Norm on Reform of Articles 5, 14, 23 and 27 of the Norm on Credit Risk Management

Resolution No. CD-SIBOIF-838-1-JUN11-2014
Date: June 11, 2014

NORM ON REFORM OF ARTICLES 5, 14, 23 AND 27 OF THE NORM ON CREDIT RISK MANAGEMENT

The Board of Directors of the Superintendence of Banks and Other Financial Institutions, after deliberations on the matter,

CONSIDERING

I

That Article 10, numeral 7) of Law No. 316, Law of the Superintendence of Banks and Other Financial Institutions, and its reforms; empowers the Board of Directors of the Superintendence of Banks and Other Financial Institutions to issue general norms aimed at establishing the general criteria for the evaluation and classification of assets and the guidelines for the establishment of reserves and provisions.

II

That it is necessary to reform Articles 5, 14, 23 and 27 of the Norm on Credit Risk Management, as it is required to adapt them to the provisions contained in Law No. 865, Law Reforming Law No. 677, Special Law for the Promotion of the Construction of Housing and Access to Social Interest Housing, and its reforms, published in La Gaceta, Official Journal No. 90, of May 19, 2014, particularly with respect to: 1) expanding the definition of mortgage credit for housing, incorporating the definition of new housing and lease contracts with purchase option, for the purposes established in the aforementioned Law; and 2) increasing the reference amount of credits for social housing, granted in national or foreign currency, from thirty thousand dollars to thirty-two thousand dollars, for purposes of establishing provisions, appraisals of the mortgage guarantee, and the periodicity of these appraisals.

III

That in accordance with the considerations stated above and based on the authority granted by Article 3, numerals 3 and 13, of Law 316 referred to above, and its reforms.

In exercise of its powers,

HAS ISSUED

The following,

Resolution CD-SIBOIF-838-1-JUN11-2014
NORM ON REFORM OF ARTICLES 5, 14, 23 AND 27 OF THE NORM ON CREDIT RISK MANAGEMENT

FIRST: Articles 5, 14, 23 and 27 of the Norm on Credit Risk Management, contained in Resolution No. CD-SIBOIF-547-1-AGOST20-2008, of August 20, 2008, published in La Gaceta, Official Journal No. 176 and 178, of September 11 and 17, 2008, are hereby reformed, which shall read as follows:

"Art. 5 Groupings.- To evaluate the credit portfolio, four groupings shall be formed, which must be treated separately according to the criteria set forth below:

a) Consumer Credits.- These are all credits granted to natural persons intended to finance the acquisition of consumer goods or the payment of personal obligations and services, whose main source of income comes from salaries, remuneration for consulting, rents, leases, interest on deposits, investment returns, pensions, among others. Also, credits disbursed through credit cards, as well as financial lease contracts, shall be attributed to this group, provided that the source of payment is the same as indicated above.

b) Mortgage Credits for Housing - These are credits granted to natural persons for the acquisition, construction, repair, remodeling, expansion, or improvement of housing, or acquisition of lots with services, always provided they are backed by a mortgage guarantee. Also, credits granted for the purchase or construction of new housing shall be attributed to this group, understood as such, that which is carried out from the first sale made once the construction works of the property are completed, or which has been previously subject to lease by the end user as part of a lease with purchase option program, for a period not exceeding two years, in accordance with the terms established in Law No. 865, Law Reforming Law No. 677, Special Law for the Promotion of the Construction of Housing and Access to Social Interest Housing and its reforms, published in La Gaceta, Official Journal No. 90, of May 19, 2014.

The above enumeration must be understood as exhaustive, so it does not include other types of credits, even if they are backed by a mortgage guarantee, which must be classified as commercial credits.

c) Microcredit.- Credits granted throughout the Financial System, in national or foreign currency up to the equivalent of ten thousand dollars (US$10,000.00), to persons with their own small-scale established business and which will be repaid with the proceeds from the sale of goods and services of the same. These credits are granted massively using credit methodologies specialized in microcredit to evaluate and determine the willingness and capacity to pay of the potential client. Also, credits disbursed through credit cards shall be attributed to this group, provided that the source of payment is the same as indicated above.

d) Commercial Credits - These are credits granted in national or foreign currency for amounts greater than the equivalent of ten thousand dollars (US$10,000.00) to natural or legal persons, oriented to finance sectors of the economy, such as: industrial, agricultural, tourism, commerce, export, mining, construction, communications, services and all other obligations of a commercial nature of the debtor.

Also, debtors of the Small and Medium Enterprise (SME) sector shall be attributed to this group, according to the definition given to this sector by the relevant law, as well as all financial lease contracts signed with legal or natural persons regarding capital goods, understood as those intended for production or the provision of some service, regardless of their value.

The commercial portfolio will be integrated, among others, by the following operations:

1) Loans
2) Discounts
3) Interest and commissions receivable
4) Acceptances
5) Authorized overdrafts
6) Bank guarantees
7) Issued and confirmed letters of credit
8) Advance on export documents
9) Bills of exchange
10) Factoring operations (Factoring)
11) Financial leasing (Leasing)
12) Debtors from installment sales of goods
13) All other obligations of a commercial nature of the debtor.

Art. 14 Scope and criteria for classification.- The financial institution must classify its portfolio of mortgage credits for housing permanently based on the criteria established in Article 6 and letter a) of Article 11 of this norm and establish the corresponding minimum provisions according to the following table:

Classification Days in arrears Provision
A Normal Risk Up to 60 1%
B Potential Risk From 61 to 90 5%
C Real Risk From 91 to 120 20%
D Doubtful Recovery From 121 to 180 50%
E Unrecoverable More than 180 100%

Credits for housing granted in national or foreign currency for amounts equal to or less than the equivalent of thirty-two thousand dollars (US$32,000.00) and classified in category "A", shall have a provision of zero percent (0%). The other classification categories must be provisioned in accordance with the table above.

These minimum provisions are without prejudice to each institution increasing its amount, if it considers that the assumed loss risk is greater than that determined according to the procedure indicated.

The provision percentage must be applied to the net balance not covered by eligible liquid guarantees as risk mitigants, as established in Chapter XIII of this norm.

Additionally, for debtors who have established eligible real guarantees as risk mitigants referred to in numeral 1), letter b) of Article 30 of this norm, whose appraised realization value is equal to or greater than one hundred percent (100%) of the outstanding balance, the institution may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to it.

Art. 23 Requirements of guarantees.- All guarantees eligible as risk mitigants must meet the following requirements:

a) Executable, meaning they are duly constituted. b) Alienable, meaning there is a market that facilitates their quick realization. c) Valuable, meaning susceptible to measurement and appraisal. Such valuation must be carried out in accordance with the regulations governing the matter of appraisers who provide services to institutions of the Financial System.

In the case of mortgage guarantees for housing credits granted in national or foreign currency for amounts equal to or less than the equivalent of thirty-two thousand dollars (US$32,000.00) that are located in the same urbanization or subdivision and have house models with identical physical characteristics (design, physical structure, built area, quality of materials, among others), the appraisal performed on the model house may be accepted as the initial appraisal for all houses. For subsequent valuations that must be carried out according to the periodicity established in Article 27 of this norm, the aforementioned appraisal shall not apply, but a new appraisal must be performed for each house.

d) Transferable with reasonable costs. e) Stable in value, meaning that the minimum value of the guarantee is maintained over time, and f) Insured in case their nature so requires.

Art. 27 Periodicity of valuations.- The financial institution must perform valuations of its liquid guarantees at least once a month. The background information such as valuations and appraisals, as well as the evaluations of the financial institution that support the recorded or accounted amounts, must be kept available to the Superintendent.

In the case of mortgage guarantees, valuations must be performed at least every three (3) years, except for mortgage guarantees of housing credits granted in national or foreign currency for amounts equal to or less than the equivalent of thirty-two thousand dollars (US$ 32,000.00) that are located in the same urbanization or subdivision and have house models with identical physical characteristics (design, physical structure, built area, quality of materials, among others), which must be performed at least every five (5) years.

A new valuation will not be required when the guaranteed credit is classified in categories "A" or "B", provided that the principal balance plus interest of said credit has been reduced by a percentage equal to or greater than fifty percent (50%), or the market realization value of the asset constituted as guarantee covers three (3) or more times the amount owed.

Notwithstanding the above, the financial institution must perform new valuations when the following situations occur:

a) Adverse market conditions and/or price drops; b) Natural disasters affecting the guaranteed assets; or c) The credit backed by a mortgage guarantee on real estate is subject to restructuring."

SECOND: This norm shall enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Journal. (f) Sara Rosales (f) V. Urcuyo V. (f) Gabriel Pasos Lacayo (f) Fausto Reyes (f) illegible (Freddy Blandón Argeñal) (f) U. Cerna B. Secretary.

URIEL CERNA BARQUERO
Secretary Board of Directors SIBOIF