Agreement No. 002-2021: Establishing Parameters and Guidelines for Modified Credits

Republic of Panama
Superintendence of Banks
AGREEMENT No. 002-2021
(June 11, 2021)
"By which parameters and guidelines applicable to modified credits are established"

THE BOARD OF DIRECTORS

In exercise of its legal powers, and

CONSIDERING:

That following the issuance of Law Decree No. 2 of February 22, 2008, the Executive Branch prepared a systematic ordering in the form of a single text of Law Decree No. 9 of February 26, 1998, and all its modifications, which was approved by Executive Decree No. 52 of April 30, 2008, hereinafter the Banking Law;

That in accordance with paragraphs 1 and 3 of Article 5 of the Banking Law, the objectives of the Superintendence of Banks are to ensure the solidity and efficiency of the banking system, as well as to promote public confidence in the banking system;

That paragraph 5 of Article 11 of the Banking Law provides, within the technical attributions of the Board of Directors, the power to fix, in the administrative sphere, the interpretation and scope of legal or regulatory provisions in banking matters;

That by Agreement No. 4-2013 of May 28, 2013, provisions on credit risk management inherent to the credit portfolio and off-balance sheet operations were established;

That the Superintendence of Banks issued Agreement No. 2-2020 of March 16, 2020, which establishes additional, exceptional, and temporary measures for compliance with the provisions contained in Agreement No. 4-2013, which allows banks to modify the originally agreed conditions of corporate and consumer loans, in order to provide economic relief to clients whose payment capacity is affected by the situation caused by Covid-19;

That Agreement No. 3-2020 of March 26, 2020 modifies paragraph 7 of Article 3 of Agreement No. 2-2020, in order to clarify and flexibilize that modifications could be accepted by the debtor through any means or modality;

That through Agreement No. 7-2020 of July 14, 2020, Article 4 of Agreement No. 2-2020 is modified, in order to extend until December 31, 2020, the period for banks to evaluate credits affected by the Covid-19 situation and carry out the corresponding modifications. Likewise, it is established that these credits will maintain the risk classification recorded upon the entry into force of Agreement No. 2-2020, until this Superintendence establishes the classification criteria and determination of provisions applicable to modified credits;

That Agreement No. 9-2020 of September 11, 2020, modifies Agreement No. 2-2020, in order to establish, among other aspects, the treatment that modified credits will have and to define the constitution of the corresponding provisions that allow protecting the interest of depositors and preserving financial stability;

That through Agreement No. 13-2020 of October 21, 2020, Agreement No. 2-2020 is modified, in order to establish an additional deadline until June 30, 2021, for banks to grant financial relief measures on modified loans in the banking system;

That the difficult economic situation in which the country remains, still caused by the health crisis of Covid-19, has led to the fact that currently a significant number of people and companies still economically affected are under financial relief conditions and that by the end of May 2021, one-third of the total local credit portfolio is under this condition; therefore, it is necessary to establish a regulation that allows banking entities to separate credit portfolios according to their financial viability to identify those that can renegotiate new terms and conditions;

That in working sessions of this Board of Directors, the need and convenience of establishing new guidelines and parameters applicable to modified credits classified in the "Special Mention Modified" category, as well as to those modified credits restored in accordance with Agreement No. 4-2013, has been highlighted.

AGREES:

ARTICLE 1. OBJECTIVE. The provisions of this Agreement have as their objective to establish guidelines and parameters for the administration of credit and counterparty risk of those modified credits in accordance with the measures established in Agreement No. 2-2020.

ARTICLE 2. SCOPE OF APPLICATION. This Agreement will be applicable to banking entities that maintain credits that were modified in accordance with Agreement No. 2-2020, as well as those modified credits that have been restored to the guidelines of Agreement No. 4-2013.

ARTICLE 3. MODIFIED LOANS. For the purposes of this Agreement, a modified loan will be understood as those credits on which the bank made changes to their terms and conditions, including grace periods for principal and/or interest, up to June 30, 2021, and that are classified in the "Special Mention Modified" category.

ARTICLE 4. GENERAL CONDITIONS TO RESTORE IN ACCORDANCE WITH AGREEMENT No. 4-2013 THE MODIFIED CREDITS UNDER AGREEMENT No. 2-2020.
For the restoration of the application of Agreement No. 4-2013 to the portfolio of modified credits according to Agreement No. 2-2020, banks will follow the following parameters:

1. Those credits on which banking entities made modifications in accordance with the parameters of Agreement No. 2-2020, and whose debtors, from the entry into force of this Agreement, are in compliance with the originally agreed terms and conditions (prior to the financial relief measures due to COVID-19), the provisions established in Agreement No. 4-2013 on Credit Risk will be applicable, classifying them in the "Normal" category. Likewise, the bank must exclude them from the category of modified credits, and any future changes to the terms and conditions will be governed by Agreement No. 4-2013.

2. Those credits that on June 30, 2021, are classified in the "Special Mention Modified" category may be restored to the application of Agreement No. 4-2013, after complying with their new terms and conditions, and provided that they evidence the consecutive fulfillment of their payments for a period of six months, in accordance with the payment plan agreed with the client. In these cases, such credits may be classified in the "Normal" category.

3. Those credits that on June 30, 2021, are classified in the "Special Mention Modified" category, whose new terms and conditions contemplated grace periods for principal and/or interest or others, that are still under this modality, cannot be restored to the application of Agreement No. 4-2013 and will remain classified in the "Special Mention Modified" category until the agreed grace period is fulfilled. These credits may be restored to the application of Agreement No. 4-2013 after complying with their terms and conditions, provided that they evidence the consecutive fulfillment of their payments for a period of six months, in accordance with the payment plan agreed with the client. In these cases, such credits may be classified in the "Normal" category.

4. Those restructured credits, in accordance with Agreement No. 4-2013, on which the bank has made modifications to their terms and conditions and that are up to date in their payments, will maintain the classification in which they were found at the time of their modification. Likewise, they will maintain the provision equivalent to the higher value between the provision originally constituted under Agreement No. 4-2013 and the provision constituted in accordance with Agreement No. 2-2020. The provisions of Article 19 of Agreement No. 4-2013 will be applicable to these credits, and consequently, they will cease to be considered modified credits.

5. Those restructured credits, in accordance with Agreement No. 4-2013, on which the bank has made modifications to their terms and conditions and that have breached these new terms, will be restored in accordance with the guidelines of Agreement No. 4-2013 and will be classified taking as a base the category in which they were before their modification, adding the days of delinquency corresponding to the delay. Likewise, they will maintain the provision equivalent to the higher value between the provision originally constituted under Agreement No. 4-2013 and the provision constituted in accordance with Agreement No. 2-2020.

6. Those credits classified as Subnormal, Doubtful, and Uncollectible that were modified in accordance with Agreement No. 2-2020 and fulfilled their payments during the first semester of the year 2021, will maintain the classification in which they were found at the time of their modification. Likewise, they will maintain the provision equivalent to the higher value between the provision originally constituted under Agreement No. 4-2013 and the provision constituted in accordance with Agreement No. 2-2020. The provisions of Agreement No. 4-2013 will be applicable to these credits, and consequently, they will cease to be considered modified credits.

7. Those credits classified as Subnormal, Doubtful, and Uncollectible that from January 1, 2021, were modified in accordance with Agreement No. 2-2020 and breached, partially or totally, their payments during the first semester of the year 2021; will be restored in accordance with Agreement No. 4-2013 and will be classified taking as a base the category in which they were before their modification, adding the days of delinquency corresponding to the delay. Likewise, they will maintain the provision equivalent to the higher value between the provision originally constituted under Agreement No. 4-2013 and the provision constituted in accordance with Agreement No. 2-2020.

PARAGRAPH. All modified credits that have been restored in accordance with Agreement No. 4-2013, as well as any other credit classified in accordance with Agreement No. 4-2013, cannot be transferred, from July 1, 2021, to the "Special Mention Modified" category.

ARTICLE 5. CATEGORIZATION OF THE MODIFIED PORTFOLIO. For the purposes of this Agreement, the existence of the credit classification category known as "Special Mention Modified" is recognized, within which modified credits up to June 30, 2021, are included.

As part of the monitoring and control processes for the "Special Mention Modified" category, banking entities must ensure the application of the guidelines and parameters established by this Superintendence regarding reporting on modified credits.

ARTICLE 6. PERIOD FOR THE RESTRUCTURING OF MODIFIED CREDITS. Banking entities will have until September 30, 2021, to carry out the restructuring of modified credits that are classified in the "Special Mention Modified" category and that by June 30, 2021, had not managed to agree on new terms and conditions. For these purposes, these restructurings must comply with the characteristics established in Article 7 of this Agreement.

Modified credits that have been restructured from July 1 onwards cannot be subject to new restructurings unless it is a reduction in the interest rate.

ARTICLE 7. CHARACTERISTICS FOR THE RESTRUCTURING OF MODIFIED CREDITS. From July 1 to September 30, 2021, the bank may restructure modified credits, provided they meet the following characteristics:

1. The new terms and conditions must attend to criteria of financial viability, taking into account the debtor's payment capacity and the bank's credit policies.

2. That the debtor evidences, through reasonable financial data and/or documents, that they have the precise present and/or prospective payment capacity.

3. That the viability evaluation must be based on the financial characteristics of the debtor and the restructuring measure must be according to their economic situation.

4. That the debtor has committed to catching up on overdue amounts and a significant reduction in the outstanding balance is expected within the agreed timeframe.

Modified credits that have been restructured cannot have as their object the successive application of several restructuring measures. Periods without debt service, i.e., payments of principal and/or interest, cannot exceed, for the same credit facility, a period of up to six (6) months for consumer credits and up to twelve (12) months for corporate credits, subject to the debtor's payment capacity.

This measure cannot become a generalized practice to regularize the behavior of the credit portfolio. Likewise, modified credits that have been restructured will be subject to special monitoring by the banking entity.

ARTICLE 8. PROVISION REQUIREMENT FOR THE "SPECIAL MENTION MODIFIED" CATEGORY. For credit risk coverage, banks must constitute provisions on the portfolio of modified credits classified in the "Special Mention Modified" category, ensuring compliance with International Financial Reporting Standards (IFRS) and the prudential standards established in this article.

For these purposes, banks will constitute a provision equivalent to the higher value between the IFRS provision of the "Special Mention Modified" portfolio and a generic provision equivalent to three percent (3%) of the gross balance of the modified loan portfolio, including accrued uncollected interest and capitalized expenses; modified credits guaranteed with pledged deposits in the same bank up to the guaranteed amount may be excluded from this calculation. For this, the following scenarios will be considered:

1. In cases where the IFRS provision is equal to or higher than the generic 3% provision established in this article, the bank will account for the corresponding IFRS provision in the year's results.

2. In cases where the IFRS provision is lower than the generic 3% provision established in this article, the bank will account for said IFRS provision in results, and the difference must be registered in results or in a regulatory reserve in equity, taking into consideration the following aspects:

a. When the IFRS provision is equal to or higher than 1.5%, the bank must account for said IFRS provision in the income statement. Likewise, the difference to complete the 3% of the generic provision established in this article must be registered in a regulatory reserve in equity.

b. When the IFRS provision is lower than 1.5%, the bank must ensure to complete this percentage and register it in the income statement. Likewise, the difference to complete the 3% of the generic provision established in this article must be registered in a regulatory reserve in equity.

All of the above, without prejudice to the power of the Superintendence to modify the provision percentages and the form and timing of reversing generic provisions and regulatory reserves, based on new circumstances derived from COVID-19.

PARAGRAPH 1. Although banks are obligated to use IFRS in the preparation of accounting records and the presentation of financial statements as established by Agreement No. 6-2012, exceptionally and only for those banks where there is an excess of generic provision over the IFRS provision as indicated in paragraph 2, letter b, of this article and that difference is material, they will temporarily use the accounting basis as follows: "International Financial Reporting Standards as modified by prudential regulations related to provisions of the Special Mention Modified portfolio, issued by the Superintendence of Banks of Panama for supervisory purposes."

PARAGRAPH 2. In the case indicated in paragraph 2 of this article, the excess of generic provision to be registered in equity will be accounted for in a regulatory reserve that is credited with a charge to the retained earnings account. For the purposes of calculating the capital adequacy ratio, limits on concentration in a single debtor or related parties, and any other prudential relationship, the balance of the regulatory reserve will not be considered as regulatory capital funds.

PARAGRAPH 3. Banking entities, from July 1, 2021, must generate the necessary provisions for modified credits that have breached their terms and conditions, taking into consideration what is established in this article and the significant increase in risk or impairment. The foregoing must be applied without prejudice to the Superintendence regulatorily determining its additional provision.

ARTICLE 9. DISCLOSURES IN FINANCIAL STATEMENTS. For the purposes of preparation and presentation of audited annual financial statements (EFA), reviewed financial statements (EFS), and interim financial statements (EFT), banks must ensure to disclose in the notes to the financial statements qualitative and quantitative information on credits classified in the "Special Mention Modified" category and their impact on the determination of the provision for expected losses, as well as on the bank's current and future cash flows. The notes must disclose at minimum the following information:

1. Amount of loans in the "Special Mention Modified" category.

2. Characteristics of these modifications, risks to which the bank is exposed, and their effect on the bank's cash flows.

3. Method of determination of significant increase in risk, amounts classified in Stage 1, 2, or 3 of IFRS, and amount of the provision for each of the stages.

4. Risk management of this portfolio if not included in another note to the financial statements.

ARTICLE 10. OPERATIONS OF FOREIGN FINANCIAL SUBSIDIARIES. In the case of banking entities that maintain financial subsidiaries established abroad, for consolidation purposes, the provisions of Agreement No. 4-2013 will be applicable.

ARTICLE 11. USE OF DYNAMIC PROVISION. For the purposes of what is established in letter c of Article 37 of Agreement No. 4-2013, which establishes restrictions on the amount of the dynamic provision, it is established as an exceptional and temporary measure that banking entities may use up to eighty percent (80%) of the dynamic provision only to compensate for retained earnings decreased by the constitution of IFRS and generic provisions on the "Special Mention Modified" portfolio. This use of the dynamic provision will be made in the accounting terms established in Circular No. 124 of April 15, 2020.

In cases where the bank needs to use more than eighty percent (80%) of the amount of the dynamic provision, it must obtain prior authorization from the Superintendence of Banks.

Banking entities may only pay dividends once they have restored the amount of the dynamic provision corresponding to them according to their credit portfolio, with the exception of dividends on preferred shares, the payment of which may be made whenever there are sufficient earnings, prior notification to this Superintendence.

ARTICLE 12. CONTAGION. During the validity of this Agreement, what is established in paragraph 1 of Article 18 of Agreement No. 4-2013 will not apply.

ARTICLE 13. TRANSPARENCY AND PROTECTION OF THE BANKING CLIENT. Banking entities must comply with the provisions established in this Agreement and ensure full transparency in the information provided to the client regarding changes made to the terms and conditions of their contracts, in order for them to know the detail of outstanding balances and the amounts charged to them for principal and/or interest and others.

Banking entities must ensure to strengthen the procedures, mechanisms, and methodology of their complaint handling system that allows them to respond to all requests, complaints, grievances, concerns, and controversies presented by clients regarding the application of the provisions established in this regulation and others related to the matter, in accordance with what is established in Article 206 of the Banking Law.

Additionally, the Superintendence of Banks will maintain its Customer Service System available to banking clients and consumers so that, through the various means and communication channels available nationwide, they can elevate such claims to the administrative channel, in order to ensure the adequate compliance of the aforementioned provisions and guarantee the protection of banking clients' rights.

ARTICLE 14. PROHIBITIONS. The provisions of this Agreement cannot be interpreted by banking entities or debtors as automatic grace periods, i.e., without the client contacting the banking entity and managing to restructure their credit.

ARTICLE 15. SUCCESSION. With the entry into force of this Agreement, Agreement No. 2-2020 of March 16, 2020, and all its modifications are succeeded.

ARTICLE 16. REPEAL. With the entry into force of this Agreement, General Resolution of the Board of Directors No. SBP-GJD-0010-2020 of December 29, 2020, is repealed.

ARTICLE 17. VALIDITY. This Agreement will begin to govern from July 1, 2021.

Given in the city of Panama, on the eleventh (11) day of the month of June of two thousand twenty-one (2021).

LET IT BE COMMUNICATED, PUBLISHED, AND COMPLIED WITH.

THE PRESIDENT, THE SECRETARY,
Luis La Rocca Nicolás Ardito Barletta