Notice No. 8/2003 of Banco de Portugal

Notices from Banco de Portugal
Notice No. 8/2003
Considering the need to review the provisioning regime for overdue credit based on the type of guarantee and the principle of progressive minimum provisioning levels; Considering that, for prudential reasons, it is important to reformulate, for provisioning purposes, the concept of doubtful credit, based on the initial term of the operations, the probability attributed to future defaults, and from a portfolio perspective; Considering that it is justified to differentiate, among general credit risk provisions, credit guaranteed by a mortgage on property intended for the borrower's housing; Banco de Portugal, using the competence conferred upon it by paragraph e) of Article 99 of the General Regime of Credit Institutions and Financial Companies, establishes the following:

1.º Paragraphs 3, 4, 5, and 7 of Notice No. 3/95 of June 30 shall have the following wording:

"3.º:
1- ..........................................
2 - The risk classes referred to in the preceding paragraph are as follows:
a) Class I - up to 3 months; b) Class II - from 3 to 6 months; c) Class III - from 6 to 9 months; d) Class IV - from 9 to 12 months; e) Class V - from 12 to 15 months; f) Class VI - from 15 to 18 months; g) Class VII - from 18 to 24 months; h) Class VIII - from 24 to 30 months; i) Class IX - from 30 to 36 months; j) Class X - from 36 to 48 months; k) Class XI - from 48 to 60 months; l) Class XII - more than 60 months.

2-A - Credits guaranteed by a mortgage on property, or real estate financial leasing operations, when the property is intended for the borrower's housing, are subject to differentiated minimum provisioning levels, depending on whether the credit amount is equal to or greater than 75% of the value of the guarantee or less than 75% of that value.

3 - ..........................................

4 - Without prejudice to the provisions of paragraph 3 of paragraph 5, provisions for overdue credit must represent at least the following percentages of the respective credits, considering the risk classes indicated in paragraph 2 of this paragraph and the existence or not of real or personal guarantee, in accordance with paragraph 5, and evaluated in accordance with paragraph 6, both also of this paragraph:

4-A - ..............
4-B - ..............
4-C - For the purpose of establishing provisions for real estate financial leasing operations, on property intended for the borrower's housing, included in Class I, the applicable percentage is 0.5%.

5 - In cases of overdue credit with guarantee, institutions must verify whether the existence of privileged creditors, the financial situation of the guarantor, or any other circumstance may result in the insufficiency of the value of the guarantee. In such situations, the unguaranteed portion of the credits must be provisioned according to the percentage provided for unguaranteed credits.

6 - Real guarantees must be revalued, under the following terms:
a) Mortgage guarantees - revaluation within a period of three months after the first default, if more than 12 months have elapsed since the initial evaluation, or 36 months if the exposure is less than 75% of the guarantee. The calculation of the value of the guarantee must be determined by an independent appraiser or by a structural unit of the institution itself, according to a method deemed appropriate, with subsequent revaluation every three years; b) Non-mortgage guarantees - revaluation within a period of three months after the first default, if more than six months have elapsed since the initial evaluation. The calculation of the value of the guarantee must be carried out by an independent appraiser or by a structural unit of the institution itself, according to a method deemed appropriate, with subsequent revaluation with a semi-annual periodicity.

7 - .....................

4.º:
1 - Other doubtful credits are considered:
a) Future installments of the same credit operation in which, regarding the respective installments in arrears of capital and interest, at least one of the following conditions is verified:
i) They exceed 25% of the capital owed, plus accrued interest; ii) They have been in default for more than:
Six months, in operations with a term of less than five years; Twelve months, in operations with a term equal to or greater than 5 and less than 10 years; Twenty-four months, in operations with a term equal to or greater than 10 years.
The future portion of the credits referred to in this paragraph must be reclassified - only for provisioning purposes - as overdue credit; b) Future credits on the same client if, according to the reclassification provided for in the previous paragraph, the overdue credit and interest of all operations, regarding that client, exceed 25% of the total credit, plus accrued interest.

2 - In the event of partial liquidation of a defaulted credit - which cancels the classification of doubtful credit, the existing balances as well as new balances - continue to be subject to the requirements imposed in the previous paragraph of this paragraph, with the exception of debt restructuring situations, where the following conditions are cumulatively verified:
Maintenance or reduction of the total exposure vis-à-vis the borrower; Liquidation, of at least, the amounts corresponding to accrued interest; Non-occurrence of the situation referred to in paragraph b) of the previous paragraph.

5.º The credits covered by the provisions of paragraph 4 are subject to the following provisioning regime:
1 - The capital installments reclassified as overdue, in accordance with paragraph a) of paragraph 1, are subject to the rates provided for in paragraph 3, considering as the start of the counting period the date of the first default recorded in the credit in question. 2 - The future credits, referred to in paragraph b) of the same paragraph 1, are subject to the application of half of the provisioning rates applicable to overdue credits, serving, as the start of the counting period, the date of verification of the condition established in that paragraph. 3 - The transition of a doubtful credit to overdue credit cannot result in a decrease in the provisions already established.

7.º:
1 - .....................................
2 - ..........................................
3 - Provisions for general credit risk must correspond to 1% of the values that constitute their tax base, except regarding:
a) Consumer credit operations, regarding which the provisions to be established must correspond to 1.5% of their respective values; b) Credit operations guaranteed by a mortgage on property, or real estate financial leasing operations, in both cases when the property is intended for the borrower's housing, regarding which the provisions to be established must correspond to 0.5% of their respective values.".

2.º In applying the changes now introduced to Notice No. 3/95, the following must be observed:
1 - Overdue credits that, on the date of entry into force of this notice, have not yet reached the risk class corresponding to 50% provisioning are subject to the regime now established.
2 - Overdue credits "without guarantee", "with personal guarantee" and "with mortgage guarantee on property intended for the borrower's housing (including real estate financial leasing operations), with credit less than 75% of the guarantee", which, on the date of entry into force of this notice, have already reached the risk class corresponding to 50% provisioning, continue to be provisioned in accordance with the previous regime. The remaining overdue credits that, on the date of entry into force of this notice, have already reached the risk class corresponding to 50% provisioning must be fully provisioned within a maximum period of:
a) Eighteen months, when they are credits with non-mortgage real guarantee and with mortgage guarantee on property not intended for the borrower's housing (including real estate financial leasing operations with the same purpose); b) Thirty-six months, in the case of credits with mortgage guarantee on property intended for the borrower's housing (including real estate financial leasing operations with the same purpose), with credit greater than or equal to 75% of the guarantee.

3.º The provisions released, as a consequence of the alteration of paragraph b) of paragraph 3 of paragraph 7 of Notice No. 3/95, are obligatorily allocated to the establishment or reinforcement of provisions for specific credit risk, and may only be used six months after the date of entry into force of this notice.

4.º This notice enters into force on the last day of the month in which it is published, with the exception of the alteration now introduced in paragraph 1 of paragraph 4 of Notice No. 3/95, which enters into force six months after that date.

January 30, 2003. - The Governor, Vítor Constâncio.