Norm on Asset Evaluation and Classification for the Production Development Bank

Page 1 of 6 Resolution CD-SIBOIF-1069-3-AGOST23-2018 Dated August 23, 2018

NORM ON ASSET EVALUATION AND CLASSIFICATION FOR THE PRODUCTION DEVELOPMENT BANK

The Board of Directors of the Superintendency of Banks and Other Financial Institutions,

CONSIDERING

I

That Article 3 of Law 640, the Law Creating the Production Development Bank (Banco Produzcamos), published in La Gaceta, Official Gazette No. 223 on November 20, 2007, and its reforms, establishes that Produzcamos may carry out first-tier and second-tier placements. That second-tier placements may be carried out through financial institutions supervised and regulated by the Superintendency of Banks and Other Financial Institutions, by the National Commission of Microfinance, or through other unregulated entities.

II

That it is the responsibility of Banco Produzcamos to carry out the evaluation and classification of placed assets in accordance with the powers provided in Article 3 of its creating law, based on the criteria established by the Superintendency of Banks and Other Financial Institutions, and on the policies that its Board of Directors approves in accordance with these criteria.

III

That according to Article 21 of the aforementioned Law No. 640, Banco Produzcamos may carry out the functions, activities, banking operations, and investments typical of commercial and development banks that this law, banking legislation, and current regulations allow. For this purpose, the bank must comply with the respective provisions contained in Law No. 561, "General Law of Banks, Non-Bank Financial Institutions and Financial Groups," Law No. 316, "Law of the Superintendency of Banks and Other Financial Institutions," current banking regulations, and must have prior authorization from the Superintendency of Banks and Other Financial Institutions.

IV

In accordance with the considerations set forth above and based on Article 3, numeral 13), and Article 10, numeral 7), of Law 316, Law of the Superintendency of Banks and Other Financial Institutions, and its reforms.

In exercise of its powers,

HAS ISSUED

The following norm, Resolution CD-SIBOIF-1069-3-AGOST23-2018

Page 2 of 6 NORM ON ASSET EVALUATION AND CLASSIFICATION FOR THE PRODUCTION DEVELOPMENT BANK

CHAPTER I CONCEPTS, OBJECT, AND SCOPE

Article 1. Concepts.- For the purposes of applying the provisions contained in this norm, the terms indicated in this article, both in uppercase and lowercase, singular or plural, shall have the following meanings:

a) Risk Assets: Risk assets shall be understood as all credit and contingent portfolio operations that in some way signify direct or indirect financing in favor of natural or legal persons. Also considered risk assets are goods given as collateral, accounts receivable, and adjudicated goods.

b) Bank: Production Development Bank (Produzcamos).

c) Board of Directors: The main administrative body of the Bank.

d) Portfolio Classification: The action of analyzing and evaluating the recoverability level of the set of credits of each debtor, including corresponding contingent operations and any other obligation that they have with the institution.

e) Eligibility Criteria for FIs: Rating criteria approved by the Bank's Board of Directors, applied to FIs to determine their eligibility.

f) Financial Intermediaries (FIs): Entities that intermediated financial resources supervised by the Superintendency of Banks and Other Financial Institutions (banks, financial companies, general warehouse deposits) or by the National Commission of Microfinance (CONAMI); as well as other entities specialized in microfinance not supervised by the aforementioned supervisory bodies, organized as non-profit associations and foundations, savings and credit cooperatives, and other financial entities constituted as joint-stock companies, such as trading companies.

g) Produzcamos Bank Law: Law 640, Law Creating the Production Development Bank (Produzcamos), published in La Gaceta, Official Gazette No. 223, on November 20, 2007, and its Reforms, contained in Law No. 684, published in La Gaceta, Official Gazette No. 92, on May 20, 2009, and Law 866, published in La Gaceta, Official Gazette No. 123, on July 3, 2014.

h) General Banking Law: Law 561, General Law of Banks, Non-Bank Financial Institutions and Financial Groups, published in La Gaceta, Official Gazette, number 232, on November 30, 2005.

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i) Norm on Credit Risk Management: Resolution No. CD-SIBOIF-547-1-AGOST20-2008, published in La Gaceta No. 176 and 178 on September 11 and 17, 2008, and its successors.

j) Superintendency: Superintendency of Banks and Other Financial Institutions.

k) Superintendent: Superintendent of Banks and Other Financial Institutions.

Article 2. Object and Scope.- The purpose of this norm is to establish minimum guidelines to regulate the evaluation and classification of the bank's risk assets according to the quality of first and second-tier debtors, and to determine the minimum provisioning requirements according to the expected losses of the respective assets.

CHAPTER II GROUPINGS FOR THE CLASSIFICATION OF CREDIT PORTFOLIOS

Article 3. Groupings.- To evaluate the credit portfolio, the bank must catalog its credits according to the groupings established in the Norm on Credit Risk Management (consumer, housing mortgage, microcredit, and commercial), which must be treated separately in accordance with the criteria regulated in the aforementioned norm. Additionally, the bank must form the grouping of credits to FIs, understood as those credits granted to the financial intermediaries defined in this norm, declared eligible by the bank.

CHAPTER III CREDITS TO FIs

SECTION I EVALUATION AND CLASSIFICATION

Article 4. Evaluation and classification criteria for credits to FIs.- Prior to granting credits to FIs, the bank will carry out an evaluation of the risk level of the totality of the applicant's obligations, taking into consideration the eligibility criteria in accordance with internal regulations approved by its Board of Directors.

The bank must permanently classify its portfolio of credits to FIs based on the criteria it defines in its own portfolio classification and provisioning methodology, which must be approved by its Board of Directors, and its application will be subject to the non-objection of the Superintendent. Said methodology must be documented and technically supported by prudential criteria that support adequate risk management.

The provisioning percentage must be applied to the net balance not covered by eligible liquid guarantees as risk mitigants, as established in the Norm on Credit Risk Management on this matter.

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Additionally, for FIs that have constituted eligible real guarantees as risk mitigants, the following procedure may be followed:

a) In the case of mortgage guarantees on real estate referred to in the Norm on Credit Risk Management, whose appraised realization value is equal to or greater than one hundred percent (100%) of the outstanding balance, the bank may apply the provisioning percentage corresponding to the immediate previous lower-risk classification assigned to the debtor, without changing the classification that corresponds to them.

b) In the case of pledge bonds as collateral referred to in the Norm on Credit Risk Management, whose certificate of deposit value is equal to or greater than one hundred fifty percent (150%) of the outstanding balance, after deducting any pending encumbrances, the bank may apply the provisioning percentage corresponding to the immediate previous lower-risk classification assigned to the debtor, without changing the classification that corresponds to them.

SECTION II ACCOUNTING OF OVERDUE LOANS, RECOGNITION AND/OR REVERSAL OF INTERESTS

Article 5. Single-maturity loans.- Credits to FIs that have not been paid on their due date will be transferred to overdue status at thirty-one (31) calendar days, counted from the due date.

Article 6. Loans payable in installments.- Credits to FIs will be transferred to overdue status at sixty-one (61) calendar days, counted from the due date of the first unpaid installment. In the case of loans with installments having a payment frequency less than one month, they will be transferred to overdue status after the non-payment of three consecutive installments.

Article 7. Suspension and reversal of financial yields.- The accrual and/or suspension of financial yields will take effect on the day the credit is transferred to overdue status; simultaneously, accumulated interest up to that date will be cleared. For those debtors classified in category D or E, even if they do not have overdue credits, they will cease to recognize income for accrued interest and commissions and will clear the interest and/or accumulated commissions up to that moment.

Article 8. Clearing.- In the case of credits to FIs not supervised by the Superintendency, with days of delinquency equal to or greater than three hundred sixty (360) days, the bank must evaluate whether clearing is appropriate or not, which must be fully documented in the debtor's file.

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Credits to FIs supervised by the Superintendency will not be subject to clearing; the bank must maintain them in overdue status until total recovery.

SECTION III MINIMUM INFORMATION OF FIs

Article 9. Information requirements.- For credit operations to FIs, the bank must require, prior to the eligibility of an FI, the information established by its own policy or internal regulation, which must consider and evidence, at a minimum, the following:

a) Intermediation proposal with its corresponding eligibility analysis and definition of credit limit.

b) Deed of incorporation and bylaws of the company or documents evidencing its legal personality according to the nature of the entity.

c) Powers of administration and general powers of law for representatives and attorneys-in-fact.

d) RUC ID (Tax Identification Number).

e) Certification of principal shareholders or detail of principal members as appropriate to the type of legal person.

f) Certification of the Board of Directors or highest administrative body, as appropriate:

1. Copy of audited and/or certified Financial Statements for the last two periods and the last tax declaration.
2. Documentation stating that guarantees are valued and registered or constituted documentally, when applicable.
3. In the case of FIs not supervised by the Superintendency, evidence of having consulted the Risk Central.
4. Any other documentation or information required by the bank's policy, depending on the nature and size of the FI.

All documentation and information required in this article must be evidenced by the bank.

Article 10. Update and analysis of information.- The information required to analyze the financial or legal situation of a client must be updated annually in accordance with the bank's procedures, or whenever the bank becomes aware of any substantial change in the entity's operations.

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CHAPTER IV OTHER APPLICABLE PROVISIONS, REPEAL, AND VALIDITY

Article 11. Other applicable provisions.- For the granting of consumer, housing mortgage, microcredit, and commercial credits, the following provisions of the Norm on Credit Risk Management will be applicable to the bank:

a) Responsibilities of the Board of Directors or highest administrative body;

b) Review of portfolio classification by the Superintendency;

c) Extensions, refinancing, and restructurings;

d) Guarantees (types of guarantees, requirements, eligible guarantees as risk mitigants, maximum applicable value of these guarantees, valuation criteria, among others);

e) Adjudicated goods;

f) Accounting of overdue loans, recognition and/or reversal of interest thereof, clearing of balances;

g) Evaluation and classification criteria for investments and accounts receivable;

h) Overdrafts;

i) Identification of persons linked to debtors;

j) Minimum information and update of debtor client files (annexes);

k) Information to be supplied to the Superintendency; and

l) Other provisions of the Norm on Credit Risk Management that are applicable to them.

For the granting of credits to FIs, in addition to the provisions established in Chapter III of this norm, the bank will be subject to letters a) to l) above, excepting that regarding the update of debtor client files, which will be governed by what is provided in Article 10 of this norm.

Article 12. Repeal.- The Norm on Asset Evaluation and Classification for the Production Development Bank, contained in Resolution CD-SIBOIF-790-1-JUL17-2013, dated July 17, 2013, published in La Gaceta, Official Gazette No. 152 on August 14, 2013; and its reforms, are hereby repealed.

Article 13. Validity.- This norm will enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Gazette. (F) S. Rosales C. (F) V. Urcuyo (F) Fausto Reyes B. (illegible) (Silvio Moisés Casco Marenco) (F) illegible (Rafael Ángel Avellán Rivas).

RAFAEL ÁNGEL AVELLÁN RIVAS Secretary of the Board of Directors SIBOIF