Circular LISOL 1 - 83. CONAU 1 - 146. Classification of Debtors and Minimum Provisions for Uncollectible Risk. Modifications.

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
__________________________________________________________________ COMUNICACION " A " 2215 09/06/94 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 83.
CONAU 1 - 146.
Classification of debtors and minimum provisions for uncollectible risk. Modifications

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

"1. Replace points 2., 5., 6.2. and 7. of the resolution disseminated by Communication "A" 2180, with the following:

• Point 2.:
  "2. Establish that, starting from June 1994, the minimum guidelines for provisioning for uncollectible risk of the private sector credit portfolio set forth in Annex II to this communication shall be applied, which shall equally be observed with respect to financial entities, with the exclusion of:
  i) interfinancial operations not due for up to 30 days term and ii) public financial entities with majority state participation and which have the guarantee of the government of the respective jurisdiction.

These criteria, with the exception of clients in normal situation, will also be used with respect to unused balances of current account advances granted, guarantees, sureties and other eventual commitments in favor of third parties on behalf of clients -including those linked to foreign trade operations-, registered in Off-Balance Sheet Accounts, as determined by the classification assigned to them and the counter-guarantees covering the operations. The amounts determined shall be charged to the account that is enabled in the "Provisions" item of the "Chart of Accounts" for financial entities.

• Gradual Framework
  a) When at the conclusion of the reclassification process of the entire portfolio, the higher provisions resulting from the cited provisions determine -even if not accounted for- deficiencies in the integration of the minimum capital, entities will have the following deadlines to meet the capital requirements:

Deficiency in the integration of minimum capital (measured against the requirement) | Maximum deadline to observe the minimum capital requirement --- | --- up to 5% | August 1995 more than 5% | December 1995

To this effect, only the higher provisions resulting from the application of the new rules as of 30.6, 30.9 and 31.12.94, with respect to the provisions constituted according to the rules prior to 31.5, 31.8 and 30.11.94, will be taken into account, for each fraction of portfolio that corresponds to be classified for the first time on each of those occasions, including as of 30.6 consumer or housing credits.

Therefore, since the mentioned exemption will be valid with respect to deficiencies derived exclusively from the registration of the higher provisions, in cases where higher deficiencies occur -at those justified amounts- what is provided in the relevant minimum capital rules (Communication "A" 2136 and complements) shall apply.

b) The higher provisions determined as of 30.6, 30.9 and 31.12.94 must be accounted for no later than 31.1.95, 30.4.95 and 31.7.95, respectively.
If this option is exercised, the entity must inform in which months and for which amounts it plans to register those higher provisions, through a note sent to the Superintendency of Financial and Exchange Entities within the 20 calendar days following the conclusion of each of those calendar quarters.

In the event that at any time -30.6, 30.9 or 31.12.94- within the transition period it is determined that, as a result of the higher provisions originating in this rule and in the assumption that they are accounted for, a deficiency in the integration of the minimum capital lower than 5% would be registered, the entity must inform the measures it plans to adopt to reach the capital requirement within the established deadlines, through a note that must be presented to the Superintendency of Financial and Exchange Entities within the 20 calendar days following the date on which, for the first time, that fact is verified. If that percentage is exceeded, a capital adjustment plan must be presented.

Both the report and the plan must be reformulated as new fractions of reclassified portfolio are incorporated and at the conclusion of the process, as appropriate in accordance with what is provided in point 5. and sent to the aforementioned Superintendency within the 20 calendar days

following 30.9 or 31.12.94, as appropriate.

c) Consequently, the defect of minimum capital integration originating in what is established in the first paragraph of this point shall not constitute a breach, to the extent that the entity was framed in the values required as of 31.5.94, with respect to the minimum provisions and minimum capital.

d) With respect to the portfolio not yet classified according to the new criteria, provisions shall continue to be constituted according to the previous rules, including those established by Communication "A" 2016.

e) The choice of the alternative to defer the constitution of the higher provisions derived from the application of the new rules does not include the additional provisions to them that, due to a change in their situation, result from subsequent reviews of clients already reclassified according to these provisions.

Until the total review of the portfolio is concluded and the total higher provisions resulting therefrom are accounted for, the provisions constituted when those resulting from the application of the new rules are lower than the previous ones cannot be derecognized, nor will their imputation or compensation for the obligation to constitute the new ones be admitted."

• Point 5.:
  "5. Establish that, regardless of the start date of the entity's economic year, it will be required that by 31.12.94 the review of the entire commercial portfolio has been concluded, applying the guidelines contained in Annex I.

Therefore and in view of what is provided in point I.a of said annex -"Minimum periodicity of classification"-, the review process between 30.6.94 and 31.12.94 must be adjusted at minimum to the following guidelines:

• as of 30.6.94: classification of clients whose indebtedness -financing and other computable concepts- is equivalent to or greater than 5% of the capital integration as of 31.5.94.

• as of 30.9.94: new classification of the clients mentioned in the preceding section and classification of clients whose indebtedness -financing and other computable concepts- is comprised between 1% and 5% of said integration, as of 31.8.94, i.e. equivalent to $ 1,000,000, as appropriate.

• as of 31.12.94: new classification of the clients mentioned in the first section and portfolio of clients whose indebtedness -financing and other computable concepts- is less than 1% of the capital integration, as of 30.11.94.

The consumer or housing portfolio must be classified monthly starting from 30.6.94."

• Point 6.2. In point 2., first concept of "Complementary Net Worth":
  "- provisions for uncollectible risk corresponding to the classified portfolio "in normal situation or of "normal compliance" (only the minimum amount required by the Central Bank)."

• Point 7.:
  "7. Establish the opening of accounts in the "Chart of Accounts" for financial entities that must separately reflect the provisions that are constituted in accordance with what is provided in point 3. of this communication and those derived from what is established in the second paragraph of point 2."

2. Suppress the second paragraph of point 6.1. of the resolution disseminated by Communication "A" 2180, and incorporate at the end of point 6 the following paragraphs:
   "During the period June to December 1994, the following provisions will apply:

• for the determination of the capital requirement of June 1994, the classification criteria valid as of 31.5.94 will be used.

• for the determination of the capital requirement (point 1.1 "in fine" of the rule, according to the text of this communication) in the following months, provisions on the portfolio classified according to the new provisions in normal situation or normal compliance and on the normal portfolio, with delay or in accordance with respect to clients not yet reclassified, will not be taken into account.

• for the calculation of "Complementary Net Worth" a homogeneous criterion of computation will be followed, according to the temperament exposed in the previous sections."

3. Incorporate into the resolution disseminated by Communication "A" 2180 the following point:
   "8. Admit that, until 31.12.95, the option referred to in the fifth paragraph of point 6 "Classification Process" of Annex I, may be exercised with respect to computable financing of a commercial nature up to the equivalent of $ 100,000 without preferred guarantees or up to the equivalent of $ 200,000 with preferred guarantees, without prejudice to carrying out the weighting provided in the last paragraph of that point when financing with and without preferred guarantees coexist.

These caps will also be applicable, until 31.12.95, for the purposes provided in the second paragraph of section I. Commercial Portfolio, on classification within that portfolio of consumer credits whose repayment is subject to the commercial evolution of the client.

Consequently, from 1.1.96 and for such purposes, the amounts of $ 50,000 and $ 100,000 established in point 6 "Classification Process" will govern."

4. Replace and/or incorporate in Annex I to Communication "A" 2180 the aspects indicated in each case:

4.1. In point 1. Basic criterion:
4.1.1. clause a) (replacement):
"a) guarantees constituted in cash (pesos and US dollars) and in gold (at their realization value)"

4.1.2. clause d) (replacement):
"d) guarantees or sureties of national public securities, taking into account permanently their market value which must be widely available,"

4.1.3. clauses f), g), h), e i) and following paragraph (incorporation):
"f) the pledge of funds from the federal tax sharing, in operations that have the pertinent intervention of the Ministry of Economy and Public Works and Services, g) warrants on primary products and/or those resulting from their elaboration to the extent that their market value represents at least 125% of the obligation and always that they refer to goods with broad and habitual quotation in local or international markets, h) guarantees constituted by invoices to consumers, issued by public service companies providing electricity, gas, telephone, water, etc., to the extent that they represent no less than 125% of the obligation, i) guarantees constituted by credit card coupons, to the extent that they represent no less than 125% of the obligation.

The supporting documentation of the aforementioned guarantees must be kept in a predetermined place -which has adequate security safeguards- of the house where the client's file is kept and, at all times, must be available to the Superintendency of Financial and Exchange Entities for its eventual verification."

4.2. In point 2. Procedures to be followed in the evaluation of the portfolio, second paragraph (replacement):
"The implemented procedures will be entered into a "Manual of classification and provisioning procedures" that allows appreciating the process followed in the matter.
Additionally, this element must include the levels that intervene in the analysis and decision in the granting of facilities, according to the attributions assigned to each of them. The manual must be permanently available to the Superintendency of Financial and Exchange Entities."

4.3. In point 3. Responsibility for the classification task, third paragraph (replacement) and fourth paragraph (incorporation):
"This review -which may be in charge of the entity's internal audit- must obligatorily comprise clients whose total indebtedness in pesos and in foreign currency (for credits and guarantees) is equal to or greater than the equivalent to 1% of the integration of the minimum capital of the entity of the month prior to the classification or $ 1,000,000, whichever is less, and reach at least 20% of the total active portfolio, which will be completed, if appropriate, by incorporating clients whose total indebtedness -in descending order- is lower than those margins.

The review must be concluded before presenting the information to the Central Bank in the "Statement of debtor situation" that includes the classification of the mentioned clients."

4.4. In point 5. Information to clients included in the "Risk Central" (replacement and incorporation):
"At the request of those clients, within the 10 calendar days of the request, the financial entity must communicate to them the last classification assigned to them, along with the grounds that justify it according to the evaluation performed by the entity, the total amount of debts with the financial system and the classifications assigned that arise from the last available information in the "Risk Central".

The mentioned clients must be notified that they have the possibility of requesting those data at the time of presenting credit requests, through a form independent of them."

4.5. In point 6. Classification process, second and third paragraphs (replacement and incorporation):
"Credits assigned in favor of the entity without responsibility for the assignor -economic unit receiving the funds- will be imputed to the signatory, drawer, debtor, co-debtor or acceptor of the respective instruments, consequently constituted as main and direct payers, performing regarding them their evaluation as credit subjects with the pertinent opening of the file. In case the evaluation is not performed, for any reason, these clients will be classified as "Uncollectible".

Credits (promissory notes, bills, confirmed invoices, etc.) assigned in favor of the entity with responsibility for the assignor may be classified taking into account the category assigned to the signatory, drawer or acceptor of the instruments always that, at the moment of granting the credit, the following conditions are observed:

• that they are obligors included in the "Risk Central", whose level of indebtedness with the system is equal to or greater than $ 10,000,000, according to the last available information.

• that they are classified, in said central, as "normal situation" by all reporting entities.

• that the credit assistance received by the assignor under this modality does not exceed, at any time, $ 200,000. This assistance must be considered within the commercial portfolio in case the client has another type of financing that, by itself, determines that the treatment provided for that portfolio should be applied.

• that the total financing granted by the entity under this modality to the set of assignors, with respect to the same signatory or obligor, does not exceed 10% of the debts of that obligor with the financial system, reported in the "Risk Central" nor 5% of the integration of the minimum capital of the entity, whichever is less.

The non-verification of all those conditions at the moment of granting the credit or subsequently, will determine the obligation to perform the credit evaluation of the assignor with responsibility according to the criteria applicable with general character.

Commercial financing in pesos and in foreign currency (credits and guarantees) up to the equivalent of $ 50,000 ($ 100,000, until 31.12.95) without preferred guarantees or up to the equivalent of $ 100,000 ($ 200,000 until 31.12.95) with preferred guarantees, may be grouped, at the option of the entity, together with consumer credits, receiving, for the purposes of these provisions, the treatment provided for the latter. This option, if any, must be applied with general character to the entire portfolio and must be provided for in the "Manual of classification and provisioning procedures" and can only be changed with a 6 months notice to the Superintendency of Financial and Exchange Entities.

When financing with and without preferred guarantees coexist, credits with preferred guarantee will be weighted at 50% for the purposes of verifying the limit ($ 50,000 - $ 100,000, until 31.12.95-) up to which one can opt to include them together with consumer credits."

4.6. In point 7. Client file, second paragraph (replacement and incorporation):
"Additionally, it will be necessary to keep in the entity's headquarters a copy of the file of each of the clients whose indebtedness (credits and guarantees granted) is equivalent to or greater than 1% of the integration of the minimum capital.

Said file must contain information about the total credit margin assigned to the client and guarantees granted, regardless of the concept or credit line.

On the other hand, the updated balance of the total debts as well as the guarantees granted -which will comprise the facilities assigned by all subsidiaries and operational units of the entity- must be available, according to the accounting information system used by the entity, in the place of location of the client's file or the headquarters, if appropriate to keep a copy in this, discriminated by concept.

It will be admitted that the client's file is located in a place different from the location of the account (e.g. headquarters or branch that is the seat of regional management), when this has been determined for operational reasons -linked to the evaluation, granting and follow-up of credits- and this circumstance is included in the "Manual of classification and provisioning procedures"."

4.7. In section I. Commercial Portfolio (incorporation as second paragraph):
"Consumer credits that exceed those limits, as appropriate, whose repayment is not linked to fixed or periodic income of the client but to the evolution of their productive or commercial activity, will be classified within the commercial portfolio."

4.8. In section I.a. Minimum periodicity of classification, clauses i) and ii) (replacement):
" i) during the course of each calendar quarter, with respect to clients individually considered whose debts and guarantees granted at some point are equivalent to 5% or more of the integration of the minimum capital of the month prior to the end of said period. For these purposes, the group or economic unit will be treated as a single client. ii) during the course of each calendar semester, with respect to clients individually considered whose debts and guarantees sum at some point between 1% -or the equivalent to $ 1,000,000, whichever is less- and less than 5% of the integration of the minimum capital of the month prior to the end of said period. For these purposes, the group or economic unit will be treated as a single client. At the close of the first calendar semester, the examination must have reached no less than 50% of the total amount of the commercial portfolio comprised, computing the clients referred to in clause i), so that, if necessary to reach that value, it will be completed with the review of clients whose debts and guarantees are less than 1% of said integration of minimum capital or the equivalent to $ 1,000,000, following a decreasing order based on their magnitude."

4.9. In section I.b. Mandatory reconsideration of the classification, last paragraph (replacement):
"The reevaluation must be immediate when it concerns clients whose debts and guarantees equal or exceed 1% of the integration of the minimum capital of the entity or $ 1,000,000, whichever is less, and within three months in which the mentioned circumstances have occurred with respect to the other clients comprised."

4.10. In section I.c. Maximum discrepancies between financial entities (replacement):
"Only a discrepancy of one level 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 will be admitted.

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, except in cases where the total debts and guarantees of the client are covered with the guarantees mentioned in the third paragraph of point 1. of this annex.

To that effect, the last available information in the "Risk Central" will be considered."

4.11. In section I.d.1. In normal situation, as ante-penultimate paragraph (incorporation):
"Clients whose debts and guarantees are fully covered with the guarantees mentioned in the third paragraph of point 1. of this annex will be included in this category."

4.12. In section I.d.2. With potential risk, clause f) (replacement):
"f) maintain payment agreements resulting from homologated judicial concordats due to mature when at least 35% of the amount involved in the said agreement has been cancelled."

4.13. In section I.d.3. With problems, clause f) (replacement)
"f) maintain payment agreements resulting from homologated judicial concordats due to mature when the 35% of the amount involved in the said agreement has not yet been cancelled."

4.14. In section I.d.4. With high insolvency risk, clause h) (replacement):
"h) has requested preventive bankruptcy or has been required for its bankruptcy, until it has been declared. for obligations that are equal to or greater than 5% of the client's net worth. In case the bankruptcy request is lifted, the debtor may be reclassified in higher levels, according to the previous situation, if the conditions provided there are observed."

4.15. In section I.d.5. Uncollectible, clause a) (replacement):
"a) presents a bad financial situation with suspension of payments, declared bankruptcy or request for its own bankruptcy, forced to sell at a loss assets of importance for the activity developed and that are materially of significant magnitude. The"

cash flow is insufficient to cover production costs."

4.16. In section I.d.5. Irrecoverable, as the last paragraph:
"Furthermore, it will be necessary to classify in this category clients who, for any reason (including not having a file), have not been evaluated with the corresponding periodicity."

4.17. In section II. Consumer or housing credits, as the last paragraph (incorporation):
"Consumer credits that exceed these limits, as applicable, whose repayment is not linked to the client's fixed or periodic income but to the evolution of their productive or commercial activity, shall be classified within the commercial portfolio."

4.18. In section II.5. Irrecoverables, first paragraph (substitution):
"It comprises the amount of financing to insolvent clients, under judicial management or in bankruptcy with null or low possibility of credit recovery, or with delays exceeding one year."

5. Substitute and/or incorporate in Annex II to Communication "A" 2180, the aspects indicated in each case:

5.1. In the first paragraph (substitution):
"According to the classification that must be assigned to clients, taking into account what is provided in Annex I, the following minimum provisioning guidelines shall be applied to the total debts of clients:"

5.2. Before the second paragraph (incorporation):
"These guidelines shall equally be observed with respect to financial entities, excluding non-matured inter-financial operations with a term of up to 30 days and public financial entities with majority state participation that have the guarantee of the government of the respective jurisdiction. These criteria shall also be applied to unused balances of current account advances granted, and for guarantees, endorsements, and other eventual commitments in favor of third parties on behalf of clients - including those linked to foreign trade operations - registered in Off-Balance Sheet Accounts, as determined by the classification assigned to them and the counter-guarantees covering the operations. No provision shall be constituted when it concerns clients classified in normal situation and compliance."

5.3. Before the fourth paragraph (incorporation):
"Debts and guarantees that are covered with the guarantees or counter-guarantees mentioned in the third paragraph of point 1. of Annex I, shall be separated from the remaining debts and guarantees, observing on the fraction of disbursed credits the provision established generally for the normal portfolio. On the remaining debts and guarantees, the minimum provisions resulting from these norms shall be applied."

5.4. In the third and fifth paragraphs, substitute "debt" by "assistance".

5.5. In the fourth paragraph, "in fine" substitute "refers to the last paragraph" by "refer to the last two paragraphs".

5.6. In the sixth paragraph, at the end (incorporation):
"from the moment they are classified in any of those categories. The greater coverage for this cause shall not imply the obligation to reclassify the client into lower categories. The entity may opt, directly, to interrupt the accrual of these concepts."

5.7. In the last paragraph, incorporate "and by other calculable concepts (unused balances of current account advances and eventual obligations)" immediately after "accessories".

6. Suppress in Annex I to Communication "A" 2180, the following:

• item f) of section I.d.4 High risk of insolvency.
• the third paragraph of section II. Consumer or housing credits.
• the second paragraphs of sections II.2. and II.3. Inadequate compliance and Deficient compliance, respectively.

Separately, we send you the ordered text of the norms cited in the reference, in replacement of those disseminated through Communication "A" 2180.

We greet you very attentively.

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