JPRF-F-2022-037 — Reforming the Annual Budget Approval Rules for Entities of the Public Financial System

Resolution No. JPRF-F-2022-037 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic of Ecuador provides: “The institutions of the State, their agencies, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution.”; That, Article 309 of the Supreme Norm prescribes: “The national financial system is composed of the public, private, and popular and solidary sectors, which intermediates public resources. Each of these sectors will have specific and differentiated control norms and entities, which will be responsible for preserving their security, stability, transparency, and solidity. These entities will be autonomous. The directors of the control entities will be administratively, civilly, and criminally responsible for their decisions.”; That, Article 425 of the Magna Carta prescribes that “The hierarchical order of application of norms shall be as follows: The Constitution; international treaties and conventions; organic laws; ordinary laws; regional norms and district ordinances; decrees and regulations; ordinances; agreements and resolutions; and other acts and decisions of the public powers. (…)”; That, Article 96 of the Organic Code of Public Planning and Public Finances establishes that the phases of the budget cycle are: programming, formulation, approval, execution, evaluation and monitoring, and closure and budget liquidation; That, Article 112 of the aforementioned Code prescribes that the budget proformas of entities subject to this norm, which are not included in the General State Budget, shall be approved in accordance with the applicable legislation; That, Article 113 of the aforementioned Code establishes that budget execution is the “phase of the budget cycle that comprises the set of actions destined to the optimal use of human talent, and the material and financial resources assigned in the budget with the purpose of obtaining the goods, services, and works in the quantity, quality, and timeliness provided therein.”; That, Article 13 of the Organic Monetary and Financial Code, Book I, creates the Financial Policy and Regulation Board as part of the Executive Function, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation; That, Article 14 number 2 of the aforementioned Organic Code, regarding the scope of action of the Financial Policy and Regulation Board, mandates: “2. Issue the regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system, securities, insurance, and prepaid comprehensive health care services, in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador (…) For the fulfillment of these functions, the Financial Policy and Regulation Board will issue norms in matters within its competence, without being able to alter legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria. (…)”; That, literal a) of number 14 of Article 14.1 ibidem establishes the following: “For the performance of its functions, the Financial Policy and Regulation Board must comply with the following duties and exercise the following faculties: (…) 14. Exercise the following attributions in matters of approvals and authorizations: a. Annually approve the budget of the entities of the public financial sector, its reforms, as well as regulate its execution; and, (…)”; That, numbers 1 and 11 of Article 375 ibidem prescribe that the functions of the board of directors of public financial entities are to “Dictate the management policies of the entity and control its execution” and to “Internally approve the budget, prior to its submission to the Board”; That, numbers 2, 3, 4 and 5 of Article 378 ibidem prescribe that the functions of the General Manager of public financial entities are (i) “Agree, execute, and celebrate any act, fact, agreement, contract, or legal business that leads to the fulfillment of the purposes and objectives of the entity”, (ii) “Comply and enforce the resolutions of the board of directors”, (iii) “Direct the operational and administrative management of the entity” and (iv) “Prepare the budget, plans, and regulations of the entity and submit them for consideration to the board of directors”; That, the Fiftieth Transitory Provision of Article 106 of the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 433 of May 3, 2021, states that: “The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy Board and the norms issued by the control bodies will maintain their validity until the Monetary Policy Board and the Financial Policy and Regulation Board decide what corresponds, within the scope of their competencies.”; That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0070-M of September 26, 2022, submits to the President of the Board the following reports:

1. Legal Report No. JPRF-CJ-2022-0038 of September 26, 2022, establishes that the Financial Policy and Regulation Board, as responsible for the formulation of credit and financial policy and regulation, has legal competence to annually approve the budget of the entities of the public financial sector and its reforms, as well as regulate its execution, and for this effect, it can issue the corresponding regulation for the fulfillment of these attributions. Furthermore, it states that the norms on budgetary matters of public financial entities contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, which are currently in force, do not observe the reforms incorporated by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization of May 3, 2021.
2. Technical Report No. JPRF-CT-2022-0032 of September 23, 2022, through which the Technical Secretariat proposes to reform Resolution No. 040-2015-F of February 13, 2015, in which it issued the Budget Management Norms for Entities of the Public Financial Sector, incorporated into the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in order for the aforementioned norm to align with the provisions of the Organic Code of Public Planning and Public Finances and its Regulation, and for the JPRF to comply with the function established in the COMYF to annually approve the budget of the entities of the public financial sector, its reforms, as well as regulate its execution; That, the Financial Policy and Regulation Board, in an extraordinary session convened by technological means on September 27, 2022, and carried out via video conference on September 29, 2022, reviewed the Memorandum No. JPRF-SETEC-2022-0070-M of September 26, 2022, issued by the Technical Secretariat of the Board, as well as the Technical Report No. JPRF-CT-2022-0032 of September 23, 2022, issued by the Technical Coordination, and the Legal Report No. JPRF-CJ-2022-0038 of September 26, 2022, of the aforementioned Board and the corresponding draft resolution; and, In exercise of its functions, RESOLVES: SINGLE ARTICLE.- Substitute in Section III “Of the Public Financial Sector Capital Budget”, of Chapter XXXIII “Of the Government and Administration of the Public Financial Sector”, of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, the following articles: Art. 7.- Scope of application.- This norm will regulate the approval of the budget of the entities of the public financial sector, its reforms, as well as its execution. Art. 8.- Of the approval.- For the approval of the budget by the Financial Policy and Regulation Board, the entities of the public financial sector must submit by October 31 of the year immediately preceding its validity, the respective internally approved budget, and at least the following:
3. Report for approval of the budget proforma, by the Board of Directors of the institution, to which a presentation will be attached and which must contain among others the following: 1.1. Executive summary; 1.2. Planning elements: summarize the content of the existing institutional strategic planning elements, which will define the proposal of the Annual Operational Plan (POA), Annual Investment Plan (PAI), and budget for the following year; 1.3. Level of execution of existing planning: see Annex 1, attached to this resolution; 1.4. Budget proforma for the following year: see Annex 1, attached to this resolution; 1.5. Financial sustainability indicators, which must contain at least the following: 1.5.1. Portfolio distribution by credit segment: number of operations, amount granted, total portfolio balance, balance of portfolio not generating interest, balance of overdue portfolio, percentage of portfolio at risk (overdue portfolio + portfolio not generating interest/total gross portfolio); 1.5.2. Provision coverage by credit segment: total provisions regarding the portfolio at risk; 1.5.3. Portfolio quality by credit segments, must include the following: percentage of portfolio at risk, percentage of portfolio not generating interest, percentage of overdue portfolio, percentage of portfolio to mature; 1.5.4. Investment composition by institution, in which the 5 most important ones are evidenced; 1.5.5. Percentage of productive asset: total productive asset regarding total assets; 1.5.6. Operational efficiency: operating expenses regarding total income; 1.5.7. Solvency indicator: Technical equity constituted in relation to assets and contingents weighted by risk; 1.5.8. Liability composition with other entities, in which the 5 most important ones are evidenced; 1.5.9. Liquidity indicators: 1st line and 2nd line; 1.5.10. Intermediation margin; 1.5.11. Profitability indicators ROA and ROE. 1.6. Conclusions and recommendations.
4. Resolution in which the Board of Directors of the public financial sector entity internally approved its institutional budget.
5. Accumulated report of budget execution control to September of the current economic exercise, made known to the Board of Directors. The minutes of said session and, if applicable, its resolution will be included.
6. Final report of budget execution control to December of the economic exercise preceding the current economic exercise.
7. Certification of the governing body of public finances, in case the budget proforma contemplates programs that require subsidy, that is, budgetary assignment by the governing body. Once the budgets of each entity are approved, its General Manager must inform the respective approval to the governing body of public finances and to the National Assembly, as prescribed in the Organic Code of Public Planning and Public Finances.

Art. 9.- Of the execution.- The General Manager of the entities of the public financial sector is responsible for the adequate and efficient budget execution. Art. 10.- Of the reforms.- The entities that are part of the Public Financial Sector will observe and apply the following provisions regarding budget reforms: a) Reforms will be made on the available balances not certified nor committed of the assignments; b) Once the budget is reformed, the corresponding financial reprogramming must be carried out; c) In no case can reforms be made that imply transferring resources from the policy (investment) budget to the operational budget of the public financial entity. Art. 11.- Reforms approved by the entity.- The Financial Policy and Regulation Board authorizes the Board of Directors of the entities that are part of the Public Financial Sector to approve reforms that do not exceed five (5) percent of the total policy or investment budget and ten (10) percent of the total operational budget approved, as the case may be. The Board of Directors of the public financial entity, for the approval of reforms, will require a technical-legal report that contains, among others, the following:

1. Legal basis that grounds the reform;
2. Justificatory analysis of the need for the reform and its impact on the execution and on the economic results of the public financial entity;
3. Demonstration of the budgetary viability of the reform, in terms of greater or lesser income and uncommitted balances of policy or operational budgetary assignments, as appropriate;
4. Impact on existing financial programming, and its corresponding financial indices; and,
5. Recommendations for its issuance. These reforms, once approved by the Board of Directors, will be sent to the Financial Policy and Regulation Board and to the governing body of public finances within a term not greater than ten (10) days counted from the date of approval by the Board of Directors. Art. 12.- Reforms approved by the Board.- It corresponds to the Financial Policy and Regulation Board, through a motivated resolution, to approve reforms that alter the amount of the budget of the public financial entity that exceeds the percentage established in the first paragraph of the previous article of this norm; the entity must present together with the request, the resolution of internal approval of its Board of Directors, and a technical-legal report that contains, among others, the following:
6. Legal basis that grounds the reform;
7. Justificatory analysis of the need for the reform, its impact on the execution, and on the planning and economic results of the public financial entity;
8. Demonstration of the budgetary viability of the reform, in terms of greater or lesser income and uncommitted balances of policy or operational budgetary assignments, as appropriate;
9. Impact on existing financial programming and its corresponding financial indices; and,
10. Recommendations for its issuance. Once these reforms are approved, the General Manager will make them known to the governing body of public finances within a term not greater than ten (10) days counted from the date of approval. Art. 13.- Of the control of budget execution.- It is the responsibility of the Boards of Directors of the entities that are part of the Public Financial Sector the mechanism of control of budget execution. The General Manager of each entity will present for the knowledge of the Board of Directors, accumulated quarterly reports corresponding to the control of budget execution, which will contain at least:
11. Existing strategic planning elements: the following information will be included: mission, vision, strategic objectives, specific objectives, articulation of objectives with the existing National Development Plan (PND), summary of the Annual Operational Plan (POA), summary of the Annual Investment Plan (PAI), and summary of the existing business plan.
12. Main results achieved: 2.1. Level of execution of existing planning: for each element in this paragraph, the results obtained must be specified, and in case of observing important deviations from what was planned, a brief explanation of the causes thereof must be included. 2.1.1. Results of the current year of the strategic plan that contains: PND objective, strategic objective, specific objective, indicator, target, result achieved. 2.1.2. Level of POA execution of the current year: the impact and the degree of contribution of the execution of each item that constitutes the POA regarding the achievement of institutional objectives must be evidenced. 2.1.3. Level of PAI execution of the current year: the impact and the degree of contribution of the execution of each item that constitutes the PAI regarding the achievement of institutional objectives must be evidenced. 2.2. Level of execution of the institutional budget. 2.2.1. Antecedent: a detail of approval support will be included. 2.2.2. Detail of reforms: date, resolution, level of approval, reformed value, type of administrative or policy budget must be included. 2.2.3. Detail of coded budget (administrative and policy). 2.2.4. Level of execution of the administrative budget of the current year. 2.2.4.1. Income execution; for each group of items, an analysis will be carried out that must contain the following: Approved budget, reforms, coded budget, incurred budget, percentage of execution, with comparative information of the last 4 years. 2.2.4.2. Expense execution; for each group of items, an analysis will be carried out that must contain the following: Approved budget, reforms, coded budget, incurred budget, percentage of execution, with comparative information of the last 4 years. 2.2.5. Level of execution of the policy budget of the current year. 2.2.5.1. Income execution; for each group of items, an analysis will be carried out that must contain the following: Approved budget, reforms, coded budget, incurred budget, percentage of execution, with comparative information of the last 4 years. 2.2.5.2. Expense execution; for each group of items, an analysis will be carried out that must contain the following: Approved budget, reforms, coded budget, incurred budget, percentage of execution, with comparative information of the last 4 years. 2.3. Financial Management Results - Financial Statements of the entity: 2.3.1. Statement of situation: comparative 4 previous years, current, projected December of the current year, absolute variation, relative variation; the information presented must be specified at the level of at least two digits. 2.3.2. Statement of results: comparative 4 previous years, current, projected December of the current year, absolute variation, relative variation; the information presented must be specified at the level of at least two digits. 2.3.3. Financial indicators: comparative 4 previous years, current, projected December of the current year. 2.3.3.1. Portfolio distribution by credit segment: number of operations, amount granted, total portfolio balance, balance of portfolio not generating interest, balance of overdue portfolio, percentage of portfolio at risk (overdue portfolio + portfolio not generating interest/total gross portfolio). 2.3.3.2. Provision coverage by segment: total provisions regarding the portfolio at risk. 2.3.3.3. Portfolio quality by credit segments: percentage of portfolio at risk, percentage of portfolio not generating interest, percentage of overdue portfolio, percentage of portfolio to mature. 2.3.3.4. Investment composition by institution: in which the 5 whose impact is the most relevant according to the financial statements are evidenced. 2.3.3.5. Percentage of productive asset: total productive asset/total assets. 2.3.3.6. Operational efficiency: operating expenses/total income. 2.3.3.7. Technical equity over assets weighted by risk. 2.3.3.8. Liability composition with other entities: in which the 5 most relevant are evidenced. 2.3.3.9. 1st and 2nd line liquidity indicators. 2.3.3.10. Intermediation margin. 2.3.3.11. Profitability indicators ROA and ROE. 2.3.4. Harvest analysis by credit segment in which the quality index (IQ) is shown, expressed as the relationship between the risky portfolio (in which the risk levels expressed by categories A1, A2, A3, B1, B2, C1, C2, D, and E are shown) and the gross portfolio. This analysis must be carried out monthly, and for this effect, the following will be used: 2.3.4.1. The information of the operations granted only in the period of validity of the approved policy budget. 2.3.4.2. The information of the existing and overdue operations, in which the operations granted indicated in the previous paragraph will be included. 2.3.5. Monthly analysis of transition matrices of existing and overdue portfolio, by credit segment and risk levels expressed by categories A1, A2, A3, B1, B2, C1, C2, D, and E. 2.3.6. The monthly balance of written-off portfolio by credit segment must be included, if it exists; additionally, the monthly balances by credit segment of total portfolio balance, balance of portfolio to mature, balance of portfolio not generating interest, balance of overdue portfolio must be available.
13. Compliance with Board of Directors resolutions: the following information must be included: conclusions and recommendations of the quarterly reports to the Board of Directors, guidelines requested by the Board of Directors regarding the quarterly reports, results obtained regarding said guidelines.
14. Conclusions and Recommendations. GENERAL PROVISIONS FIRST.- Without prejudice to the provisions contained in the Organic Code of Public Planning and Public Finances, this norm must be observed by the entities of the public financial system. SECOND.- Renumber the articles of Chapter XXXIII “Of the Government and Administration of the Public Financial Sector”, of Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions. THIRD.- Public financial entities will report to the respective control bodies on the application of this norm, regarding the control of budget execution and budget reforms, in the periodicity and form that they determine. TRANSITORY PROVISIONS FIRST.- The budgets that are presented for approval by the Financial Policy and Regulation Board of BANECUADOR B.P. and CORPORACIÓN FINANCIERA NACIONAL B.P. for the 2023 economic exercise, must consider the aspects that guarantee the efficient use of resources, te