Circular 6/2016 of the Bank of Spain on the Content and Format of the SME Financial Information Document and Risk Rating Methodology

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Circular 6/2016, of June 30, of the Bank of Spain, to credit institutions and financial credit establishments, determining the content and format of the "SME Financial Information" document and specifying the risk rating methodology provided for in Law 5/2015, of April 27, on the promotion of business financing. (BOE of July 11)

Law 5/2015, of April 27, on the promotion of business financing, has as one of its fundamental objectives to foster and promote the financing of small and medium-sized enterprises (hereinafter, SMEs) through two complementary channels: making bank financing more flexible and accessible, and developing alternative financing means.

One of the reasons hindering the achievement of the first objective is the information asymmetry faced by credit institutions when granting financing to SMEs, which complicates and increases the cost of the necessary work to assess their risk.

To mitigate such asymmetry and facilitate access to bank financing, Chapter I of Title I of Law 5/2015, of April 27, whose application also extends to self-employed workers, establishes that when entities decide to cancel or reduce the financing flow to their SME clients and self-employed workers, in addition to informing them with a three-month advance notice, they must deliver extensive information about their financial situation and payment history in a document called "SME Financial Information." This document, which will include a risk rating of the borrower, must also be delivered in any other circumstance, upon payment of the corresponding fee, at the request of the borrower.

With the aim of ensuring that the information is comparable and reliable, Law 5/2015, of April 27, entrusts the Bank of Spain with specifying the content and format of the aforementioned document and with developing a standardized methodology for evaluating the credit quality of SMEs and self-employed workers to obtain a risk rating.

This circular is divided into three chapters. Chapter I establishes the object and scope of application of the circular, which includes credit institutions and, in accordance with Article 7 of Law 5/2015, of April 27, financial credit establishments. Chapter II regulates the minimum content of the "SME Financial Information" document, which ranges from declarations to the Bank of Spain's Risk Information Central to the risk rating, including an exhaustive credit history, data communicated to companies providing information services on asset solvency and credit, and extracts of transactions from the last year. Chapter III establishes a methodology whose essential purpose is the standardization of the risk rating that entities must grant to SMEs and self-employed workers.

Consequently, in exercise of the powers conferred upon it, the Board of Governors of the Bank of Spain, upon proposal of the Executive Commission, and in accordance with the Council of State, has approved this Circular:

INDEX

Chapter 1. General Provisions.

Rule 1. Object.

Rule 2. Scope of application.

Chapter 2. Content of the "SME Financial Information" document.

Rule 3. "SME Financial Information" Document.

Rule 4. Declarations to the Bank of Spain's Risk Information Central.

Rule 5. Data communicated to companies providing information services on asset solvency and credit.

Rule 6. Credit history.

Rule 7. Extract of transactions carried out during the last year in the borrower's financing flow contracts.

Rule 8. Risk rating of the borrower.

Chapter 3. Risk rating methodology.

Rule 9. Object of the methodology.

Rule 10. Description of the methodology.

Rule 11. Financial situation of the borrower.

Rule 12. Rating of the borrower's financial situation.

Rule 13. Qualitative variables.

Rule 14. Rating of qualitative variables.

Rule 15. Behavioral variables.

Rule 16. Rating of behavioral variables.

Rule 17. Relative position of the borrower with respect to its activity sector.

First Transitional Provision. Data declarations to the Risk Information Central.

Sole Final Provision. Entry into force.

Annexes.

Annex 1. Model-template of the "SME Financial Information" document.

Annex 2. Instructions for preparing section "4. Credit History" of the "SME Financial Information" document.

Annex 2.1 List of creditor petitions, refinancing or out-of-court payment agreements, seizures, enforcement proceedings, and other judicial situations.

Annex 2.2 List of insurance contracts linked to the financing flow.

Annex 3. Relative position of the borrower with respect to its activity sector.

CHAPTER 1

General Provisions

Rule 1.

Object.

This circular, in accordance with what is provided in Article 2.3 of Law 5/2015, of April 27, on the promotion of business financing, aims to:

a) Specify the content and format of the document called "SME Financial Information," as well as the model-template that entities referred to in Rule 2 must complete to transfer this information to their borrowers in the cases established in Articles 1 and 2.2 of Law 5/2015, of April 27.

b) Develop the methodology and model-template for preparing a standardized report on risk quality evaluation, which will also form part of the aforementioned document.

Rule 2.

Scope of application.

1. The provisions of this circular shall apply to:

a) Credit institutions established in Spain.

b) Activities carried out in Spain by credit institutions established in other countries.

c) Financial credit establishments established in Spain.

The references made in this circular to entities shall be understood as referring to the subjects contemplated in the above enumeration.

Likewise, references made to borrowers shall be understood as referring to SMEs and self-employed workers who are clients of the entity and holders of any of the credit contracts collected in Article 1.3 a) of Law 5/2015, of April 27. For these purposes, and in line with what is established in Article 1.3 d) of Law 5/2015, of April 27, the following shall be understood by:

a) SME, microenterprise, small or medium enterprise: those companies that meet the criteria established in Recommendation 2003/361/EC of the Commission, of May 6, 2003, on the definition of microenterprises, small and medium-sized enterprises, as reflected in the following table:

b) Self-employed worker: natural persons who carry out economic activities in accordance with Article 1 of Law 20/2007, of July 11, on the Statute of the Self-Employed Worker.

2. The provisions of this circular shall apply:

a) When none of the exceptions provided for in Article 1.4 of the aforementioned law apply and the entity intends to extinguish, not renew, or reduce, in the terms and deadlines established in Article 1.1 of Law 5/2015, of April 27, the financing flow that it had granted to its borrower.

b) When the borrower requests the "SME Financial Information" document, exercising the right collected in Article 2.2 of Law 5/2015, of April 27.

CHAPTER 2

Content of the "SME Financial Information" Document

Rule 3.

"SME Financial Information" Document.

1. The "SME Financial Information" document shall have the minimum content provided for in this circular, in accordance with Article 2 of Law 5/2015, of April 27, and shall be divided into the following sections:

a) Declarations to the Bank of Spain's Risk Information Central.

b) Data communicated by the entity to companies providing information services on asset solvency and credit.

c) Credit history.

d) Extract of transactions carried out during the last year in the borrower's financing flow contracts.

e) Risk rating of the borrower.

2. The document shall be prepared in accordance with the provisions of this circular, adhering to the formats and notes specified in its annexes.

The reference date of the document shall be the last day of the month preceding the date of notification provided for in Article 1 of Law 5/2015, of April 27, or the date of the request by the borrower provided for in Article 2.2 of the aforementioned law. Nevertheless, the document must be supplemented with more up-to-date information deemed relevant.

3. Entities must retain, for six years, the documentation justifying the data used to prepare the "SME Financial Information" document, as well as the documentation accrediting the receipt by the borrower of the said document or that it has been made available to them.

Rule 4.

Declarations to the Bank of Spain's Risk Information Central.

1. The "SME Financial Information" document shall include, in accordance with what is provided in Article 2.1.a) of Law 5/2015, of April 27, the last four monthly data declarations regarding borrowers, as well as those corresponding to the end of each natural quarter of the last five years prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, sent by the corresponding entity to the Bank of Spain's Risk Information Central with the singularities contemplated in the following section.

2. The data declarations to the Risk Information Central shall be included in the "SME Financial Information" document, following the content and level of aggregation established in Annex 3, "Information on risks to be provided to reporting entities," of Circular 1/2013, of May 24, of the Bank of Spain, on the Risk Information Central and modifying Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards and financial statement models. Such data declarations shall include the borrower's operations without limiting the amount for which they are reported.

3. The data declarations contained in this rule shall be included in section 2 of the "SME Financial Information" document referred to in the model-template collected in Annex 1.

Rule 5.

Data communicated to companies providing information services on asset solvency and credit.

1. The "SME Financial Information" document shall include, in accordance with what is provided in Article 2.1.b) of Law 5/2015, of April 27, the data of borrowers communicated by entities to companies providing information services on asset solvency and credit that remain in the records of such companies on the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27.

2. The data declarations contained in this rule shall be included in section 3 of the "SME Financial Information" document referred to in the model-template collected in Annex 1.

Rule 6.

Credit history.

The "SME Financial Information" document shall contain, in accordance with what is provided in Article 2.1.c) of Law 5/2015, of April 27, the borrower's credit history referring to the five years prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of the aforementioned Law 5/2015, of April 27, and shall include the data listed below, without prejudice to entities being able to complete this information with any other they consider essential to facilitate the correct interpretation of the delivered data:

a) A list of historical and current credits, and of amounts pending amortization.

1. For all asset products of which the borrower is the holder on the reference date of the document, as well as for those cancelled during the five-year period indicated above, entities shall provide, following the definitions established in modules B.2 and C.1 of Annex 2, "Instructions for preparing data modules," of Circular 1/2013, of May 24, and adhering to the formats and notes established in section 4.i), "List of historical and current credits, and amounts pending amortization," of Annex 1, "Model-template of the 'SME Financial Information' document," of this circular, the following data:

i) Operation code.

ii) Product type.

iii) Purpose of the operation.

iv) Principal or notional at the start of the operation.

v) Date of formalization or issuance.

vi) Maturity date.

vii) Maximum limit available to the borrower at the start of the operation.

viii) Current limit of the risk assumed by the entity.

ix) Available risk assumed by the entity.

x) Principal assumed by the entity. Unpaid amount.

xi) Status of refinancings and restructurings.

Risks transferred to third parties but whose management the entity retains shall be communicated for the purposes of this section as risks assumed by the entity itself.

2. Likewise, entities must provide the following data regarding the real and personal guarantees of which the operations have:

i) Operation code.

ii) Main real guarantee. Type of main guarantee.

iii) Main real guarantee. Coverage of the main guarantee.

iv) Main personal guarantee. Type of main personal guarantee.

v) Main personal guarantee. Coverage of the main personal guarantee.

b) A chronological list of unpaid obligations with their details or, failing that, an express declaration that the borrower has fully complied with its obligations.

Entities shall provide for each monthly closing of the year prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, and for the closing of each natural quarter of the four previous years the following information on unpaid obligations by the borrower:

i) Date of declaration of the information.

ii) Operation code.

iii) Date of first default.

iv) Date of last default.

v) Principal assumed by the entity. Amount due.

vi) Interest and commissions due assumed by the entity.

vii) Late interest assumed by the entity.

Risks transferred to third parties but whose management the entity retains shall be communicated for the purposes of this section as risks assumed by the entity itself.

In the event that the borrower has fully complied with its obligations during the five years prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, the box enabled for this purpose in section 4.ii), "Chronological list of unpaid obligations and current status of defaults," referred to in the model-template collected in Annex 1, shall be checked.

This information shall be provided using the definitions established in modules B.2 and C.1, of Annex 2, "Instructions for preparing data modules," of Circular 1/2013, of May 24, and adhering to the formats and notes established in section 4.ii), "Chronological list of unpaid obligations and current status of defaults," referred to in the model-template collected in Annex 1, indicating the date of declaration of the information mentioned in point i) above.

c) A statement of the current status of defaults.

If no default is recorded in the borrower's credit history on the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, the box enabled for this purpose in section 4.ii), "Chronological list of unpaid obligations and current status of defaults," referred to in the model-template collected in Annex 1, shall be checked.

In other cases, the current status of defaults shall be recorded in the chronological list of unpaid obligations referred to in section b).

d) A list of creditor petitions, refinancing or out-of-court payment agreements, seizures, enforcement proceedings, and other judicial incidents related to the borrower in which the entity is a party.

Regarding creditor petitions and refinancing or out-of-court payment agreements, the following data shall be provided:

i) Status of the borrower.

ii) Start date of the status.

iii) End date of the status.

Additionally, if at any time during the five years prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, the borrower had been subject to seizure, enforcement procedure, or other judicial incident in which the entity had been a party, the following data shall be provided:

i) Operation code.

ii) Start date of the procedure.

iii) Legal steps taken to recover the operation.

This information shall be included in the "SME Financial Information" document following the formats, notes, and definitions established in section 4.iii), "List of creditor petitions, refinancing or out-of-court payment agreements, seizures, enforcement proceedings, and other judicial situations," of Annex 1, "Model-template of the 'SME Financial Information' document," and in Annex 2, "Instructions for preparing section '4. Credit History' of the 'SME Financial Information' document."

e) A list of insurance contracts linked to the financing flow.

Entities must report on any insurance contract of which they have documented knowledge and which is linked to the financing flow, provided it can be considered a risk mitigating factor derived from any of the contracts comprising this financing flow and has not been previously included as a main personal guarantee in section a), within the list of historical and current credits. The data to be provided shall follow the format, notes, and definitions established in section 4.iv), "List of insurance contracts linked to the financing flow," of Annex 1, "Model-template of the 'SME Financial Information' document," and in Annex 2, "Instructions for preparing section '4. Credit History' of the 'SME Financial Information' document," and shall be the following:

i) Operation code.

ii) Insurance branch.

iii) Insurance company.

iv) Insured amount.

v) Expiry date.

In accordance with what is provided in Article 2 of Law 5/2015, of April 27, for these purposes, insurance contracts are considered linked to the financing flow those contracted within the six-month period prior or subsequent to the perfection of any of the loan or credit contracts comprising the financing flow or any of their extensions.

Rule 7.

Extract of transactions carried out during the last year in the borrower's financing flow contracts.

The "SME Financial Information" document shall contain in section 5, "Extract of transactions carried out during the last year in the borrower's financing flow contracts," of Annex 1, "Model-template of the 'SME Financial Information' document," in accordance with what is provided in Article 2.1 d) of Law 5/2015, of April 27, the transactions of the contracts that, according to what is provided in Article 1.3.a) of Law 5/2015, of April 27, make up the financing flow of the borrower. For each transaction, at least the date of the operation, the value date, and the concept originating it shall be detailed.

This obligation shall be deemed fulfilled with the delivery of a copy of the extracts provided to the borrower during the last year from the date of notification or the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27.

In the event that the entity, in accordance with the contractual conditions agreed, had not delivered the extracts, it must report, at least, on all transactions corresponding to the last quarter prior to the date of notification or the date of the request provided for in Article 1 and in Article 2.2, respectively, of Law 5/2015, of April 27, and, regarding the previous nine months, on the accumulated transactions of each quarter, separately including the number of transactions registered as inflows and outflows and the average amount registered in each. Additionally, it must report, if applicable, and at the close of each quarter, the available, retained, and current balances of each contract.

Rule 8.

Risk rating of the borrower.

Entities must incorporate into the "SME Financial Information" document, following the model-template of section 6 of Annex 1, a risk rating of the borrower. This rating shall be obtained through the application of the methodology provided for in Chapter 3 of this circular.

CHAPTER 3

Risk rating methodology

Rule 9.

Object of the methodology.

1. The methodology developed in this chapter will allow evaluating, in a standardized and comparable manner, the credit quality of borrowers. The risk shall be rated taking into account the borrower's ability to meet its financial commitments, in accordance with the categories established in section 3 of Rule 10.

2. Entities that, in accordance with Rule 2.1 of this circular, are obliged to prepare the "SME Financial Information" document shall be responsible for the correct application of this methodology.

Rule 10.

Description of the methodology.

1. Entities shall determine the risk rating of borrowers by analyzing, in accordance with the criteria detailed in Rules 11 to 16, the following variables:

a) Financial situation of the borrower.

b) Qualitative variables.

c) Behavioral variables.

2. Additionally, entities shall provide the relative position of the borrower with respect to its activity sector, for which they shall follow the criteria established in Rule 17.

3. The result of the evaluation shall allow the entity to classify the risk of its borrower into one of the categories established in Table 1.

4. Entities must establish the relationship existing between the valuations given to each of the groups of variables analyzed, contemplated in the previous section 1, and the risk rating provided for in Table 1.

Entities must report in the final evaluation the order of importance given to each of the groups of variables analyzed contemplated in the previous section 1.