JPRF-F-2021-008 — Reform of the Number of Days for Private Banking Delinquency Counting and the Provision Deferral Process

THE FINANCIAL POLICY AND REGULATION BOARD
CONSIDERING:
That, Article 226 of the Constitution of the Republic orders that: “The institutions of the State, their agencies, dependencies, public servants and persons who act by virtue of 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 entity 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 regulation; and its composition was determined; That, numbers 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, 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 accordance with 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 areas 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 within its competence, without altering legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria.”; That, in accordance 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, a 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 for the aforementioned operations. These levels may be defined by segments, economic activities, and other criteria;” and, for this purpose, 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, will permanently qualify them and constitute the provisions established by the Organic Code of Monetary and Financial Law, in its Book 1, and the regulations issued by the Financial Policy and Regulation Board to cover the risks of uncollectibility, the loss of asset value, and to support adequate macroeconomic performance;

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That, Chapter XIX “Qualification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks”, Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, was renumbered by Article 2 of Resolution of the Monetary and Financial Policy Board No. 647, published in Official Registry 415 of March 22, 2021; by virtue of which, currently said Chapter has become “XVIII”; That, in Article 5 of Section II “Elements of the qualification of risk assets and their classification”, Chapter XVIII “Qualification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks”, Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, the general elements that must be taken into account to qualify risk assets in the different categories of credit segments and their respective provision requirement ranges are established; That, Transitional Provision Nineteenth of Chapter XVIII “Qualification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks” (introduced by Resolution No. 663-2021-F) orders: “NINETEENTH.- Entities of the public and private financial sectors in the monthly and closing financial statements of the 2021 economic year, will register the transfer to delinquent accounts, of the operations of the different credit segments that have not been paid on the due date, at 61 days term.”; That, the Superintendent of Banks, in compliance with international best practices, regarding the potential effects derived from the COVID-19 pandemic, the declaration of sanitary emergency state and state of exception, and in order to contribute to the stability of the financial system, the protection of depositors, taxpayers, pensioners, and affiliates of the social security system, proposed to the Monetary and Financial Policy and Regulation Board through Letters Nos. SB-DS-2020-0142-O of March 17, 2020; SB-DS-2020-0144-O of March 20, 2020, SB-DS-2020-0467-O of October 28, 2020, SB-DS-2021-0368-O of May 12, 2021, the voluntary deferral of credit obligations; the regularization of the transfer of the portfolio to delinquent accounts at 61 days until December 31, 2021; and the temporary modification of provision percentages and days of delinquency to attenuate the credit risk generated by confinement due to the Covid-19 pandemic; That, the Monetary and Financial Policy and Regulation Board, in exercise of its legal attributes, 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 deferral of credit obligations was granted, suggested by the Superintendent of Banks, which it called “Extraordinary Deferral of Credit Obligations”; the transfer of the portfolio to delinquent accounts at 61 days was regularized until December 31, 2021; and the provision percentages and days of delinquency were temporarily modified to attenuate the credit risk generated by confinement due to the Covid-19 pandemic;

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That, through Memorandum No. SB-INCSFPR-2021-0728-M of August 29, 2021, the National Intendancy of Control of the Private Financial Sector of the Superintendent of Banks, issued the technical report in which it indicates that, based on the results of in-situ supervision processes focused mainly on the qualitative and quantitative evaluation of the credit portfolio qualification process, it was observed that the COVID-19 pandemic significantly affected the credit portfolio of banking entities that concentrate their credit placement strategy in sectors with lower purchasing power, such as the informal employment and medium/low income sectors, and recommended that entities of the public and private financial sectors be allowed to register the transfer to delinquent accounts, of the operations of the different credit segments that have not been paid on the due date, at 61 days term, from January 1 to December 31, 2022, subject to approval by the Superintendent of Banks, for which controlled entities must present the respective request, which will be evaluated by the control entity for its approval or denial; That, through Letter No. SB-DS-2021-0668-O of December 16, 2021, the Superintendent of Banks sent to the Financial Policy and Regulation Board the technical report No. SB-INRE-2021-0933-M of December 16, 2021, in which the Superintendent of Banks determines that it considers it necessary to maintain the deferral of the term for transfer to delinquent accounts at 61 days and the provision percentages and days of delinquency from January 1 to June 30, 2022, as established in Resolution No. 663-2021-F; as well as modify to 46 days the term for transfer to delinquent accounts and days of delinquency from July 1 to September 30, 2022 and maintain the provision percentages as established in Resolution No. 663-2021-F; in addition, modify to 31 days the term for transfer to delinquent accounts and days of delinquency from October 1 to December 31, 2022; maintain the provision percentages as established in Resolution No. 663-2021-F; and, include consumer credits and microcredits in the fourth general provision “Extraordinary mechanism for the deferral of provisions; and signals that, from the analysis performed, the proposed scenario would allow Ecuadorian private banking to continue in a process of approaching international practices, exiting the temporary norms applied during the pandemic, which allowed supporting micro-entrepreneurs, households, and companies without putting depositors' resources at risk, and at the same time, continue with portfolio recovery management, as well as improve efficiencies in their management and economies of scale to compete in increasingly technology-intensive markets, for which they determine that this approach schedule will benefit the payment character of borrowers of financial institutions; by virtue of which, the Superintendent of Banks recommends a reform to the corresponding Chapter of “Qualification of risk
assets and constitution of provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks”, Title II “National Financial System, Book I “Monetary and Financial System of the Codification of Monetary, Financial, Securities, and Insurance Resolutions; That, through Memoranda Nos. SB-INJ-2021-0975-M of August 29, 2021, and No. SB-INJ-2021-1365-M of December 16, 2021, the National Legal Intendancy of the Superintendent of Banks issues favorable legal reports and recommends the sending, on those dates, to the Monetary and Financial Policy and Regulation Board and to the Financial Policy and Regulation Board, respectively, of the corresponding resolutions, for their respective analysis and approval; That, it is pertinent to accept the recommendations of the control body in order to preserve the stability of the financial system, to which effect it is necessary to reform Chapter XVIII “Qualification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks”, Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions;

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That, the Technical Secretary of the Financial Policy and Regulation Board through Memorandum No. JPRF-SETEC-2021-0006-M of December 27, 2021, sends to the President of the JPRF, the technical and legal analyses that support the pertinence of this resolution, contained in reports No. JPRF-CT-2021-004 and No. JPRF-CJ-2021-0005 of December 27, 2021, respectively; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on December 27, 2021, on December 30, 2021, knew and approved the text of the following resolution; and, In exercise of its functions, RESOLVES:
In Chapter XVIII “Qualification of Risk Assets and Constitution of Provisions 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:
ARTICLE FIRST.- Substitute the first paragraph of General Provision Fourth, with the following:
“FOURTH.- Extraordinary mechanism for the deferral of provisions: The Superintendent of Banks may establish schedules to defer the constitution of the provisions required by financial entities, originated in the process of qualification of credits, for sectors that are going through temporary crises or are affected by contingencies of a natural character.”
ARTICLE SECOND.- Substitute the eighth paragraph of General Provision Fourth, with the following:
The authorization process for the deferral of provisions described above, may not take more than thirty (30) days, counted from the date on which it has been requested.
ARTICLE THIRD.- Substitute Transitional Provision Nineteenth (added by Resolution No. 663-2021-F of May 14, 2021), with the following:
“NINETEENTH.- Entities of the public and private financial sectors, in the financial statements until June 30, 2022, will register the transfer to delinquent accounts, of the operations of the different credit segments.
ARTICLE FOURTH.- In the first paragraph of Transitional Provision Twentieth (added by Resolution No. 663-2021-F of May 14, 2021), replace the term “until December 31, 2021 inclusive” with “until June 30, 2022 inclusive”;

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ARTICLE FIFTH.- Substitute Transitional Provision Seventeenth, with the following:
“SEVENTEENTH.- Entities of the private and public financial sectors must constitute generic provisions. These provisions will represent from 0.02% up to 5% of the total gross portfolio as of June 30, 2022 and will form part of the secondary technical equity, and may be reclassified to specific provisions, subject to authorization by the control body. These provisions will be considered for the effects of what is provided in number 11 of Article 10 of the Organic Law of the Internal Tax Regime. This transitional provision will be valid until June 30, 2022.”
GENERAL PROVISIONS.-
FIRST.- Cases of doubt that arise in the application of Chapter XVIII “Qualification of Risk Assets and Constitution of Provisions 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.- The Superintendent of Banks will communicate to the controlled entities the content of this resolution.
TRANSITIONAL PROVISION.- Until the web page of the Financial Policy and Regulation Board is enabled, the publications that this collegiate body must carry out according to the law, will be carried out through the web page of the Superintendent of Banks.
FINAL PROVISION.- This resolution will enter into force from the present date, without prejudice to its publication in the Official Registry.
NOTIFY.- Given in the Metropolitan District of Quito, on December 30, 2021.
THE PRESIDENT,
Mgs. María Paulina Vela Zambrano
The resolution above was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on December 30, 2021.- I CERTIFY.
TECHNICAL SECRETARY
Dr. Nelly Arias Zavala