The reporting of the interest rate cap and floor
- Question ID: 2020/0003
- Date of publication: 31/01/2020
- Subject matter: Loans price and other conditions
- AnaCredit Manual: Part II
- Data attribute: Interest rate cap, Interest rate floor
We kindly ask for clarification of the definition of the interest rate cap and floor, as they do not appear to be strictly compatible with the interest rate data attribute. More specifically, Section 3.4.13 of the AnaCredit Reporting Manual defines the interest rate cap and floor as the maximum and the minimum interest rate per annum that can be charged on the outstanding nominal amount. Consequently, this suggests that the interest rate cannot exceed the interest rate cap and cannot be lower than the interest rate floor. In some cases, however, the interest rate (not the nominal interest rate but the effective interest rate determined for monetary and financial institutions’ interest rate statistics) can exceed the interest rate cap, if, for example, interest is paid monthly and the interest rate cap is a nominal interest rate.
Could you clarify whether the calculation of the interest rate cap/floor and the interest rate should be aligned?
The interest rate cap indicates the upper limit of the interest rate that can be charged on the outstanding nominal amount. Accordingly, the interest rate floor indicates the minimum interest rate that can be charged. The floor and ceiling constitute a corridor for the possible interest rates and are used to protect against interest rate fluctuations. Typically, they are contractually agreed between the creditor and the debtor.
This approach is followed under AnaCredit, whereby the interest rate cap and floor are reported as a nominal maximum and minimum interest rate per annum (i.e. they are annualised values, but do not take into account the interest payment frequency).
This is aligned with how interest rate payments and related arrangements are contractually agreed between the credit institution and the debtor. Specifically, interest rates and interest rate caps and floors (if any) specified in loan contracts are typically quoted as nominal rates per annum, i.e. without taking into account the interest payment frequency, which is specified separately.
At the same time it is acknowledged that the interest rate reported under AnaCredit may fall outside the corridor spanned by the contractually agreed floor and ceiling. The reason for that is that the contractually agreed floor and ceiling, while annualised, are nominal values, whereas the interest rate is converted to an annual basis that also takes into account the frequency of interest payments. Under AnaCredit, two possibilities exist for converting interest rates: either an algebraic formula leading to the annualised agreed rate (AAR) or successive approximation resulting in the narrowly defined effective rate (NDER). More information on the methodology for calculating the interest rate can be found in the Manual on MFI interest rate statistics.
Please also refer to Q&A “Reporting percentage interest rates as numerical values” for information regarding how data attributes related to interest rates are reported under AnaCredit.