Product description for the deferred adjustable instrument for Russia

The Deferred Adjustable Instrument for Russia (DAIR) is affordable for households and ensures lenders an adequate return on their investment. The DAIR uses two interest rates: (1) The "contract rate" to calculate what the borrower owes. This rate is set with a fixed spread above the interbank lending rate. Thus the contract rate changes as the interbank lending rate changes. (2) A separate, lower rate to calculate what the borrower pays each month (the "payment rate"). This rate is set at an amount slightly higher than the contract interest rate"s spread over the interbank rate. The DAIR does not fully insulate lenders from increases in their servicing expenses. The faster the DAIR"s outstanding loan balance declines in real terms, the larger the difference between servicing costs and payments designed to cover them. However, the faster the outstanding loan balance declines in real terms, the easier it will be for borrowers to prepay their balance. The bank can reduce losses from servicing expenses by aggressively promoting prepayment. For most of the life of a DAIR, a significant portion of interest is capitalized. Setting up a capitalized interest reserve account will allow banks to avoid taxation on interest until it is due to be received. (Author abstract)