Resolution No. JPRF-F-2022-030 Reforming Risk Asset Classification and Provisioning Provisions for Public and Private Financial Sector Entities

THE FINANCIAL POLICY AND REGULATION BOARD
CONSIDERING:
That, Article 226 of the Constitution of the Republic orders that: “The State institutions, their agencies, dependencies, public servants and persons who act under a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution.”; That, through Article 13 of the Organic Code of Monetary and Financial Law, Book I, the Financial Policy and Regulation Board was created as part of the Executive Function, as a legal person of public law, with administrative, financial, and operational autonomy, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy; and its composition was determined; That, items 1, 2, and 3 of Article 14 of the same legal body, provide that it corresponds to the Financial Policy and Regulation Board: “1. Formulate credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policies; 2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems in attention to what is provided in Article 309 of the Constitution of the Republic of Ecuador.”; and “3. Issue micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence.”; That, Article 14 ibidem provides that, for the fulfillment of its functions, “the Financial Policy and Regulation Board shall issue norms in matters proper to its competence, without being able to alter legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria.”; That, in concordance with the aforementioned provisions, Article 14.1 of the Organic Code of Monetary and Financial Law, Book I, mandates that, for the performance of its functions, the Financial Policy and Regulation Board must comply with the following duties and exercise the following faculties:
“(…) 7. Issue the prudential regulatory framework to which financial, securities, insurance, and prepaid comprehensive health care services entities must adhere, framework that must be coherent, not give rise to regulatory arbitrage, and cover, at least, the following: (…) c) Levels of concentration of credit and financial operations; and, applicable provisions, to the aforementioned operations. These levels may be defined by segments, economic activities, and other criteria;” and, for this effect, the second paragraph orders that the Superintendent of Banks may propose regulation projects for consideration by the Financial Policy and Regulation Board with the backing of the respective technical reports; That, Article 204 ibidem determines that entities of the national financial system, in order to reflect the true quality of assets and contingencies, shall permanently qualify them and constitute the provisions established by the Organic Code of Monetary and Financial Law, in its Book I, and the regulations issued by the Financial Policy and Regulation Board to cover uncollectibility risks, the loss of asset value, and to support adequate macroeconomic performance;

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That, Article 206 of the aforementioned Code prescribes that public and private financial entities shall constitute specific provisions for asset and contingent devaluation, generic provisions, provisions for economic cycle; and, any other provision determined by the Financial Policy and Regulation Board. And that these provisions shall be subject to the norms established by the Board; That, the Financial Policy and Regulation Board, in exercise of its legal attributions, in order to minimize the economic effects of the COVID-19 pandemic, in attention to the proposals presented by the Superintendent of Banks, issued resolutions Nos. 569-2020-F of March 22, 2020, 582-2020-F of June 08, 2020, 588-2020-F of July 02, 2020, 609-2020-F of October 28, 2020, and 663-2021-F of May 14, 2021, with which the voluntary deferment of credit obligations, suggested by the Superintendent of Banks, was granted, which it called “Extraordinary Deferment of Credit Obligations”; the transfer of the portfolio to overdue accounts at 61 days until December 31, 2021 was regularized; and the percentages of provisions and days of delinquency were temporarily modified to attenuate the credit risk generated by the confinement due to the Covid-19 pandemic; That, through Resolutions Nos. JPRF-F-2021-008 of December 30, 2021 and JPRF-F-2022-013 of January 06, 2022, the Financial Policy and Regulation Board reformed the validity periods and provisions of the resolutions issued by the Financial Policy and Regulation Board described above; That, the Technical Secretariat of the Financial Policy and Regulation Board, through memorandum No. JPRF-SETEC-2022-0051-M of June 26, 2022, sends to the President of the Board the following reports:
Technical Report No. JPRF-CT-2022-00028 of June 26, 2022, in which a quantitative analysis of the information sent by the control bodies was carried out in order to sensitize the effects resulting from the transfer to overdue accounts of credit operations that had not been paid on the maturity date, at 61 days. In addition, it was observed that, to face the effects of the health crisis caused by the COVID 19 pandemic, the national political scenario, and international armed conflicts; the design and application of regulation for the national financial sector is of particular relevance, which avoids inequalities or asymmetries that generate distortions in the market that do not favor competition due to the different application of rules to financial intermediaries; a particular that relates to the functions of the Financial Policy and Regulation Board regarding the issuance of a prudential regulatory framework that must be coherent and not give rise to regulatory arbitrage, in application of what is prescribed in item 7 of Article 14.1 of the Organic Code of Monetary and Financial Law, Book I; Legal Report No. JPRF-CJ-2022-0031 of June 26, 2022, in which it was determined that there is no legal obstacle for the Board to know and resolve on the conclusions and recommendations of a legal and technical nature contained in the respective reports, which for this effect the Technical Secretariat shall issue, regarding the corresponding modifications in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in the terms contained in Technical Report No. JPRF-CT-2022-00028 of June 26, 2022; by virtue of which, it recommended that the collegiate body of the Board know and resolve regarding the proposed reforms to the provisions of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", and Chapter XXXVI “Popular and Solidary Financial Sector”, corresponding to Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions;

____________________________ recommending additionally, the re-numbering of the General and Transitional Provisions of Chapter XVIII referred to above, in order to maintain numerical consistency within the Codification of Resolutions; That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on June 27, 2022 and carried out through video conference on June 29, 2022, knew and approved the following resolution; and, In exercise of its functions, RESOLVES:
ARTICLE 1.- In Article 5 of Section II "Elements of Risk Asset Classification and its Classification", Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, the following reforms are made:

1. In item 1.1.2.1.1 “Category A-1” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 1.00% to 1.99%”
2. In item 1.1.2.1.2 “Category A-2” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 2.00% to 2.99%”
3. In item 1.1.2.1.3 “Category A-3” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 3.00% to 5.99%”
4. In item 1.1.2.2.1 “Category B-1” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 6.00% to 9.99%”
5. In item 1.1.2.2.2 “Category B-2” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 10.00% to 19.99%”
6. In item 1.1.2.3.1 “Category C-1” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 20.00% to 39.99%”
7. In item 1.1.2.3.2 “Category C-2” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 40.00% to 59.99%”

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8. In item 1.1.2.4 “Doubtful Collection Credits-Category D” regarding the Risk Classification of Productive Credit, substitute the last paragraph with the following:
   “Expected loss range: 60.00% to 99.99%”
9. In item 1.2.1 “Coverage of the Classification of Consumer Credits”, substitute the Table regarding Categories and Days of Delinquency with the following:

CATEGORIES DAYS OF DELINQUENCY
A-1 0
A-2 1 15
A-3 16 30
B-1 31 45
B-2 46 60
C-1 61 75
C-2 76 90
D 91 120
E |+120

10. In item 1.4.1 “Coverage of the Classification of Microcredits”, substitute the Table regarding Categories and Days of Delinquency with the following:

CATEGORIES DAYS OF DELINQUENCY
A-1 0
A-2 1 15
A-3 16 30
B-1 31 45
B-2 46 60
C-1 61 75
C-2 76 90
D 91 120
E |+120

ARTICLE 2.- In Article 6 of Section III “Constitution of Provisions”, Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, substitute the table of “Categories Provision Percentage” with the following:

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PROVISION PERCENTAGE
CATEGORIES MIN MAX
A-1 1.00% 1.99%
A-2 2.00% 2.99%
A-3 3.00% 5.99%
B-1 6.00% 9.99%
B-2 10.00% 19.99%
C-1 20.00% 39.99%
C-2 40.00% 59.99%
D 60.00% 99.99%
E 100.00%

ARTICLE 3.- Substitute the Fourth General Provision of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:
“FOURTH.- Extraordinary mechanism for the deferment of provisions.- The Superintendent of Banks may establish schedules to defer the constitution of the provisions required by public and private financial entities, originated in the credit qualification process, for sectors that are going through temporary crises or are affected by natural contingencies. Public and private financial entities, to adhere to a provision deferment plan, must have previously exhausted the application of measures for the regularization of credits, such as the processes of concurrent evaluation of operations, in such a way that they can identify ex ante the level of exposure to credit risk by exogenous factors, as well as portfolio recovery processes, and credit management mechanisms recognized in the legal order. To determine the validity period of the provision deferment schedule, the Superintendent of Banks will evaluate the request of the financial entity. The request must at least contain the reports that establish the level of exposure of the loan portfolio, with respect to the sectors identified in the first paragraph of this article, the financial situation of said entity, and its capacity to absorb losses. The provisions that the Superintendent of Banks authorizes to defer to financial entities will be registered in off-balance sheet accounts, which will be debited by the expense registration in the period, according to the schedule authorized by the control body. The authorization process of the provision deferment described above, cannot take more than thirty (30) days, counted from the date it was requested. The Superintendent of Banks must carry out at least quarterly the evaluation of the adjusted financial and patrimonial situation of the financial entity to which the deferment of provisions was authorized, in order for the control body to have the necessary inputs to take the appropriate measures corresponding.”

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ARTICLE 4.- Substitute the Seventeenth Transitional Provision of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, incorporated, with the following:
“SEVENTEENTH.- Entities of the public and private financial sectors shall constitute generic provisions until December 31, 2022. Such provisions will represent from 0.02% to 5% of the total gross portfolio at December 2020, the same will form part of the secondary technical equity and may be reclassified to specific provisions, prior authorization of the control body. These provisions will be considered for the effects of what is provided in item 11 of Article 10 of the Organic Law of the Internal Tax Regime. This transitional provision will be valid until December 31, 2022.”
ARTICLE 5.- Substitute the Nineteenth Transitional Provision (added by Resolution No. 663-2021-F of May 14, 2021) of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:
“NINETEENTH.- Entities of the public and private financial sectors, in financial statements until December 31, 2022, will register the transfer to overdue accounts, of the operations of the different credit segments that had not been paid on the maturity date, at the 61-day term.”
ARTICLE 6.- Substitute the first paragraph of the Twentieth Transitional Provision (substituted by Resolution No. 663-2021-F of May 14, 2021) of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:
“TWENTIETH.- Temporarily modify the percentages of provisions and days of delinquency, to attenuate the credit risk generated by the confinement due to the Covid-19 pandemic, which will be applied from the validity of this resolution until December 31, 2022 inclusive.”
ARTICLE 7.- Re-number the General and Transitional Provisions of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions.
ARTICLE 8.- In Article 44 of Paragraph I “Credit Portfolio and Contingents”, Subsection IV “On Classification” Section IV ”Norm for the Management of Credit Risk in Savings and Credit Cooperatives and Mutual Associations of Savings and Credit for Housing”, Chapter XXXVI "Popular and Solidary Financial Sector", of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, substitute the table of “Categories Provision Percentage” with the following:

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ARTICLE 9.- Substitute the Eighth General Provision of Section V “Norms for the Constitution of Provisions of Risk Assets in Savings and Credit Cooperatives and Mutual Associations of Savings and Credit for Housing” Chapter XXXVI "Popular and Solidary Financial Sector", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:
“EIGHTH.- Extraordinary mechanism for the deferment of provisions.- The Superintendent of Popular and Solidary Economy may establish schedules to defer the constitution of the provisions required by entities of the popular and solidary financial sector, originated in the credit qualification process, for sectors that are going through temporary crises or are affected by natural contingencies. Entities of the popular and solidary financial sector, to adhere to a provision deferment plan, must have previously exhausted the application of measures for the regularization of credits, such as the processes of concurrent evaluation of operations, in such a way that they can identify ex ante the level of exposure to credit risk by exogenous factors, as well as portfolio recovery processes, and credit management mechanisms recognized in the legal order. To determine the validity period of the provision deferment schedule, the Superintendent of Popular and Solidary Economy will evaluate the request of the financial entity. The request must at least contain the reports that establish the level of exposure of the loan portfolio, with respect to the sectors identified in the first paragraph of this article, the financial situation of said entity, and its capacity to absorb losses. The provisions that the Superintendent of Popular and Solidary Economy authorizes to defer to financial entities will be registered in off-balance sheet accounts, which will be debited by the expense registration in the period, according to the schedule authorized by the control body. The authorization process of the provision deferment described above, cannot take more than thirty (30) days, counted from the date it was requested. The Superintendent of Popular and Solidary Economy must carry out at least quarterly the evaluation of the adjusted financial and patrimonial situation of the financial entity to which the deferment of provisions was authorized, in order for the control body to have the necessary inputs to take the appropriate measures corresponding.”

RISK LEVEL CATEGORIES
A-1
A-2 1 15 1 15 1 30 1 15 1 15
A-3 16 30 16 30 31 60 16 30 16 30
B-1 31 60 31 45 61 120 31 45 31 60
B-2 61 90 46 60 121 180 46 60 61 90
C-1 91 120 61 75 181 210 61 75 91 120
C-2 121 180 76 90 211 270 76 90 121 180
Doubtful Collection D 181 360 91 120 271 450 91 120 181 360 Loss E Potential Risk Deficient Risk 0 0
|+360 |+120 |+450 |+120 |+360

MICROCREDITS EDUCATIONAL CREDIT
DAYS OF DELINQUENCY DAYS OF DELINQUENCY DAYS OF DELINQUENCY DAYS OF DELINQUENCY DAYS OF DELINQUENCY PRODUCTIVE CREDIT:
CORPORATE,
ENTERPRISE AND SMEs
CONSUMER CREDITS
HOUSING CREDITS
OF SOCIAL AND
PUBLIC INTEREST AND
REAL ESTATE
0
Normal Risk

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GENERAL PROVISIONS
FIRST.- Cases of doubt that arise in the application of Chapter XVIII "Risk Asset Classification and Provisioning by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, will be resolved by the Superintendent of Banks. SECOND.- Cases of doubt that arise in the application of Sections IV ”Norm for the Management of Credit Risk in Savings and Credit Cooperatives and Mutual Associations of Savings and Credit for Housing” and V “Norms for the Constitution of Provisions of Risk Assets in Savings and Credit Cooperatives and Mutual Associations of Savings and Credit for Housing”, of Chapter XXXVI "Popular and Solidary Financial Sector", of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, will be