Circular LISOL 1-241 and OPRAC 1-452: Modifications to Guarantees, Debtor Classification, Minimum Provisions for Credit Risk, and Credit Risk Fractionation

"1999 - Year of Export"

CENTRAL BANK OF THE ARGENTINE REPUBLIC
__________________________________________________________________ COMMUNICATION "A" 2932 I 09/06/99 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 241.
OPRAC 1 - 452.
Guarantees. Classification of debtors. Minimum provisions for risk of uncollectibility. Fractionation of credit risk. Modifications.

We address you to bring to your knowledge that this Institution adopted the following resolution:

"1. Replace the norms on guarantees with those contained in the Annex to this communication.

2. Incorporate into point 3.4.1. of the norms on classification of debtors, the following paragraph:
   'When it is not appropriate to evaluate the debtor's repayment capacity because the debt is covered by preferred "A" guarantees, as provided in point 4.4., it will not be mandatory to include in the client's file the cash flow, financial statements, nor any other information necessary to carry out that analysis.'

3. Replace point 4.3.1. of the norms on classification of debtors with the following:
   '4.3.1. When evaluating repayment capacity, the emphasis must be placed on the analysis of cash flows carried out by the entity.'

4. Incorporate into Section 4. of the norms on classification of debtors, the following points:
   '4.4. Financings covered with preferred "A" guarantees.
   The evaluation of repayment capacity shall not apply to financings that are backed by such guarantees.'

4.5. Debtors who should not be subject to classification.
Debtors whose financings are fully covered by preferred "A" guarantees shall not be subject to classification, without prejudice to their reporting according to the norms established in the respective regimes.'

5. Replace points 6.5.1.4. and 6.5.2.4. of the norms on classification of debtors with the following:
   '6.5.1.4. have an adequate information system that allows permanent knowledge of the company's financial and economic situation. The information is consistent and up-to-date. When financings are backed by preferred "B" guarantees, according to the applicable norms in that matter, the entity may request this information at a frequency that allows it to perform the debtor evaluation observing the minimum periodicity established in point 6.3.'

'6.5.2.4. have an adequate information system that allows regular knowledge of the client's financial and economic situation. The information is consistent. When financings are backed by preferred "B" guarantees, according to the applicable norms in that matter, the entity may request this information at a frequency that allows it to perform the debtor evaluation observing the minimum periodicity established in point 6.3.'

6. Replace the second paragraph of points 6.6. and 7.3. of the norms on classification of debtors with the following:
   'The existence of major differences will require a recategorization, starting from the month following the availability of the relevant information from said central, when the classification assigned by the entity is higher than the aforementioned worse classification. To this end, the classifications made according to the evaluation of the entities will be taken into account, i.e., categories 1 to 5.'

7. Incorporate into point 2.1. of the norms on minimum provisions for risk of uncollectibility, the following paragraphs:
   'For the purpose of determining provisions, it will be considered that financings are covered by preferred guarantees up to the amount resulting from the application of the coverage margins established in the norms on guarantees. Financings that exceed the respective coverage margins will be subject to the constitution of provisions for the percentages established for operations that do not have the aforementioned guarantees.'

8. Replace the third paragraph of point 1.3. of Annex I to Communication "A" 2140, with the following:
   'In assignments in favor of entities with or without liability for linked assignors, when the obligors to pay are non-linked third parties, the credit margin granted to the linked assignor will be affected, except if the documents or titles subject to assignment constitute preferred "A" guarantees according to the applicable norms in that matter, in which case they will be imputed to the margin of the drawer or issuer. In the case of rights to collect invoices from consumers issued by public service companies; credit card coupons; on the collection of tariffs and taxes in public works concessions; "warrants" and fixed pledge with displacement towards the entity, the operation will be imputed to the margin of the linked assignor.'

9. Replace point 4. of Annex I to Communication "A" 2140, with the following:
   '4. For the purposes established in point 2.2., financings included that have the following guarantees will be computed:
   4.1. Preferred "A" constituted by the assignment of rights to collect invoices from consumers issued by public service companies; credit card coupons; on the collection of tariffs and taxes in public works concessions; "warrants" and, with the exception of fixed pledge with displacement towards the entity.
   4.2. Preferred "B", except first-degree mortgage on real estate and fixed pledge without displacement towards the entity.
   To this effect, the applicable norms in matter of preferred guarantees and the amounts resulting from the coverage margins fixed in those dispositions will be taken into account.
   Credit assistance that exceeds the respective coverage margins will be imputed to the limit of operations without guarantee.'

10. Incorporate into Annex II to Communication "A" 2140, the following point:
    '1.9. In cases of assignments in favor of entities without liability for the assignor of rights to collect invoices from consumers issued by public service companies; credit card coupons; on the collection of tariffs and taxes in public works concessions; "warrants" and fixed pledge with displacement towards the entity, the operation will be imputed to the margin of the assignor.'

11. Replace point 5. of Annex II to Communication "A" 2140, with the following:
    '5. For the purposes established in point 3.2., financings included that have the following guarantees will be computed:
    5.1. Preferred "A" constituted by the assignment of rights to collect invoices from consumers issued by public service companies; credit card coupons; on the collection of tariffs and taxes in public works concessions; "warrants" and fixed pledge with displacement towards the entity.
    5.2. Preferred "B".
    To this effect, the applicable norms in matter of preferred guarantees and the amounts resulting from the coverage margins fixed in those dispositions will be taken into account.
    Credit assistance that exceeds the respective coverage margins will be imputed to the limit of operations without guarantee.
    Financings computable to National, provincial, and municipal governments will be considered as guaranteed. For these purposes, the definition of the concept government according to point 3.9. will be taken into account.'

12. Incorporate into point 2.1. of Annex I (text according to Communications "A" 2140 and 2829) and in point 3.1. of Annex II to Communication "A" 2140, the following paragraph:
    'To determine the available margin of credit assistance for each client within this tranche, the value of the documents or titles regarding which one is legally obligated to pay and that constitute preferred "A" guarantees according to the applicable norms in that matter, which back financings granted by the entity to other borrowers, will also be computed.'

13. Incorporate into point 3. of Annex I to Communication "A" 2140 (text according to Communication "A" 2829), the following point:
    '3.4. Financings that are covered with preferred "A" guarantees imputable to the credit margin of the obligor to pay of the documents or titles that constitute that backing.'

14. Incorporate into point 4. of Annex II to Communication "A" 2140, the following point:
    '4.8. Financings that are covered with preferred "A" guarantees imputable to the credit margin of the obligor to pay of the documents or titles that constitute that backing.'

15. Replace in the second paragraph of point 1.2.2. of the norms on classification of debtors, in the third paragraph of point 2.1. and in point 2.2.1. of the norms on minimum provisions for risk of uncollectibility and in points 3.1.1.3. ii) and 3.1.5.3. of the norms on liquidity position, the expression "self-liquidating" by "A".

16. Leave point 5.2. and the penultimate paragraph of point 6.5.1. of the norms on classification of debtors without effect."

We salute you very attentively.

CENTRAL BANK OF THE ARGENTINE REPUBLIC
Juan Carlos Isi Alfredo A. Besio
Submanager of Norms Manager of Norms for for Financial Entities Financial Entities

ANNEX

B.C.R.A. ORDERED TEXT OF THE NORMS ON GUARANTEES -IndexSection 1. Classes.
1.1. Preferred “A”.
1.2. Preferred “B”.
1.3. Remaining guarantees.
Section 2. Conditions.
2.1. Consideration of preferred guarantees.
2.2. Backing documentation.
Section 3. Computation.
3.1. Coverage margins.
3.2. Partial coverage with preferred guarantees.
Version: 2nd Communication “A” 2932 Validity:
09.06.99

1.1. Preferred “A”.
They are constituted by the assignment or pledge of rights regarding titles or documents of any nature that, faithfully instrumented, ensure that the entity will be able to dispose of funds for the cancellation of the obligation contracted by the client, without needing to previously require payment from the debtor since the effectiveness depends on solvent third parties or on the existence of markets in which the mentioned titles or documents, or the effects they represent, can be liquidated directly, whether their maturity coincides or is subsequent to the maturity of the loan or the committed periodic payments or that the proceeds are applied to the cancellation of the debt or transferred directly to the entity for that purpose, provided that credit operations do not exceed, measured residually, the term of 6 months. Included in this category, with the character of taxative enumeration, are the following:
1.1.1. Guarantees constituted in cash, in pesos or in United States dollars, or in the following foreign currencies: Swiss francs,
pounds sterling, yen, and those comprised in the European Monetary Union convertible into euros.
1.1.2. Guarantees constituted in gold.
1.1.3. Pledges of time deposit certificates issued by a financial entity, constituted in the currencies referred to in
point 1.1.1.
1.1.4. Automatic reimbursement in export operations, at the charge of the
Central Bank of the Argentine Republic, according to the respective regimes of bilateral or multilateral agreements.
1.1.5. Guarantees or pledges of national public securities, taking into account permanently their market value that
must respond to a normal and habitual quotation, in the country or abroad, of wide dissemination and easy access to public knowledge.
1.1.6. Sureties and letters of credit issued by banks abroad with international risk rating “A” or superior, granted by some of
the raters admitted by the norms on evaluation of financial entities, to the extent that they are unrestricted and that the accreditation of funds is effected immediately upon simple request of the beneficiary entity. Version: 2nd Communication “A” 2932 Validity:
09.06.99

1.1.7. Allocation of funds from the federal tax sharing, in operations that count with the pertinent intervention of the Ministry of Economy and Public Works and Services of the Nation.
1.1.8. “Warrants” on fungible goods that count with normal and habitual quotation in local or international markets,
of wide dissemination and easy access to public knowledge.
1.1.9. Guarantees constituted by the assignment of rights to collect
invoices from consumers for services already rendered, issued by companies providing services to the public (companies supplying electricity, gas, telephone, water, etc.), provided that it is a set of invoices representing a quantity no less than 1,000 clients.
1.1.10. Guarantees constituted by the assignment of rights to collect regarding credit card coupons.
1.1.11. Credit titles (promissory notes, bills of exchange, invoices, credit invoices and deferred payment checks), with liability for the assignor, in which one of the obligors legally to pay meets at least one of the following conditions:
1.1.11.1. Register a level of indebtedness with the system equal to or greater than $ 5,000,000, according to the last information available in the “Central of debtors of the financial system” or, if lower than that amount but not less than $ 1,000,000, being informed by three or more financial entities in which the indebtedness –in each of them- is at least $ 200,000 and corresponds to clients comprised in the commercial portfolio.
Furthermore, it must be classified, in said central, “in normal situation” by all financial entities.
Version: 2nd Communication “A” 2932 Validity:
09.06.99

The total financing granted to different assignors and assigned by the entity in this modality to the same legal obligor to pay, cannot exceed 10% of the debts of the latter with the financial system, reported in the “Central of debtors of the financial system”, nor 5% of the computable patrimonial responsibility of the entity of the month prior to the one corresponding, of both the lesser. This latter limit will not be observed in case the entity has a credit file of said obligor, so that the operations will be computed within the assistance margins provided by the norms applicable in the matter.
1.1.11.2. Maintain valid negotiable obligations or other debt titles in the local market that count with local risk rating “A” or superior or, in the international market, that count with international risk rating equal to or superior to that of the debt issued by the Argentine Republic in the international market granted by some of the raters admitted by the norms on evaluation of financial entities, for a sum no less than $ 15,000,000.
The total financing granted to different assignors and assigned by the entity in this modality to the same legal obligor to pay cannot exceed 5% of the computable patrimonial responsibility of the entity of the month prior to the one corresponding. This limit will not be observed in case the entity has a credit file of said obligor, so that the operations will be computed within the assistance margins provided by the norms applicable in the matter.
1.1.12. Direct guarantees issued by central governments, agencies or dependencies of central governments of countries members of the Organization for Economic Cooperation and Development (O.E.C.D.) that count with international risk rating “A” or superior granted by some of the raters admitted by the norms on evaluation of financial entities.
1.1.13. Guarantees constituted by the assignment of rights on the collection of tariffs and taxes in public works concessions, provided that it does not exceed 50% of the projected income.
Version: 1st Communication “A” 2932 Validity:
09.06.99

1.1.14. Guarantees or pledges of securities (shares or obligations) privately issued by national or foreign companies, taking into account permanently their market value, which must respond to a normal and habitual quotation in local or international markets, of wide dissemination and easy access to public knowledge.
The local issuing companies must maintain valid debt papers that count with local risk rating “A” or superior or with international risk rating equal to or superior to that of the debt issued by the Argentine Republic in the international market, granted by some of the raters admitted by the norms on evaluation of financial entities. The foreign titles must correspond to companies whose debt papers count with international risk rating “A” or superior granted by some of those raters.
1.1.15. Credit titles (certificates of public works, deferred payment checks and promissory notes), with liability for the assignor, issued by provinces, municipalities or Government of the City of Buenos Aires that count with the guarantee of the federal tax sharing or it is about drawers or issuers whose debt –without specific guarantees- counts with local risk rating “A” or superior or international risk rating equal to that of the Argentine Republic.
The entities must report monthly to the Central Bank of the Argentine Republic and to the Secretariat of Economic and Regional Programming the amount of the operations they carry out under this modality, discriminated by drawer or issuer.
1.1.16. Fixed pledge with displacement towards the entity.
1.2. Preferred “B”.
They are constituted by real rights on goods or commitments of third parties that, faithfully instrumented, ensure that the entity will be able to dispose of funds for the cancellation of the obligation contracted by the client, complying previously with the procedures established for the execution of the guarantees, and by the guarantees defined in point 1.1. while the residual term of the operations exceeds the term of 6 months. Version: 2nd Communication “A” 2932 Validity:
09.06.99

Included in this category, with the character of taxative enumeration, are the following:
1.2.1. First-degree mortgage of privilege on real estate.
1.2.2. Fixed pledge with registration in first degree.
1.2.3. Guarantees or sureties granted by reciprocal guarantee societies,
registered in the Registry enabled at the Central Bank of the Argentine Republic.
1.2.4. Preferred “A”, in operations of residual term superior to 6 months.
1.3. Remaining guarantees.
The guarantees not explicitly included in the preceding points, such as the mortgage in degree other than first and the pledge or pledge of shares or commercial documents and the encumbrances constituted abroad with adjustment to legislations different from the local –except the cases expressly provided-, will be considered non-preferred. Version: 2nd Communication “A” 2932 Validity:
09.06.99

Section 2. Conditions.
2.1. Consideration of preferred guarantees.
Preferred guarantees are considered such only as long as circumstances do not occur that, by affecting the quality, the possibilities of realization, the legal situation or other aspects relative to the encumbered goods, diminish or nullify their realization value, negatively impacting the integrity and/or effectiveness of the guarantee, Special and permanent attention will be paid to ensure that the credit rating of the third parties legally obligated in the situations provided in point 1.1. of Section 1., corresponds to the levels established, deassigning immediately the operations when, due to subsequent modifications, the ratings result lower than the minimums fixed.
2.2. Backing documentation.
The backing documentation of preferred guarantees must be kept in a predetermined place –that counts with adequate security safeguards- of the house where the client's file is led and, at all times, must be available to the Superintendence of Financial and Exchange Entities for its eventual verification. Version: 2nd Communication “A” 2932 Validity:
09.06.99

Section 3. Computation.
3.1. Coverage margins.
For its determination in operations covered with preferred “A” guarantees contracted under figures distinct from discount, the amount of capital and interests will be taken into account.
Preferred guarantees will be computed by the following percentages:
3.1.1. Cash (point 1.1.1.).
3.1.1.1. In pesos or United States dollars: 100%.
3.1.1.2. In foreign currencies distinct from the United States dollar: 90% of the quotation value.
3.1.2. Gold (point 1.1.2.): 90% of the realization value.
3.1.3. Time deposit certificates (point 1.1.3.).
3.1.3.1. In pesos or United States dollars: 90% of the imposed capital.
3.1.3.2. In foreign currencies distinct from the United States dollar: 80% of its quotation value, calculated on the imposed capital.
3.1.4. Reimbursement of export operations (point 1.1.4.): 100%.
3.1.5. National public securities (point 1.1.5.): 80% of its quotation value.
3.1.6. Sureties and letters of credit from banks abroad (point 1.1.6): 90%.
3.1.7. Allocation of the federal tax sharing (point 1.1.7.):
90%.
3.1.8. “Warrants” (point 1.1.8.): 80% of the market value of the goods.
3.1.9. Invoices from consumers for services already rendered, issued by
companies providing services to the public (point 1.1.9.): 80% of the nominal value of the documents.
3.1.10. Credit card coupons (point 1.1.10.):
3.1.10.1. Issued by financial entities: 90% of the nominal value
of the documents.
3.1.10.2. Issued by companies that are not financial entities
that meet the required conditions to be subject of credit: 80% of the nominal value of the documents.
3.1.10.3. Issued by the remaining non-financial companies: 50%
of the nominal value of the documents.
Version: 2nd Communication “A” 2932 Validity:
09.06.99

Section 3. Calculation.

3.1.11. Negotiable instruments (point 1.1.11.): 85% of the nominal value of the documents.
3.1.12. Direct guarantees from foreign governments (point 1.1.12.): 90%.
3.1.13. Assignment of rights over the collection of fees and taxes in public works concessions (point 1.1.13.): 80%.
3.1.14. Private securities (point 1.1.14.): 70% of their quotation value.
3.1.15. Provincial and municipal negotiable instruments (point 1.1.15.): 90% of their nominal value.
3.1.16. Fixed pledge with displacement (point 1.1.16.): 75% of the appraised value of the asset.
3.1.17. First-degree mortgage on real estate properties when financing is granted from January 1, 1998, and depending on the result of the comparison between the values of the index "Evolution of the price of the square meter in sales operations (national average)," which is compiled monthly by Banco Hipotecario S.A. and whose series is published by the Central Bank of the Argentine Republic, corresponding to the third month prior to that in which the financing is granted and to the base month –October 1997 = 100–, according to the following scale (point: 1.2.1.):
3.1.17.1. Up to 1.50: 75% of the appraised value of the asset.
3.1.17.2. More than 1.50 and up to 2: 55% of the appraised value of the asset.
3.1.17.3. More than 2: 40% of the appraised value of the asset.
3.1.18. Fixed pledge with registration in the first degree (point 1.2.2.): 75% of the appraised value of the asset.
3.1.19. From reciprocal guarantee companies (point 1.2.3.): 90%.

3.2. Partial coverage with preferred guarantees.
When existing preferred guarantees do not cover the total assistance to the client, the portion not reached by that coverage will have the treatment established for debts without preferred guarantees.

Version: 2nd Communication “A” 2932 Validity: 09.06.99

B.C.R.A. ORIGIN OF THE PROVISIONS INCLUDED IN THE ORDERED TEXT OF THE GUARANTEES REGULATIONS

ORDERED TEXT			ORIGINATING REGULATION				Observations
Section	Point	Paragraph	Com.	Annex	Point	Paragraph
1.	1.1.	“A” 2932	único	1.1.
1.	1.1.1.	“A” 2216	I 1. 3º, a)	According to Com. “A” 2443 and “A” 2932
1.	1.1.2.	“A” 2216	I 1. 3º, a)	According to Com. “A” 2443 and “A” 2932
1.	1.1.3.	“A” 2216	I 1. 3º, b)	According to Com. “A” 2932
1.	1.1.4.	“A” 2216	I 1. 3º, c)	According to Com. “A” 2932
1.	1.1.5.	“A” 2216	I 1. 3º, d)	According to Com. “A” 2932
1.	1.1.6.	“A” 2216	I 1. 3º, e)	According to Com. “A” 2932
1.	1.1.7.	“A” 2216	I 1. 3º, f)	According to Com. “A” 2932
1.	1.1.8.	“A” 2216	I 1. 3º, g)	According to Com. “A” 2932
1.	1.1.9.	“A” 2216	I 1. 3º, h)	According to Com. “A” 2932
1.	1.1.10.	“A” 2216	I 1. 3º, i)	According to Com. “A” 2932
1.	1.1.11.	“A” 2932	único	1.1.11.
1.	1.1.12.	“A” 2932	único	1.1.12.
1.	1.1.13.	“A” 2932	único	1.1.13.
1.	1.1.14.	“A” 2932	único	1.1.14.
1.	1.1.15.	“A” 2932	único	1.1.15.
1.	1.1.16.	“A” 2932	único	1.1.16.
1.	1.2.	“A” 2932	único	1.2.
1.	1.2.1.	“A” 2419	1. 1º	Modified by Com. “A” 2563 (points 1. and 2.) and “A” 2932
1.	1.2.2.	“A” 2448		Debtor status report (point 6.1.2.2.2.) and “A” 2932
1.	1.2.3.	“A” 2448		Debtor status report (point 6.1.2.2.2.) and “A” 2932
1.	1.2.4.	“A” 2410	7.	“A” 2932	único	1.2.4.

NEW ORDERED TEXT			ORIGINATING REGULATION				Observations
Section	Point	Paragraph	Com.	Annex	Point	Paragraph
1.	1.3.	“A” 7		Specifications of the items of “other guarantees received”, modified by Com. “A” 2932
2.	2.1.	1º	“A” 2448	Debtor status report (point 6.1.2.2.2.)
2.	2.1.	2º	“A” 2932	único	2.1. 2º
2.	2.2.	“A” 2216	I 1. 4º
3.	3.1.	“A” 2932	único	3.1.
3.	3.1.1.	“A” 2932	único	3.1.1.
3.	3.1.2.	“A” 2932	único	3.1.2.
3.	3.1.3.	“A” 2932	único	3.1.3.
3.	3.1.4.	“A” 2932	único	3.1.4.
3.	3.1.5.	“A” 2932	único	3.1.5.
3.	3.1.6.	“A” 2932	único	3.1.6.
3.	3.1.7.	“A” 2932	único	3.1.7.
3.	3.1.8.	“A” 2216	I 1. 3º, g)	According to Com. “A” 2932
3.	3.1.9.	“A” 2216	I 1. 3º, h)	According to Com. “A” 2932
3.	3.1.10.	“A” 2216	I 1. 3º, i)	According to Com. “A” 2932
3.	3.1.11.	“A” 2932	único	3.1.11.
3.	3.1.12.	“A” 2932	único	3.1.12.
3.	3.1.13.	“A” 2932	único	3.1.13.
3.	3.1.14.	“A” 2932	único	3.1.14.
3.	3.1.15.	“A” 2932	único	3.1.15.
3.	3.1.16.	“A” 2932	único	3.1.16.
3.	3.1.17.	“A” 2419	1. 1º, ii)	Modified by Com. “A” 2932
3.	3.1.18.	“A” 2932	único	3.1.18.
3.	3.1.19.	“A” 2932	único	3.1.19.
3.	3.2.	“A” 2216	II 5º