Circular LISOL 1-119, OPRAC 1-393, CONAU 1-186: Credit Graduation Limits, Minimum Requirements for Financing, and Controls on Liquidity and Solvency Norms

BANCO CENTRAL DE LA REPUBLICA ARGENTINA __________________________________________________________________ COMUNICACION " A " 2373 21/09/95 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 119.
OPRAC 1 - 393.
CONAU 1 - 186.
Credit graduation limits, minimum requirements for the granting of finan- cing and controls on the compliance with certain norms on liquidity and sol- vency

We address you to inform you that this Institution adopted the following resolution:

"1. Replace, with effect for financings that are concluded from 1.10.95, point 1. of the Annex to Communication "A" 467 (text according to Communication "A" 2233), with the following:

"1. Applicable relations and minimum formalities to observe for the assignment of credits.

National and foreign financings cannot exceed 100% of the computable equity responsibility of the clients to be determined in accordance with the norms contained in point 6.1., whether natural or legal persons, groups or economic sets, linked or not.

Without prejudice to this, the granting of credit facilities in excess of this limit and up to 300% of the computable equity of the applicant will be admitted, when that additional support does not exceed 2.5% of the computable equity responsibility of the registered financial entity on the last day of the second month immediately preceding that in which the pertinent financing agreement is formalized, which will require prior approval by the Board of Directors, Board of Administration -in both cases by a simple majority of its members-, or equivalent authority, regardless of the amount of assistance granted within this complementary margin.

Participations in companies that do not have as their corporate object the provision of services complementary to the activity developed by the financial entity cannot exceed 12.5% of the computable equity of those companies, without prejudice to which the financial support for all concepts cannot exceed the sum of the general and additional margins established.

Entities must analyze the cash flow of credit applicants against obligations assumed with third parties in order to weigh the capacity for repayment of financings, without prejudice to studying the risk emerging from each assignment to require the constitution of guarantees they deem appropriate."

2. Clarify that for the purposes of determining the res-
   ponsibility computable equity of the clients referred to point 6.1. of the resolution disseminated by the Communication "A" 467, participations in the capital of the lending financial entity are deductible.

3. Establish, with effect from 1.10.95, that the finan-
   cings, regardless of their modality -except for inter-financial operations-, that exceed 2.5% of the computable equity responsibility of the lending financial entity registered on the last day of the second month prior to that in which the decision to grant credit support is made, must have the prior opinion of:

• Branch Manager, except if the request is
  processed by the head office.
• Regional or zone Manager -in its case and when the
  assistance has not been managed by the head office-.
• Highest ranking official of the credit or
  commercial area responsible for deciding on credit matters.
• General Manager or equivalent authority.
• Credit Committee, unless it does not exist in the structure
  functional of the entity.

These interventions must be complied with in all cases included, except for the provided exceptions, even when this is not required according to the organizational-functional structure and regime of resolving powers for the assignment of credits in force in the lending financial entity. To this effect, the functional unit immediate superior must control the effective intervention of previous levels.

Without prejudice to this, the granting of the credit assistance must have the approval of the simple majority of the members of the Board of Directors or Board of Administration, except if it is credit support to linked firms, in which case the conformity of at least two thirds of the directors or councilors will be required.

Non-compliance with the established requirements will give rise to the application of the sanctions that follow:

• fine of 1 to 2 times the amount of the funds e-
  fectively disbursed.
• from 1 to 3 times the amount of those funds when non-
  compliance with the obligation in matters of control over the interventions that correspond is verified.
• disqualification of five (5) to twenty (20) years to
  perform in the financial activity.

These sanctions will fall on the natural persons to whom the transgression is attributable and on the financial entity, which will be jointly responsible for the payment of the fines applied to them in the case of being declared insolvent by competent authority.

The application of the sanctions will be adjusted to the provisions contained in article 41 of the Law of Financial Entities and its regulation in matters of graduation of fines referred to in the annex to the Communication "A" 2124.

4. Establish that the excesses to the credit graduation limits
   that are configured with the application of the provisions in point 1. of this resolution with respect to the refinancing of operations in force on
   30.9.95 will not be subject to the payment of the charge referred to in point 5. of the resolution disseminated through the
   Communication "A" 2019 during the twelve (12) months following that last date.

This franchise will be subject to the formulation and approval of a schedule of progressive framing of these operations to the new limits that cannot exceed that maximum term and must be presented to the Superintendency of Financial and Exchange Entities by October 31, 1995 at the latest.

5. Replace point 4.1. of Annex IV to the minimum norms
   on external audits, with the following:

"4.1. Verification of information on "Main debtors of financial entities"

The external auditor will prepare a report whose scope refers to all and each of the data contained in the mentioned information -emphasizing in the analysis of provisions constituted on the debts included- corresponding to the last month of each calendar quarter, indicating if they agree with those obtained from its own examination and leaving a record of the discrepancies it has observed. In addition, it will record the results of the circularization of substantive test 11., specifying the debtors from whom no response has been received.

In the case of borrowers whose debts are equivalent to 5% or more of the responsibility computable equity at the date of the review, the report must contain the specific opinion of the external auditor on the situation that each of these debtors presents in the matter object of the examination.

6. Incorporate as points 4.7. and 4.8. of Annex IV to
   the minimum norms on external audits, the following:

"4.7. Verification of contingent risks by the realization of operations with derivatives (options in their different modalities), especially when they do not have as their object the coverage of active or passive operations and imply the existence of open positions."

"4.8. Verification of the realization or not of operations with financial entities and/or natural persons and legal persons from abroad not subject to the regime of supervision on consolidated bases whose amount, frequency or other conditions make it presume the existence of direct or indirect linkage with the audited entity.

In this special report, the characteristics and significance of the operations must be specified and if they are adequately considered in the accounting statements."

7. Replace the first paragraph of point 5. of Annex IV to
   the minimum norms on external audits, with the following:

"5. The reports mentioned in points 3. and 4.5. to
4.8. will be carried out quarterly, indicating with
the same periodicity that they have not occurred -if so- the circumstances provided for in sections
4.3. and 4.4."

8. Establish, with effect from 1.10.95, that the clas-
   sification of debtors and the constitution of provisions for uncollectibility by the finan- cings granted that exceed 2.5% of the computable equity responsibility of the financial entity must have the prior approval of the members of the Board of Directors or Board of Administration, or authority equivalent, of the lending financial entity, to whose effect the majorities established in the third paragraph of point 3. of this resolution must be observed.

This conformity will be referred to -with opinion founded in all cases- both to the classification assigned to each of the debtors included as to the level of the provisions constituted."

We salute you very attentively.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA Alfredo A. Besio Miguel A. Kiguel Manager of Standards for General Manager Financial Entities Area of Economics and Finance