Agreement No. 012-2022: Parameters and Guidelines for the Final Restoration of the Modified Special Mention Portfolio

Republic of Panama
Banking Superintendence
AGREEMENT No. 012-2022
(November 1, 2022)
"By which the parameters and guidelines are established for the definitive restoration of the Modified Special Mention portfolio, modifying Agreement No. 4-2013"

THE BOARD OF DIRECTORS in the exercise of its legal powers, and CONSIDERING:

That as a result of the issuance of Decree-Law No. 2 of February 22, 2008, the Executive Branch prepared a systematic ordering in the form of a Single Text of Decree-Law No. 9 of February 26, 1998 and all its modifications, which was approved through Executive Decree No. 52 of April 30, 2008, hereinafter the Banking Law;

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

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

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

That the Banking Superintendence 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 numeral 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 make the corresponding modifications. Likewise, it is established that these credits will maintain the risk classification registered at the time of entry into force of Agreement No. 2-2020, until this Superintendence establishes the classification criteria and determination of provisions that will be 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 define the constitution of the corresponding provisions that allow protecting the interest of depositors and preserving financial stability;

Agreement No. 012-2022

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 of the banking system;

That through Agreement No. 2-2021 of June 11, 2021, new parameters and guidelines applicable to modified credits granted by banking entities as a consequence of the economic effects of COVID-19 were established, and the existence of the modified credit classification category called "Modified Special Mention" was recognized, within which modified credits up to June 30, 2021 are included, subrogating Agreement No. 2-2020 and all its modifications;

That Article 8 of Agreement No. 2-2021 establishes the provision requirements applied to credits classified in the "Modified Special Mention" category;

That through General Resolution of the Board of Directors No. SBP-GJD-0003-2021 of June 11, 2021, the Banking Superintendence established the parameters and guidelines for the reporting of modified credits included in the "Modified Special Mention" category;

That Articles 2 and 3 of General Resolution of the Board of Directors No. SBP-GJD-0003-2021 establish as an identification mechanism for the reporting of modified credits included in the "Modified Special Mention" category the codifications of normal modified, special mention modified, subnormal modified, doubtful modified, and uncollectible modified, as well as the corresponding reporting parameters for each of these codifications;

That through General Resolution of the Board of Directors No. SBP-GJD-0004-2021 of June 21, 2021, guidelines were established for the restructuring of credits of debtors who had shown willingness to fulfill their obligation despite being in a temporary liquidity constraint;

That through Agreement No. 6-2021, the parameters and guidelines for the determination of provisions applicable to credits in the "Modified Special Mention" category were established, modifying Agreement No. 2-2021;

That the timely and correct constitution of provisions according to the risk classification of credits is a necessary tool for banks to cover possible losses in the value of their assets and guarantee the sustainability of their operations, as well as the solidity of the banking system;

That the reversal of the difficult economic situation of the country caused by the health crisis of COVID-19, has allowed a significant number of economically affected people and companies to renegotiate new terms and conditions of the loans they maintained under financial relief conditions and normalize the payment of their debts;

That in working sessions of this Board of Directors, the need and convenience of bringing to a good end the modified credit portfolio classified in the "Modified Special Mention" category, establishing the guidelines for its definitive restoration to Agreement No. 4-2013 and the parameters for its migration within the categories of said Agreement, has been highlighted.

AGREES:

ARTICLE 1. OBJECTIVE. The provisions of this Agreement have as their objective to establish the guidelines and parameters for the definitive restoration of the credit portfolio classified in the "Modified Special Mention" category to Agreement No. 4-2013.

ARTICLE 2. SCOPE OF APPLICATION. This Agreement will be applicable to banking entities that maintain credits classified in the "Modified Special Mention" category on the date of entry into force of this Agreement.

ARTICLE 3. GENERAL GUIDELINES FOR RESTORATION TO AGREEMENT No. 4-2013.
Banking entities will migrate the portfolio of modified credits classified in the "Modified Special Mention" category to the risk categories of Agreement No. 4-2013, in accordance with the parameters established in this article, for which they will use in principle as reference the days of delay that each credit maintains, as described below.

For the purpose of what is established in the previous paragraph, the Superintendence will use as reference the days of default according to the concepts of delinquent credit and overdue credit defined in numerals 13 and 14 of Article 2 of Agreement No. 4-2013.

I. CORPORATE CREDITS
a. Corporate credits with payment delays of 0 to 30 days will be classified in the Normal category of Agreement No. 4-2013. b. Corporate credits with payment delays of 31 to 90 days will be classified in the Special Mention category of Agreement No. 4-2013.
c. Corporate credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 31 to 180 days, will be classified in the Special Mention category of Agreement No. 4-2013.
d. Corporate credits with payment delays of 91 to 180 days will be classified in the Subnormal category of Agreement No. 4-2013. e. Corporate credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 181 to 270 days, will be classified in the Subnormal category of Agreement No. 4-2013. f. Corporate credits with payment delays of 181 to 270 days will be classified in the Doubtful category of Agreement No. 4-2013. g. Corporate credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 271 to 360 days, will be classified in the Doubtful category of Agreement No. 4-2013. h. Corporate credits with payment delays of more than 270 days will be classified in the Uncollectible category of Agreement No. 4-2013.
i. Corporate credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of more than 360 days, will be classified in the Uncollectible category of Agreement No. 4-2013.

II. PERSONAL CREDITS
Consumer Loans a. Consumer credits with payment delays of 0 to 60 days will be classified in the Normal category of Agreement No. 4-2013. b. Consumer credits with payment delays of 61 to 90 days will be classified in the Special Mention category of Agreement No. 4-2013.
c. Consumer credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 61 to 180 days, will be classified in the Special Mention category of Agreement No. 4-2013.
d. Consumer credits with payment delays of 91 to 120 days will be classified in the Subnormal category of Agreement No. 4-2013. e. Consumer credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 181 to 270 days, will be classified in the Subnormal category of Agreement No. 4-2013. f. Consumer credits with payment delays of 121 to 180 days will be classified in the Doubtful category of Agreement No. 4-2013. g. Consumer credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of 271 to 360 days, will be classified in the Doubtful category of Agreement No. 4-2013. h. Consumer credits with payment delays of more than 180 days will be classified in the Uncollectible category of Agreement No. 4-2013.
i. Consumer credits with real estate collateral, whose amount is less than 50% of the value of the collateral and that maintain payment delays of more than 360 days, will be classified in the Uncollectible category of Agreement No. 4-2013.

Home Loans (Mortgage) a. Mortgage credits with payment delays of 0 to 60 days will be classified in the Normal category of Agreement No. 4-2013. b. Mortgage credits with payment delays of 61 to 90 days will be classified in the Special Mention category of Agreement No. 4-2013.

Agreement No. 012-2022
c. Mortgage credits with real estate collateral, whose amount is less than 70% of the value of the collateral and that maintain payment delays of 61 to 180 days, will be classified in the Special Mention category of Agreement No. 4-2013.
d. Mortgage credits with payment delays of 91 to 180 days will be classified in the Subnormal category of Agreement No. 4-2013. e. Mortgage credits with real estate collateral, whose amount is less than 70% of the value of the collateral and that maintain payment delays of 181 to 270 days, will be classified in the Subnormal category of Agreement No. 4-2013. f. Mortgage credits with payment delays of 181 to 360 days will be classified in the Doubtful category of Agreement No. 4-2013. g. Mortgage credits with real estate collateral, whose amount is less than 70% of the value of the collateral and that maintain payment delays of 271 to 360 days, will be classified in the Doubtful category of Agreement No. 4-2013. h. Mortgage credits with payment delays of more than 360 days will be classified in the Uncollectible category of Agreement No. 4-2013.
i. Mortgage credits with real estate collateral, whose amount is less than 70% of the value of the collateral and that maintain payment delays of more than 360 days, will be classified in the Uncollectible category of Agreement No. 4-2013.

In summary, the deadlines established above for the restoration of modified credits to the credit portfolio of Agreement No. 4-2013 are as follows:

PARAGRAPH 1. Regardless of the days of delay, if a client presents other weaknesses that could affect their payment capacity, as detailed in Article 18 of Agreement No. 4-2013, the restoration of modified credits must be carried out to the corresponding higher risk category.

All credits in the "Modified Special Mention" portfolio restored to Agreement No. 4-2013, through the provisions of this Agreement, will be considered as restructured credits.
Consequently, in order to be reclassified to a lower risk category, the conditions of Article 19 of Agreement No. 4-2013 must be met, and the six (6) month period referred to in said article will begin to run from the date of migration (restoration) to said Agreement.

PARAGRAPH 2. Corporate modified credits or personal modified credits (consumer and mortgage) from the "Modified Special Mention" portfolio that maintain grace periods and were registered in the normal, special mention, and subnormal categories, will be classified in the subnormal category of Agreement No. 4-2013.

[Table Content]
Classification of credits according to Agreement No. 4-2013:

Corporate:

• Normal: 0 to 30 days
• Special Mention: 31 to 90 days
• Subnormal: 91 to 180 days
• Doubtful: 181 to 270 days
• Uncollectible: More than 270 days

Personal - Consumer Loan:

• Normal: 0 to 60 days
• Special Mention: 61 to 90 days
• Subnormal: 91 to 120 days
• Doubtful: 121 to 180 days
• Uncollectible: More than 180 days

Personal - Consumer Loan with Real Estate Collateral (Loan amount less than 50% of collateral value):

• Normal: 0 to 60 days
• Special Mention: 61 to 180 days
• Subnormal: 181 to 270 days
• Doubtful: 271 to 360 days
• Uncollectible: More than 360 days

Personal - Home Mortgage Loan:

• Normal: 0 to 60 days
• Special Mention: 61 to 90 days
• Subnormal: 91 to 180 days
• Doubtful: 181 to 360 days
• Uncollectible: More than 360 days

Personal - Home Mortgage Loan with Real Estate Collateral (Loan amount less than 70% of collateral value):

• Normal: 0 to 60 days
• Special Mention: 61 to 180 days
• Subnormal: 181 to 270 days
• Doubtful: 271 to 360 days
• Uncollectible: More than 360 days

Agreement No. 012-2022

Corporate modified credits or personal modified credits (consumer and mortgage) that maintain grace periods for payment of principal and interest and were in the doubtful and uncollectible categories will be classified in the doubtful and uncollectible categories of Agreement No. 4-2013, as applicable.

PARAGRAPH 3. Banking entities must ensure to fully apply the provisions established in Article 30 of Agreement No. 4-2013 regarding the suspension of the recognition of interest on the restored portfolio, as applicable.

ARTICLE 4. WRITE-OFF OF OPERATIONS. For the purposes of the write-off of all loans classified in the uncollectible category, the guidelines of Article 27 of Agreement No. 4-2013 will be followed, and the respective deadlines will begin to run from the date of restoration of the credit to the conditions of said Agreement. This is without prejudice to carrying out the write-off on an earlier date.

ARTICLE 5. PROVISIONS. For the coverage of credit risk, banks must constitute provisions on the portfolio of credits restored to Agreement No. 4-2013, ensuring compliance with International Financial Reporting Standards (IFRS) and taking into account the significant increase in risk. Additionally, they must establish the specific provisions required by said Agreement.

ARTICLE 6. CONTAGION. The application of what is provided in paragraph 1 of Article 18 of Agreement No. 4-2013 remains suspended.

ARTICLE 7. ELIMINATION OF THE MODIFIED SPECIAL MENTION CREDIT PORTFOLIO. All designations of "Modified Special Mention" credits will be eliminated from accounting accounts with closing dates of December 31, 2022, and subsequent ones. Nevertheless, banking entities will use the codification assigned by the Superintendence for the identification and reporting of these credits.

ARTICLE 8. VALIDITY. This Agreement will enter into force from its promulgation.

ARTICLE 9. REPEAL. This Agreement repeals in all its parts Agreement No. 2-2021 of June 11, 2021 and all its modifications, and Agreement No. 6-2021 of December 22, 2021 and all its modifications. Likewise, General Resolution of the Board of Directors No. SBP-GJD-0003-2021 of June 11, 2021 and General Resolution of the Board of Directors No. SBP-GJD-0004-2021 of June 21, 2021 are repealed.

Given in the city of Panama, on the first (1) day of the month of November of two thousand twenty-two (2022).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT
Rafael Guardia Pérez

THE SECRETARY
Felipe Echandi Lacayo