Reform to Point One of the Reform Standard of Articles 34, 35, 36, 37, 38, 40 and 41 of the Standard on Credit Risk Management

Resolution No. CD-SIBOIF-616-2-FEB24-2010
Dated 24 February 2010

REFORM TO POINT ONE OF THE REFORM STANDARD OF ARTICLES 34, 35, 36, 37, 38, 40 and 41 OF THE STANDARD ON CREDIT RISK MANAGEMENT

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

SOLE CONSIDERATION

That based on the power granted by article 3, numerals 3 and 13, and article 10, numeral 7, of Law 316, Law of the Superintendency of Banks and Other Financial Institutions, and its reforms contained in Law 552, Law of Reforms to the aforementioned Law 316;

In use of its powers,

HAS ISSUED

The following,

CD-SIBOIF-616-2-FEB24-2010 REFORM TO POINT ONE OF THE REFORM STANDARD OF ARTICLES 34, 35, 36, 37, 38, 40 and 41 OF THE STANDARD ON CREDIT RISK MANAGEMENT

First: Reform point one of the Reform Standard of articles 34, 35, 36, 37, 38, 40 and 41 of the Standard on Credit Risk Management, contained in Resolution No. CD-SIBOIF-605-1-DIC9-2009 dated 09 December 2009, which shall read as follows:

Art. 34 Refinancings.- Current loans with classification “A” that do not involve, prior to the refinancing, a deterioration in the debtor's payment capacity shall be considered refinancings.

Modifications made to the conditions of a credit contract in order to adjust its payment to the deterioration of the client's payment capacity may not be considered refinancings, but rather extensions or restructurings, as applicable, in accordance with the provisions of this chapter.

Art. 35 Extensions.- The extension or enlargement of the term originally agreed for the payment of a loan, without any other modification of the terms of the contract, motivated by a temporary deterioration in the debtor's payment capacity for the loans, shall be considered an extension. If one or several of the original terms of the contract, other than the term, are modified, the loan shall be considered restructured, and shall be treated in accordance with the provisions of article 36 of this standard.

Extensions may be granted for a term no greater than six months of the term originally agreed. Said term may be extended if one or some of the assumptions of the projection cannot be

Managua, Nicaragua

SIBOIF Building - Km. 7 Carretera Sur

Telephone PBX: 2265-1555 P.O. Box 788

web: www.siboif.gob.ni

Email: correo@siboif.gob.ni

Superintendency of Banks and Other Financial Institutions

REPUBLIC OF NICARAGUA, CENTRAL AMERICA

fulfilled, even though at the time the application was analyzed they were supported. In the case of an extension of the term, all the assumptions, documents, bases and indications used to support the authorization of said application must be recorded in the client's file. In no case may the original term of the extension plus any enlargement exceed nine months.

Installments may be extended, partially or totally, in the case of loans payable in installments, or balances in the case of loans with a single maturity.

No more than one extension may be granted to the same loan within a period of twelve months.

Extensions must be processed like any other loan in accordance with the requirements established in this standard and prior to their authorization, they must comply with the following:

a) The extension may be granted only for those loans with classification category “A”.

b) Have payment capacity, which evidences the return of the loan within a term no greater than the term of the extension.

c) That the cause of non-payment on the agreed date is due to temporary external factors not attributable to improper actions or omissions of the debtor, and that the expectations of overcoming them are not greater than the term of the extension.

d) That there has been no diversion of funds from the financed activity or from the pledge given as collateral, nor breach of other contractual conditions aimed at the protection of the creditor.

e) That the debtor has not failed to comply with indications or orientations of the technicians or officers of the creditor financial institution, whose effects could have caused a reduction in its capacity to pay its obligations, or weakening of the guarantees.

The extended loan may be accounted for as current once the client complies with the total payment of the amount subject to the extension; otherwise, the loan shall be considered in arrears and the days of arrears shall be calculated from the originally agreed due date, that is, before the extension. In the case of loans payable in installments, the payment of the extended installments may be made at the end of the period by means of an extension of the term originally agreed. In this case, the extended loan may be accounted for as current once the client regularizes its payments for a period of at least three months (installments).

The provisions of this article are not applicable to consumer loans or microcredits that are not intended to finance economic and production activities.

Art. 36 Restructurings.- A loan shall be considered restructured when the changes in the terms and conditions originally agreed are motivated by a deterioration in the debtor's payment capacity for the loans.

The restructuring must be processed like any other loan in accordance with the requirements established in this standard and prior to its authorization, it must comply with the following:

Managua, Nicaragua

SIBOIF Building - Km. 7 Carretera Sur

Telephone PBX: 2265-1555 P.O. Box 788

web: www.siboif.gob.ni

Email: correo@siboif.gob.ni

a) The carrying out of a prior analysis and approval by the corresponding instance of the institution; b) That the debtor has payment capacity, whether as a product of the financed activity or of other activities that evidence the recovery of the credit within the new term and agreed conditions; c) That there has been no diversion of funds from the financed activity or from the pledge given as collateral, nor breach of other contractual conditions aimed at the protection of the creditor; and d) The coverage ratio of the originally agreed collateral is maintained or improved. In cases where the collateral has been affected by causes of force majeure or fortuitous event and the client does not have assets susceptible of being given as collateral, the financial institution may proceed to restructure, provided that, through the restructuring, the recovery position of the amount owed is improved. For such cases, said situation must be duly documented in the debtor's file.

Debt consolidation shall be considered a restructuring when one or more of the credits to be consolidated have been granted by the same financial institution and at least one of them is more than thirty (30) days past due in the last ninety (90) days prior to the debt consolidation. Debt consolidation shall be understood as credits granted to pay obligations that the client has with the granting financial institution or with another institution of the financial system, in order to take advantage of better market conditions.

Art. 37 Classification of restructured microcredits, consumer credits and housing mortgage loans

restructured.- Microcredits, consumer credits and housing mortgage loans subject to a restructuring shall be classified in the risk category that the credit had before the restructuring. For all consumer credits, including those disbursed through credit cards that do not have liquid or real collateral of those referred to in numerals 1), 3) (machinery and vehicles only) and 5) of literal b) of article 30 of this regulation, in no case may the classification be lower than risk category "C".

1) Restructured credits whose payment is agreed in equal and successive installments may improve the classification of the credit up to category "A" in accordance with the criteria set forth in this regulation for this type of credit, after at least one of the following conditions is met:

a) Normal payment behavior for at least six (6) installments after the restructuring.

b) That an amount equivalent to twenty-five percent (25%) of the principal of the restructured credit has been paid.

The restructured credit may be accounted for as current, once the two conditions established in literals a) and b) above are met.

2) In the event that the credit is structured in installments that are not equal or successive, they may only improve the classification of the credit up to category "A" in accordance with the criteria set forth in

this regulation for this type of credit after complying with the provisions of literal b) of numeral 1) referred to above. The restructured credit may be accounted for as current, once the condition established in this numeral is met.

If during the payment period of the six installments referred to in literal a) of numeral 1) of this article, the debtor shows breaches in the payment of the agreed installments and/or deterioration in their payment capacity, the financial institution must proceed to reclassify the credit to a higher risk category.

Art. 38 Classification of restructured commercial credits.- Restructured commercial credits

shall be classified in accordance with the criteria set forth in this regulation for each category, based on the evaluation of the debtor before the restructuring.

The credit subject to restructuring shall be considered in arrears when it has previously been subject to an extension and is restructured before the expiration of the extension period or when the client has not complied, at its maturity, with the total payment of the amount subject to the extension. For these purposes, the days of arrears shall be calculated from the maturity date of the originally agreed credit, that is, before the extension.

In the event that the debtor has more than one credit and these are subject to restructuring via consolidation thereof, for the calculation of arrears the maturity date of the oldest credit shall be used as reference.

The restructuring of a credit shall not induce a debtor to be automatically reclassified to a lower risk category, unless the following conditions are met:

a) Debtors who pay off the interest pending payment before the date of formalizing the restructuring or debtors who have a secure source of payment with coverage of 80% of the total debts (principal and interest) or whose principal and interest of the restructured credit is 100% covered by liquid collateral may be reclassified up to category "B".

The following are considered secure sources of payment:

1) Flows from a pledge on harvest in favor of the creditor financial institution and that has been effectively delivered to the marketing entity or its equivalent;

2) Flows from the payments of principal and interest of debt securities issued by the Central Bank of Nicaragua or the Ministry of Finance and Public Credit, duly pledged in favor of the creditor financial institution;

3) Securities issued by financial institutions of the country supervised by the Superintendency or by foreign financial institutions qualified as first order in accordance with the regulations governing the matter on limits of deposits and investments, duly pledged in favor of the creditor financial institution; and

4) Prior authorization, any other that in the opinion of the Superintendent is considered a source of
secure payment. b) Those restructured credits whose payment is agreed in equal and successive installments may improve the credit classification up to category "A", after at least one of the following conditions is met:
1) Normal payment behavior for at least twelve (12) months following the
restructuring.
2) That an amount equivalent to twenty-five percent (25%) of the principal of the restructured credit has been paid
restructured.
The restructured credit may be accounted for as current, once both conditions established in numerals 1) and 2) above are met. c) Credits that do not comply with the provisions of literal a) above or are structured in installments that are not equal or successive may only be reclassified up to category "A", after receiving payment of an amount equivalent to twenty-five percent (25%) of the principal of the restructured credit restructured. The restructured credit may be accounted for as current, once the condition established in this literal is met. For the purpose of the reclassifications referred to in literals a), b) and c) above, the new credit conditions must comply with the criteria set forth in this standard for the respective category.

Arto. 40 Measurement.- Assets received in payment or adjudicated shall be measured as follows:

a) Initial Measurement: Assets received in payment or adjudicated shall be measured at the lower of: 1) The value agreed in the transfer in payment or the adjudication value in judicial auction, as applicable. 2) The realizable value in accordance with the regulations governing the matter of appraisers providing services to institutions of the Financial System, at the date of incorporation of the asset. 3) The book balance of the bank, corresponding to the principal of the credit plus interest, plus other accounts receivable other than transaction costs. The foregoing without considering the provisions recorded or the interest written off prior to adjudication. The value of the measurement methods in numerals 1) and 3) indicated above must include the transaction costs incurred in the acquisition of such assets. Transaction costs shall be understood as costs directly attributable to the acquisition or realization of the asset (taxes, duties, professional fees to acquire or transfer ownership of the assets, etc.)

b) Subsequent Measurement: Once the assets are recorded in accordance with the provisions of the preceding literal, they shall be measured at the value recorded in books less the provisions assigned to the asset, as established in the following article. Additionally, in the case of real estate, for any loss of value due to impairment.

Arto. 41 Constitution of provisions.- The financial institution must transfer the respective provisions assigned to the credit to provisions for assets received in payment or adjudicated. In the event that the value determined in literal a) of the preceding article is less than the book balance of the corresponding credit, the financial institution must write off the outstanding balance and transfer the remainder of the provisions assigned to the credit to provisions for assets received in payment or adjudicated.

Likewise, when there is more than one asset in the process of adjudication, the financial institution must transfer the respective provisions assigned to the credit as the assets are adjudicated and in the proportion of the value determined in literal a) of the preceding article.

Without prejudice to the foregoing, these provisions must be adjusted to the provisions of literal a) below:

a) Provisions: The provision recorded may not be less than the following percentages of the value of the asset recorded in the books:

1) Movable assets:

    - 30% minimum provision from its registration up to 6 months from the adjudication of the asset.

    - 50% minimum provision after 6 months up to 12 months.

    - 100% provision after 12 months from the adjudication of the asset.

2) Real estate:

    - The provision that the credit had assigned before the adjudication in accordance with the provisions of the first and second paragraphs of this article, up to 6 months from the adjudication of the asset.

    - 30% minimum provision after 6 months up to 12 months from the adjudication of the asset.

    - 50% minimum provision after 12 months up to 24 months from the adjudication.

    - 75% minimum provision after 24 months up to 36 months from the adjudication.

    - 100% provision after 36 months from the adjudication.

Second: This standard shall enter into force upon its notification without prejudice to its publication in the Official Gazette, La Gaceta.

The following parts are irrelevant. (f) A. Rosales B. (f) V. Urcuyo (f) Gabriel Pasos Lacayo (f) Fausto Reyes B. (f) illegible (Silvio Moises Casco Marenco) (f) U. Cerna Barquero. Secretary.

URIEL CERNA BARQUERO
Secretary Board of Directors SIBOIF