Circular LISOL 1 - 79. CONAU 1 - 138. Classification of Debtors and Minimum Provisions for Uncollectible Risk

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
__________________________________________________________________ COMUNICACION " A " 2180 04/01/94 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 79.
CONAU 1 - 138.
Classification of debtors and minimum provisions for uncollectible risk

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

"1. Establish that, from June 1994, debtors of financial entities shall be classified in accordance with the norms contained in Annex I to this communication.

2. Provide that, from June 1994, the minimum guidelines for provisioning for uncollectible risk of the private sector credit portfolio - including other financial entities - listed in Annex II to this communication shall be applied.

When the aforementioned provisions determine increases with respect to the provisions established as of May 31, 1994, the entities will have the following deadlines to observe the new minimum provisions:

Increase in provision compared to RPC	Maximum deadline to meet requirements
up to 5%	March 1995
more than 5% up to 20%	June 1995
more than 20%	December 1995

In the event that the determined increase exceeds 20%, the entity must inform the measures it plans to adopt to meet the requirements within the cited period.

Consequently, a lower provision established in relation to what is established in the first paragraph of this point will not constitute a breach, provided that the entity falls within the values required by the regulations in force as of May 31, 1994.

3. Establish that, from June 1994, provisions must be established for 100% of the interest and similar accessories accrued from that month, corresponding to customer debts classified as "with problems" or "with deficient compliance" or in lower quality grades, according to the classification contained in Annex I to this communication.

4. Establish that the minimum provision, with respect to the "normal situation" or "normal compliance" portfolio, required from June 1994 will be 0.50%, a percentage that will increase to 0.75% from January 1995 to reach the value indicated in Annex II (1%) in January 1996.

5. Provide that, regardless of the start date of the entity's economic year, it will be required that by December 31, 1994, the review of the entire commercial portfolio has been completed, applying the guidelines contained in Annex I.

6. Substitute, with effect from June 1994, in the resolution disseminated by Communication "A" 2136 (ordered text on minimum capital requirement and integration) the aspects indicated:

6.1.: In point 1.1., last two paragraphs:
"Financing that, at origin, was weighted with values lower than 100%, will remain subject to that weighter from the moment the debtor is classified as 'with problems' or 'deficient compliance' or in any of the following lower quality categories.
To this effect, assets - immobilized or not - will be calculated based on the monthly averages of daily balances of the month prior to that corresponding to the determination of the requirement (capital, interest, premiums and quotation differences, as applicable, net of provisions for uncollectible risk and devaluation and of accumulated amortizations attributable to them, without deducting provisions for uncollectible risk on the portfolio classified in 'normal situation' or 'normal compliance')." For this last purpose and for the determination of the capital requirement of June 1994, the classification criteria in force as of May 31, 1994 will be used.

6.2. In point 2., first concept of "Complementary Net Worth":
"- provisions for uncollectible risk corresponding to the portfolio classified 'in normal situation' or 'of normal compliance'."

7. Provide for the opening of accounts in the "Chart of Accounts" for financial entities that must separately reflect the provisions that are established in accordance with what is provided in point 3. of this communication."

We salute you very attentively.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA
Alfredo A. Besio Martha L. Blanco
Manager of Standards for Manager of Studies
Financial Entities Economic

ANNEXES

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I	Annex I NORMS FOR THE CLASSIFICATION OF DEBTORS	a to
I	Com. "A" 2180
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Clients of the entity for financing (loan operations, other intermediation financial credits and financial leasing), as well as that of beneficiaries of guarantees granted by it, must be classified from the point of view of the quality of the obligors regarding the fulfillment of their commitments and/or the possibilities assigned to this effect based on an evaluation of their particular situation.

1. Basic criterion.
   Levels of grouping of clients have been provided in decreasing order of quality, in direct relation to the uncollectible risk that derives from the situations they present.
   The basic criterion to be used to carry out such classification is the ability to pay the debt in the future, or of the commitments object of the entity's guarantee.
   When evaluating repayment capacity, the emphasis must be placed on the analysis of cash flows carried out by the entity, considering as income, if applicable, the effect of:
   a) guarantees constituted in cash (pesos and US dollars), b) sureties of fixed-term deposit certificates issued by the entity itself, c) automatic reimbursement in export operations in accordance with the respective regimes of bilateral or multilateral agreements, d) guarantees or sureties of national public securities, with the pertinent weighting according to their average residual life, e) guarantees granted by banks abroad included in the highest quality categories for investment ("investment grade") according to rating granted by a risk rating agency (Moody's, Standard and Poors or equivalents). Secondly, the possibility of liquidation of assets not essential for the company's operations must be considered.

2. Procedures to be followed in the portfolio evaluation.
   The entity must develop portfolio analysis procedures that ensure: a) an adequate analysis of the company's economic and financial situation, and b) a periodic review of its situation regarding the objective and subjective conditions of all risks assumed.
   The implemented procedures will be recorded in a "Provision Procedures Manual" that allows appreciating the process followed in the matter, which must be permanently available to the Superintendence of Financial and Exchange Entities.

3. Responsibility for the classification task.
   The classification task may be entrusted to the sector in charge of granting credits and guarantees or to an independent area thereof.
   If opting for the first alternative, the financial entity must have an independent office whose function will be to carry out the review of the classifications assigned to clients by the credit sector.
   This review - which may be in charge of the entity's internal audit - must obligatorily include clients whose total indebtedness in pesos and foreign currency (by credits and guarantees) exceeds the equivalent to 1% of the entity's computable equity responsibility or $ 1,000,000, whichever is lower, and reach at least 10% of the total active portfolio, which will be completed, if applicable, by incorporating clients whose total indebtedness - in decreasing order - is lower than those margins.

4. Periodicity.
   The classification of credits and guarantees must be carried out with a periodicity that takes into account the importance of the debtor - considering all their credits and guarantees -, and in all cases the analysis carried out must be documented.

5. Information to the client.
   At the client's request, within 15 days of the request, the financial entity must communicate to them the last classification assigned to them, along with the grounds justifying it, according to the evaluation carried out by the entity.

6. Classification process.
   The portfolio will be grouped into two basic categories: a) commercial nature credits, and b) consumer credits (personal and family, for professionals, for the acquisition of consumer goods, credit card financing) or for own housing (purchase, construction or renovation).

Credits assigned in favor of the entity without responsibility for the assignor - economic unit receiving the funds - will be imputed to the signer, drawer, debtor, co-debtor or acceptor of the respective instruments, consequently becoming main and direct payers, when an evaluation is made regarding them as credit subjects with the pertinent opening of the file. Financing in pesos and foreign currency (credits and guarantees) of commercial nature up to the equivalent of $ 50,000 without preferred guarantees or up to the equivalent of $ 100,000 with preferred guarantees, may be grouped, at the entity's option, together with consumer credits, receiving, for the purposes of these provisions, the treatment provided for the latter.

7. Client file.
   The entity must keep at the place where the account is located, a file for each debtor in its portfolio in which all the elements of judgment that are taken into account to carry out the evaluations and classifications will be gathered, the reviews carried out and the classification assigned will be recorded. In addition, said file must contain updated information regarding all debts and guarantees granted corresponding to the client, regardless of the concept or credit line, that is, it must include the facilities assigned by all subsidiaries and operational units of the entity.

I. Commercial Portfolio
For the purposes of these provisions, this concept includes all financing and guarantees, with the exception of those that do not exceed the equivalent to $ 50,000 without preferred guarantees or $ 100,000 with preferred guarantees - if the entity exercises this option - and those considered as consumer credits or for own housing. When the client maintains financing for both concepts, consumer or housing credits will be added to the commercial portfolio to determine their grouping in one or the other portfolio based on the indicated amounts, for which credits with preferred guarantee will be weighted at 50%.

The review of the commercial portfolio will be practiced based on updated financial information - balances and supplementary statements, investment projects, etc. - which clients must provide upon request of the entities, applying parameters valid for each sector and considering other circumstances of the economic activity.

a. Minimum classification periodicity.
It will be taken into account that the basic evaluation criterion is based on the debtor's repayment capacity based on the estimated financial flow and, only secondly, on the basis of the liquidation of the client's assets, given that the granting of financing must be carried out under amortization conditions that respond to their true credit needs and the real possibilities of return that their activity and fund generation allow. The review must be carried out at least with the periodicity indicated below, leaving a record of this in the file of the analyzed client:
i) during each economic quarter, with respect to clients who individually considered maintain debts equivalent to 5% or more of the computable equity responsibility of the month prior to the study. For these purposes, the group or economic set will be treated as a single client. ii) during each economic semester, with respect to clients who individually considered maintain debts between 1% - or the equivalent to $ 1,000,000, whichever is lower - and less than 5% of the computable equity responsibility of the month prior to the study. For these purposes, the group or economic set will be treated as a single client. At the close of the first economic semester, the examination must have reached no less than 50% of the total amount of the commercial portfolio included, computing the clients referred to in item i), so that, if necessary to reach that value, it will be completed with the review of clients whose debts are lower than 1% of said equity responsibility or the equivalent to $ 1,000,000, following a decreasing order based on their magnitude. iii) during the economic year, in other cases, so that at the close of the exercise the review must have reached the entire commercial portfolio included.

b. Mandatory reconsideration of the classification.
In addition to the minimum periodicity previously exposed, it must be analyzed - leaving documented evidence of this in the client's file - and, if necessary, modify the classification each time:
i) modifications occur in the objective classification criteria arising from these norms (term of delinquency, client's legal situation, etc.); ii) at least another financial entity, whose claims represent at least 10% of the total reported by all entities, negatively modifies the classification of a client, taking it to a lower grade than that of the entity, exposing it in the "Risk Central"; iii) a decrease of more than one level occurs in the classification assigned by a risk evaluation company to the securities issued by the client. The reevaluation must be immediate when it concerns clients whose debts exceed 1% of the entity's computable equity responsibility or $ 1,000,000, whichever is lower, and within three months in which the aforementioned circumstances have presented themselves with respect to other clients included.

c. Maximum discrepancies between financial entities.
Only a discrepancy of one level will be admitted between the classification given by the financial entity and the worst classification granted by at least two other financial entities whose claims represent at least 20% of the total reported by all entities, so the existence of greater differences will oblige to carry out a recategorization when the classification assigned by the entity is higher than the aforementioned worst classification. To this effect, the last available information in the "Risk Central" will be considered.

d. Classification of commercial debtors.
Each client, and all their debts (by capital, quotation differences, interest and premiums corresponding to the respective operations) and guarantees, will be included in one of the following five categories, which are defined taking into account the conditions detailed in each case.

In the case of debtors who have requested their preventive bankruptcy, the credits granted to them after that request, to the extent that they have third-party guarantees that allow their collection at maturity without the need for the client's intervention in bankruptcy, for the purposes of this classification may be imputed - at the entity's option - to the third party constituted as principal or direct payer or guarantor or co-debtor who has waived the benefit of exclusion.

The same treatment may be observed when it comes to credits regarding documents or values assigned by the debtor in bankruptcy that can be considered as "self-liquidating" because they are collectible directly from the third party responsible for the document (e.g.: confirmed invoices, invoices to consumers issued by public service companies providing electricity, gas, etc., credit card coupons, etc.). In the cases of debtors for public services or credit cards, the opening of the file referred to in point 7. will not be mandatory.

In order to verify the fulfillment of obligations without resorting to new direct or indirect financing or refinancing, it will be taken into account that periodic credit renewals for working capital will not be considered included in those definitions, to the extent that these are consistent with the normal course of business and that there is capacity to meet the rest of the financial obligations. Nor will refinancing granted to agricultural producers be considered within that concept when this results from the application of provisions linked to the Agricultural Emergency Law.

d.1. In normal situation.
The client's cash flow analysis demonstrates that they are able to easily meet all their financial commitments.
Among the indicators that can reflect this situation, it stands out that the client:
a) presents a liquid financial situation, with a low level and adequate structure of indebtedness in relation to their earning capacity; shows a high ability to pay debts (capital and interest) under the agreed conditions generating funds - measured through flow analysis - to an acceptable degree. The cash flow is not susceptible to significant variations in response to important modifications in the behavior of variables both own and linked to their activity sector. b) punctually fulfills the payment of its obligations, understood to occur when the client cancels them without resorting to new direct or indirect financing from the entity. c) has qualified and honest management, very professional and technical, with adequate internal control systems. d) has an adequate information system, which allows permanent knowledge of the company's financial and economic situation. The information is consistent and up to date. e) belongs to a sector of economic activity or business branch that registers an acceptable future trend, considering, among other aspects, demand and an adequate relationship between profit and income. f) is located above the sector average and is highly competitive in its activity.

In this category, debtors whose debt titles have received a rating lower than "B" granted by any risk evaluation company in the country cannot be included. This circumstance will determine their incorporation, at minimum, in the next level.

d.2. With potential risk.
The client's cash flow analysis demonstrates that, at the time of being made, they can meet all their financial commitments.
However, there are possible situations that, if not controlled or corrected in a timely manner, could compromise the client's future payment capacity.
Among the indicators that can reflect this situation, it stands out that the client:
a) presents a good financial and profitability situation, with moderate indebtedness and adequate cash flow for the payment of capital and interest debts. The cash flow tends to weaken to face payments because it is extremely sensitive to the variation of one or two variables, over which there is a significant degree of uncertainty, being especially susceptible to changes in circumstances linked to the sector. b) incurs in reduced and occasional delays in payments, some possibility of non-compliance with contractual conditions. It is understood that the client makes the payment of its obligations when it does not resort to new direct or indirect financing from the entity. c) has qualified and honest management. d) has an adequate information system, which allows permanent knowledge of the client's financial and economic situation. The information is consistent. There may be some delays in its presentation. e) belongs to a sector of economic activity or business branch whose future trend presents questionable aspects, possibility of income decline, increase in competition or structural costs. f) maintains payment agreements resulting from homologated judicial concordats to expire when at least 50% of the amount involved in the cited agreement has been canceled.

d.3. With problems:
The client's cash flow analysis demonstrates that they have problems to normally meet all their financial commitments and that, if not corrected, these problems may result in a loss for the financial entity.
Among the indicators that can reflect this situation, it stands out that the client:
a) presents an illiquid financial situation and a level of cash flow that does not allow them to meet the payment of the total capital and interest of the debts, being able to cover only the latter. Scarce earning capacity. The cash flow projection shows a progressive deterioration and high sensitivity to minor and foreseeable modifications of significant variables, further weakening their payment possibilities. b) incurs in delays exceeding 90 days and up to 180 days. For this purpose, the calculation of the terms will not be interrupted by the granting of renewals when the effective cancellation of the due obligations has not previously occurred, that is, without resorting to direct or indirect financing from the entity. c) has management of little capacity and/or experience and/or of unclear honesty and/or weak and/or with objectionable internal control systems. d) has an information system not entirely adequate, which makes it difficult to know with exactness the real financial and economic situation of the client. The information is not totally consistent and there is no adequate updating process that allows having

e) It has repeated and systematic refinancing of the principal owed linked to insufficient payment capacity, even when interest is paid, provided there are no principal haircuts, interest rates are not reduced (unless derived from market conditions), and it is not necessary to accept assets in payment of part of the obligations.

When at least 40% of the refinanced obligations have been paid on time and there are additional guarantees of rapid realization beyond those originally offered, whose market value allows recovering the debts without losses and which are constituted on assets not linked to the business operations, the debtor may be reclassified to the immediate higher level if, in addition, the other conditions provided for in that level are observed.

f) It maintains payment agreements resulting from homologated judicial concords due to expire when at least 25% of the amount involved in the said agreement has been cancelled.

g) It incurs in recurrent delays, default of more than 90 days with respect to contractual conditions or null movement in accounts with the entity.

h) It belongs to a sector of economic activity or line of business whose future trend is not firm, with a perspective of decreasing income and profits, and a possibility of reduction in the demand for products.

i) It is located below the sector average with difficulties in facing competition and with minor problems in terms of technology adaptation. It presents problems in its relationship with suppliers and customers.

The debtor that remains for prolonged periods in this category or in any lower one will generate the presumption that it must be incorporated into the lower level.

d.4. High risk of insolvency

The analysis of the client's cash flow demonstrates that it is highly improbable that it can meet all its financial commitments.

Among the indicators that may reflect this situation, it stands out that the client:

a) Presents an illiquid financial situation and a very high level of indebtedness, with negative results in operations and forced to sell assets of importance for the activity developed and that are materially of significant magnitude. The cash flow is manifestly insufficient, not reaching to cover the payment of interest, making it feasible to presume that it will also have difficulties in complying with any refinancing agreements.

b) Incurs in delays superior to 180 days and up to 1 year. For this purpose, the calculation of the terms will not be interrupted by the granting of renewals when the effective cancellation of the due obligations has not previously occurred, that is, without resorting to direct or indirect financing by the entity.

c) Has incompetent and/or dishonest management. Lack of control in internal systems.

d) Has an inadequate information system, which prevents knowing with exactness the real financial and economic situation of the company. The information presented is not reliable as it does not have adequate supporting documentation. In general, the information is not consistent and is not updated.

e) Has refinancing of the principal owed and accrued interest linked to insufficient payment capacity, with the granting of haircuts or reduction in the agreed interest rates (unless derived from market conditions) or when it has been necessary to receive assets in payment of part of the obligations.

When at least 50% of the refinanced obligations have been paid on time and there are additional guarantees of rapid realization beyond those originally offered, whose market value allows recovering the debts without losses and which are constituted on assets not linked to the business operations, the debtor may be reclassified to the immediate higher level if, in addition, the other conditions provided for in that level are observed.

f) Maintains payment agreements resulting from homologated judicial concords due to expire when the 25% of the amount involved in the said agreement has not yet been cancelled.

g) Has been judicially sued by the entity for the collection of its credit when this is linked to the inability to pay. Cases are excluded where the actions refer to the discussion of other contractual aspects.

h) Has requested preventive bankruptcy or required its bankruptcy, as long as it has not been declared.

i) Is permanently delayed in payment, with defaults superior to 180 days with respect to contractual conditions.

j) Belongs to a sector of economic activity or line of business with a poor future trend, with prospects of scarce or negative income and profits.

k) Is located very far below the sector average with very serious problems in facing competition and has technology that requires urgent modernization. Serious difficulties in its relationship with clients and suppliers.

The debtor that remains for prolonged periods in this category or in any lower one will generate the presumption that it must be incorporated into the lower level.

d.5. Unrecoverable.

Client debts incorporated into this category are considered uncollectible. Although these assets could have some recovery value under a certain set of future circumstances, their uncollectibility is evident at the time of analysis.

Among the indicators that may reflect this situation, it stands out that the client:

a) Presents a bad financial situation with suspension of payments, declared bankruptcy, forced to sell at a loss assets of importance for the activity developed and that are materially of significant magnitude. The cash flow does not reach to cover production costs.

b) Incurs in delays superior to 1 year, has refinancing of the principal and its interest and financing of operating losses. For this purpose, the calculation of the terms will not be interrupted by the granting of renewals when the effective cancellation of the due obligations has not previously occurred, that is, without resorting to direct or indirect financing by the entity.

When at least 60% of the refinanced obligations have been paid on time and there are additional guarantees of rapid realization beyond those originally offered, whose market value allows recovering the debts without losses and which are constituted on assets not linked to the business operations, the debtor may be reclassified to the immediate higher level if, in addition, the other conditions provided for in that level are observed.

c) Has incompetent and/or dishonest and/or capable of fraudulent acts management. Null internal control.

d) Has an inadequate information system, which prevents knowing with exactness the real financial and economic situation of the company. The information presented is not reliable as it does not have adequate supporting documentation. In general, the information is not consistent and is not updated.

e) Belongs to a sector of economic activity or line of business in extinction, with serious structural problems or that are requiring a generalized restructuring.

f) Is located in the lowest portion within its sector, not being in conditions to compete and with obsolete, unprofitable technology.

Financing to clients who are themselves debtors in irregular situation with financial entities in liquidation will also be included, according to the list provided by the Central Bank.

II. Credits for consumption or housing.

Without prejudice to the fact that the previous analyses before granting financing must also take into account the payment capacity of the debtors, evaluating the impact of their periodic income by the total of credit commitments assumed, the classification of these clients will be carried out considering -at the end of each month- exclusively objective guidelines linked to the degree of compliance in terms of their obligations or their legal situation and the information that arises from the "Risk Central" when it reflects quality levels lower than those assigned by the entity.

In those situations, a discrepancy of one level with respect to the worst classification granted by at least two other financial entities whose credits represent at least 20% of the total informed by all entities will be admitted, so the existence of greater differences will oblige to carry out a recategorization when the classification granted by the entity is higher than the aforementioned worst classification.

In the case of clients classified as having inadequate or deficient compliance, the entity must verify the periodic income of the clients in order to weigh their impact on the payment of installments for credits.

Financing in pesos and in foreign currency (credits and guarantees) of a commercial nature up to the equivalent of $ 50,000, without preferred guarantees, or up to the equivalent of $ 100,000 with preferred guarantees may also be included in this set, at the option of the entity.

1. Normal Compliance.

It includes the amount of financing to clients who attend to the payment of their obligations punctually or with delays that do not exceed 31 days.

2. Inadequate Compliance.

It includes the amount of financing to clients who register occasional defaults in the attention of their obligations, with delays of more than 31 up to 90 days.

The relationship between the amount of installments/periodic income is maintained or deteriorates slightly.

3. Deficient Compliance.

It includes the amount of financing to clients who show some inability to cancel their obligations, with delays of more than 90 up to 180 days.

Significant deterioration of the relationship between the amount of installments/periodic income.

4. Difficult Recovery.

It includes the amount of financing to clients who are in judicial collection management or with delays of more than 180 days up to one year.

5. Unrecoverable.

It includes the amount of financing to insolvent clients, in judicial management with null or scarce possibility of credit recovery, or with delays superior to one year.

Financing to clients who are themselves debtors in irregular situation with financial entities in liquidation will also be included, according to the list provided by the Central Bank.

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MINIMUM PROVISION GUIDELINES FOR	Annex II CLIENTS OF THE PRIVATE SECTOR
Com. "A" 2180
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According to the classification that corresponds to assign to the clients, taking into account what is provided in Annex I, the following minimum provision guidelines shall be applied to the total debts of the clients -including other financial entities-:

Category | With preferred guarantees | Without preferred guarantees --- | --- | ---

1. Normal situation and compliance | 1% | 1%
2. With potential risk and inadequate compliance | 3% | 5%
3. With problems and deficient compliance | 12% | 25%
4. With high risk of insolvency and difficult recovery | 25% | 50%
5. Unrecoverable | 50% | 100%

The provision on the normal portfolio will be global, while the corresponding to the other categories will have individual attribution.

When the existing preferred guarantees do not cover the total debt of the client, the part not reached with that coverage will have the treatment established for debts without preferred guarantees.

Entities may make provisions for amounts higher than those resulting from the preceding scales, if they deem it reasonable, but in such cases it must be taken into account that the application of percentages corresponding to other subsequent levels will determine the automatic reclassification of the client by assimilation to the quality degree associated with the minimum provision, except in the cases referred to in the last paragraph of this annex.

In the case of debts with preferred guarantees, the permanence in the categories "with high risk of insolvency", "difficult recovery" and "unrecoverable" for a period of 24 consecutive months will determine that, from the twenty-fifth month, the minimum provision corresponding to operations without preferred guarantees must be applied.

Provisions must be constituted for 100% of the accrued interest and similar accessories corresponding to the debts of clients classified as "with problems" or "deficient compliance" or in degrees of lower quality, according to the classification contained in Annex I.

The amount of accrued interest and similar accessories that are collected, corresponding to debts of clients included in the categories "with problems", "deficient compliance", "with high risk of insolvency", "difficult recovery", with or without preferred guarantees, and "unrecoverable", with preferred guarantees, cannot generate the removal of the provisions constituted, unless the 100% of the accounted credits by principal and accessories is covered, all considered for each client. The collection of the aforementioned concepts that have not been accrued accounting-wise, having opted to interrupt their accrual, cannot also generate profits, except that the indicated coverage is met by constituting the pertinent provisions. The greater coverage with provisions for these circumstances does not determine the obligation to reclassify the client into lower categories.