’ from the ‘Admin Section’ in the main menu. You can search using the FTOS_BP_GuaranteeTypes name. By default there are two types of guarantees defined that should cover most of the business requirements:
- Real Estate
- Cash Collateral.
Going further, these types of guarantees will be used in defining the types of collateral. In FintechOS System there is a large range of predefined collaterals, but new types of collaterals can be inserted in ‘FTOS_CB_CollateralType’ entity:
- Predefined collaterals for Cash Collateral guarantee: Fixed Deposit, Stock, Bonds.
- Predefined collaterals for Real Estate guarantee: Land and Property.
When a collateral type is defined, the user can set an adjustment percent. This can also be viewed as the haircut applied for that collateral. Further, when a collateral is linked to a secured loan contract, it’s market value will be automatically adjusted by the system using the adjustment percent.
Registering a Collateral
In order to register a collateral, follow the path:
- From the main menu, navigate to the Banking Contracts > Collateral Register.
- The page Lista de Collateral Register opens. A collateral can be added by clicking on the Insert button from this section or one can be added directly from the legal entity by clicking on the Insert button from Collateral Register section:
The attributes of a Collateral are:
Field Description Name Name of the collateral. Collateral Type Fixed Deposit / Property / Stock / Land / Bonds / Other. Currency It can be different from the Currency of the Contract on which is used as guarantee. Market Value The value of the Collateral, which is taken into consideration in calculation. Adjusted Value The percent that should be covered by the Collateral is set in Banking Product, Collateral Cover Percent. Available Value If the Collateral is used to cover other loans, here is automatically calculated the remaining value. Next Evaluation Date Last Evaluation Date Description
Insert a suggestive description.
CONTRACT COLLATERAL
The list is automatically generated. It shows the Contracts where the current Collateral is used as guarantee.
COLLATERAL OWNERS
To add other Collateral Owners is should be specified if other registered Customers that partially own the Collateral. The other owners are considered guarantors of the Contract, and they should consent on this.
Collaterals can be also added from Customer form:
If a Real Estate collateral is registered, the user has the possibility to insert the last evaluation date and the next evaluation date.
Only after a collateral is registered, it can be used for covering a secured loan contract. To add a collateral to a secured contract, the user has to go to the Collaterals tab. In this section, the user can insert one or more collaterals in order to have the contract covered.
Notice that the field ‘Product collateral coverage percent’ is read-only, and set with the value defined in Banking Product.
After clicking on the Insert button, a window containing the list of collaterals specific to the selected customer will open. The fields Cover value percent and Cover value in contract currency will be automatically populated.
There is one more optional tab that can be defined called Contract Guarantors. This can be used if the user wants to add a collateral that is not owned by the customer. If a guarantor is added on the loan contract, the user can use the collaterals owned by the guarantors in order to cover the contract risk.
A collateral registered can be attached to multiple contracts if the contracts total amount does not exceed the collateral available amount.
If the collateral is in a different currency then the contract currency, the exchange rate should be automatically applied in order to have the available amount correctly calculated. Further, there is a job ‘Daily recalculation of Collaterals’ that runs daily in order to recalculate the available amount for each collateral.