Agreement No. 13 (2020) Modifying Agreement No. 2-2020 on Credit Risk and Establishing Additional Relief Measures

Republic of Panama
Superintendence of Banks
AGREEMENT No. 013-2020
(October 21, 2020)

"Modifying Agreement No. 2-2020 through which additional, exceptional, and temporary measures are established for compliance with the provisions contained in Agreement No. 4-2013 on credit risk, and establishing an additional deadline for financial relief measures"

THE BOARD OF DIRECTORS

In exercise of its legal powers, and

CONSIDERING:

That following 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 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, among the technical attributions of the Board of Directors, the power to fix, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters;

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

That following the outbreak of Covid-19 worldwide and, in follow-up to the international recommendations of the World Health Organization and the Pan American Health Organization, the National Government through the Ministry of Health issued Executive Decree No. 64 of January 28, 2020, which adopts necessary, indispensable, and urgent measures contained in the National Plan against the threat of Covid-19; as well as extraordinary measures necessary to prevent the introduction and spread of this public health problem;

That subsequently, in order to expand Cabinet Resolution No. 6 of 2020 which declares a high-risk threat of the spread of Covid-19 and redouble surveillance measures to contain the epidemic, the Cabinet Council through Cabinet Resolution No. 10 of March 3, 2020, elevated the threat of spread of the Covid-19 outbreak in the national territory to very high and issued other provisions;

That this health threat situation of Covid-19 worldwide has collateral effects on different sectors of the economy, including the financial sector, so it is necessary to protect the financial stability of the Panamanian banking system;

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 through Law No. 156 of June 30, 2020, economic and financial measures are issued to counteract the effects of Covid-19 in the Republic of Panama for those persons whose labor contracts have been suspended or terminated, for independent workers, and for merchants whose activity has been affected by the measures established by the National Government;

That Article 2 of Law No. 156 of 2020 establishes a moratorium until December 31, 2020, on loans granted by banks, cooperatives, and financial institutions to natural or legal persons economically affected by the Covid-19 pandemic;

That the Superintendence of Banks issued Agreement No. 7-2020 of July 14, 2020, through which Article 4 of Agreement No. 2-2020 was 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 entry into force of Agreement No. 2-2020, until this Superintendence establishes the classification criteria and determination of provisions that will be applied to the modified credits;

That the Superintendence of Banks issued Agreement No. 9-2020 of September 11, 2020, through which Agreement No. 2-2020 was modified, 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 currently the world continues to face the Covid-19 pandemic and the health, economic, financial, and social consequences generated by its spread, with its behavior, termination, and the impact it will continue to cause on the population and on the different sectors of the economies of countries being indeterminate;

That in light of this reality and the economic recession it has caused, many debtors cannot meet or continue to adequately meet their banking obligations, due to potential or real deterioration of payment capacity;

That aware of the impact, uncertainty, and uncertain expectations that has been generated on people, families, and some sectors of the national economy, we have considered it convenient to extend the deadlines so that clients and banking entities find measures that allow a sustained solution to their credit relationships, prioritizing and promoting the culture of responsible payment in the Panamanian banking system;

That in working sessions of this Board of Directors, the need and convenience of modifying Agreement No. 2-2020 has been highlighted, in order to establish an additional deadline for granting financial relief measures on modified loans in the banking system.

AGREES:

ARTICLE 1. Paragraphs 8 and 9 are added to Article 3 of Agreement No. 2-2020, as follows:

ARTICLE 3. RULES RELATING TO MODIFIED CREDITS.
The modifications of credits as provided in this Agreement must not become a generalized practice to regularize the behavior of the credit portfolio. Additionally, banking entities must ensure to apply the following rules:

1. ….
   ……

2. Modified loans shall not be subject to a late interest rate or any other charge or penalty.

3. During the modification period established in Article 4 of this Agreement, the credit references of debtors in the credit bureau will not be affected.

ARTICLE 2. Article 4 of Agreement No. 2-2020 is hereby amended as follows:

ARTICLE 4. EVALUATION PERIOD FOR GRANTING MODIFIED LOANS. Banking entities will have until June 30, 2021, to continue evaluating credits of those debtors whose cash flow and payment capacity have been affected by the COVID-19 situation and who, at the time of their original modification, had a delay of up to 90 days.

Likewise, banks may make modifications to those credits that have not been previously modified, whose cash flow and payment capacity remain affected by the COVID-19 situation and which do not present a delay of more than 90 days.

Such credits may be subject to a review of their terms and conditions, for which the bank may agree and/or grant grace periods, ensuring to maintain the credit classification as provided in Article 4-A of this Agreement, maintaining the provision accounted for at the time of their modification.

In the case of modified restructured loans that were in the "special mention" category, they will be classified in accordance with what is provided in Article 4-A. Modified restructured loans that were in the substandard, doubtful, or uncollectible categories will maintain the credit classification they have at the time of their modification with their respective provisions.

During the period from January 1 to June 30, 2021, the bank will not execute the guarantee corresponding to the modified loans.

PARAGRAPH 1. Loans of those debtors who maintained a delay of more than 90 days (covered by Law No. 156 of 2020) may also be subject to modification by the banking entity. For such purposes, the bank will have until June 30, 2021, to make the corresponding modifications, ensuring to establish the new terms and conditions agreed with the client. For these cases, the bank will maintain the classification the credit had prior to its modification (substandard, doubtful, or uncollectible). Likewise, the bank must ensure to make the corresponding adjustments to the client's risk profile with the adaptations in their provisions according to their expected loss models.

PARAGRAPH 2. For the purposes of the application of this Agreement, banks must ensure to document in the credit files the information that evidences the debtor's impact through the documentation and proofs presented.

ARTICLE 3. Article 4-C of Agreement No. 2-2020 is hereby amended as follows:

ARTICLE 4-C. GENERAL CONDITIONS TO RESTORE IN ACCORDANCE WITH AGREEMENT No. 4-2013 THE MODIFIED CREDITS AND THE CREDITS COVERED BY LAW No. 156 OF 2020. For the restoration of the application of Agreement No. 4-2013 to the portfolio of modified credits according to Agreement No. 2-2020 and Law No. 156 of 2020, banks will follow the following parameters:

1. Those credits of clients on which banking entities made modifications in accordance with the parameters established in this Agreement and whose debtors, from September 21, 2020, are in compliance with the originally agreed terms and conditions, will be subject to the provisions established in Agreement No. 4-2013 on Credit Risk. Likewise, the bank must exclude them from the category of modified credits and any change to the terms and conditions will be governed by Agreement No. 4-2013.

2. Those credits of clients that, from January 1, 2021, comply for three (3) consecutive months with their modified payment conditions, may be restored to the normal category, in accordance with the application of Agreement No. 4-2013. Likewise, this provision will be applicable to those credits classified as normal and special mention of debtors who adhered to Law No. 156 of 2020.

3. Those modified credits, classified in the "modified special mention" category and on which the bank makes modifications between January 1 and June 30, 2021, that fail to comply with their new terms and conditions, will remain classified in the Modified Special Mention category until the regulatory Superintendence determines their new classification and additional provision.

4. Those restructured credits 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 provisions that had already been constituted. The provisions of Article 19 of Agreement No. 4-2013 will be applicable to these credits.

5. Those credits classified as substandard, doubtful, or uncollectible of debtors who adhered to Law No. 156 of 2020, and that from January 1, 2021, have been modified in accordance with what is established in paragraph 1 of Article 4 of this Agreement and remain up to date in their payments by June 30, 2021, will maintain the classification in which they were found at the time of their modification. Likewise, they will maintain the provisions that had already been constituted. The provisions of Article 19 of Agreement No. 4-2013 will be applicable to these credits.

6. Those credits classified as substandard, doubtful, or uncollectible of debtors who adhered to Law No. 156 of 2020, and that from January 1, 2021, have been modified in accordance with what is established in paragraph 1 of Article 4 of this Agreement and fail, partially or totally, their payments by June 30, 2021, will maintain the classification in which they were found at the time of their modification. Likewise, they will maintain the provisions that had already been constituted.
   For these credits, from July 1, 2021, the bank must continue with the application of Agreement No. 4-2013, regarding their displacement, constitution of provisions, and write-off of operations, for which it must consider the days of delay that said client maintained at the time of the modification.

ARTICLE 4. PROTECTION OF THE BANKING CLIENT. Banking entities must comply with the provisions established in this Agreement and 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 benefits of the financial relief measures 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 clients and banking consumers so that, through the various means and communication channels available at the national level, 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 the rights of banking clients.

ARTICLE 5. VALIDITY. This Agreement will enter into force starting January 1, 2021.

Given in the city of Panama, on the twenty-first (21) day of the month of October of two thousand twenty (2020).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT THE SECRETARY
Luis La Rocca Nicolás Ardito Barletta