Resolution Amending Articles 16, 22, 24, and 29 of the Credit Risk Management Standard

Resolution No. CD-SIOIF-793-1-AGOST9-2013 Dated August 9, 2013

RESOLUTION AMENDING ARTICLES 16, 22, 24, AND 29 OF THE STANDARD 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, item 7) of Law No. 316, Law of the Superintendence of Banks and Other Financial Institutions, and its amendments; empowers the Board of Directors of the Superintendence of Banks and Other Financial Institutions to issue general norms intended to establish general criteria for the evaluation and classification of assets and guidelines for the establishment of reserves and provisions;

II

That based on the aforementioned authority, it is necessary to amend Articles 16, 22, 24, and 29 of the Standard on Credit Risk Management, with the following purposes: a) to clarify the criteria for evaluating commercial credits intended to finance new medium and long-term maturity projects; b) to accept pledge bonds as real guarantees mitigating risk; c) to establish at 100% the maximum value applicable to State securities considered as liquid guarantees mitigating risk; and d) to include guarantee funds and State guarantees as liquid guarantees; and

III

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

In exercise of its powers,

HAS ISSUED

The following,

Resolution No. CD-SIOIF-793-1-AGOST9-2013 RESOLUTION AMENDING ARTICLES 16, 22, 24, AND 29 OF THE STANDARD ON CREDIT RISK MANAGEMENT

FIRST: Articles 16, 22, 24, and 29 of the Standard 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 amended, which shall read as follows:

"Art. 16 Classification Categories.- The financial institution must permanently classify its portfolio of commercial credits based on the criteria established in Article 8 of this standard and establish the corresponding minimum provisions according to the following table:

Classification	Description	Provision
Category A	Normal Risk	1) The fulfillment of the debt amortization plan has not presented any kind of irregularities, except for delays of up to thirty (30) days; or

2. The projected operating cash flow presents levels that cover the debt needs, under the agreed terms. No negative impacts are evidenced or expected in the primary variables of the projected cash flow. Its leverage levels are those accepted by the financial institution for the activity it develops. Profitability is satisfactory; or
3. In the case of new projects, the analysis must consider their nature and have duly updated and justified projections. The projected operating cash flow must broadly cover the payment of financial obligations to be incurred with the institution; and there must be sufficient equity backing and the payment source duly identified, whether it be from the project itself or an alternative source that is part of the original loan structuring. 1%

Category B | Potential Risk | 1) Some degree of non-compliance with conditions, such as payment delays of up to sixty (60) days, or extensions not exceeding a term of six (6) months, resulting from negative situations that may have temporarily affected the debtor, provided such extensions comply with what is established in Article 35 of this standard; or 2) Presents adequate operating cash flow, allowing it to operate the business normally and with the capacity to meet its obligations under the agreed terms. Presents positive liquidity with a constant trend. Presents an adequate degree of leverage. Profitability has been temporarily reduced, which can be overcome in the short term; or 3) In the case of new projects, the projected operating cash flow must be adequate to meet financial obligations; and there must be sufficient equity backing and the payment source duly identified, whether it be from the project itself or an alternative source that is part of the original loan structuring. 5%

Category C | Real Risk | 1) Delays in payments and obligations of up to ninety (90) days, and extensions not exceeding a term of six (6) months, provided such extensions comply with what is established in Article 35 of this standard; or 2) Long-term perspective with a stable/decreasing trend. Presents operating cash flow at break-even, susceptible to trending downward. The business resorts with some periodicity to secondary sources of cash generation to face operational requirements and sporadic deficits. Presents decreasing and compromised liquidity, profitability is negative with a decreasing trend, with potential impact on equity, where losses have a negative effect on payment capacity in terms of flow. For new projects of medium and long maturity, where the main variables of the projected flow are affected, the project will need external sources not contemplated in it to be able to have payment capacity, but these could be overcome in the short term. 20%

Category D | Doubtful Recovery | 1) Delays in payments and obligations of up to one hundred eighty (180) days, and credits matured within the same financial institution; or 2) Clearly identified weaknesses in cash flow, liquidity, leverage, and/or profitability, which put at risk the debtor's capacity to face its debt obligations. A necessary and clear dependence on secondary repayment sources is required to prevent default. The viability of the business is doubtful and bankruptcy or suspension of payments procedures are expected to begin. The deterioration in quantitative elements is then considered permanent. 50%

Category E | Uncollectable | 1) Delays in obligations of more than one hundred eighty (180) days; or 2) The debtor stopped paying and has no capacity to meet its contractual debt obligations. The business is no longer viable or has such a small value that continuing to maintain the loan as a banking asset is no longer justifiable; or 3) The debtor has not invested the resources lent by the financial institution in their entirety and in strict compliance with the activity or purpose requested; or 4) The debtor has diverted pledges; or 5) When the supervised financial institution does not provide detailed information on the capital structure of another legal entity linked to the debtor legal entity. 100%

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 standard.

Additionally, for debtors who have established eligible real guarantees as risk mitigants, the following procedure may be followed:

a) In the case of the guarantees referred to in item 1), letter b) of Article 30 of this standard, 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 lower risk classification prior to the one assigned to the debtor, without changing the classification that corresponds to it.

b) In the case of the guarantees referred to in item 2), letter b) of Article 30 of this standard, 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 institution may apply the provision percentage corresponding to the immediate lower risk classification prior to the one assigned to the debtor, without changing the classification that corresponds to it.

Art. 22 Eligible Guarantees as Risk Mitigants.- All liquid guarantees referred to in Article 29; and the real guarantees referred to in items 1) and 2), of letter b) of Article 30 of this standard, shall be considered eligible guarantees as risk mitigants.

The provisions of the preceding paragraph do not prevent financial institutions from backing their risk assets with the rest of non-eligible real guarantees, fiduciary guarantees, or any other asset legitimately susceptible of being received as collateral referred to in Articles 30 and 31 of this standard.

Art. 24 Maximum Value Applicable to Eligible Liquid Guarantees as Risk Mitigants. The maximum value applicable to eligible liquid guarantees as risk mitigants shall be the following:

ELIGIBLE GUARANTEE AS RISK MITIGANT	VALUATION	MAXIMUM VALUE APPLICABLE
State Securities	Market Value	100%
Time deposit certificates, bank guarantees, sureties, Stand By letters of credit, and any other liquid instrument, backed, accepted, or guaranteed by financial institutions of the country.	Nominal Value	100%
Time deposit certificates, bank guarantees, sureties, Stand By letters of credit, and any other liquid instrument, backed, accepted, or guaranteed, including guarantee funds, by financial institutions of the foreign country qualified as first-class.	Nominal Value	100%
Securities (Bonds, commercial paper, and shares) issued by foreign financial institutions with dispersed share capital whose shares are traded on a stock exchange or regulated market and are qualified as first-class.	Market Value	1) 80% fixed income

2. 70% variable income Securities issued by the central bank or ministry of finance of States with first-class country risk rating. | Market Value | 90% Debt and equity securities of companies with dispersed share capital whose shares are traded on a stock exchange or regulated market and such issuances are qualified as first-class investments. | Market Value | 1) 80% fixed income
3. 70% variable income

In the case that a certain security does not have an active and liquid market, the valuation shall be determined in accordance with what is established in the regulations governing the matter of portfolio valuation.

Art. 29 Liquid Guarantees.- The following are considered liquid or quickly realizable guarantees:

a) The following are considered liquid guarantees, those that meet all and each of the following requirements:

1. Allow for a quick realization of the guarantee in cash, with which the guaranteed obligation can be cancelled, without significant costs;
2. Have adequate legal documentation;
3. Do not present prior obligations that could diminish their value or in any way prevent the financial institution from acquiring clear title;
4. Their value is permanently updated.

b) The following are accepted as liquid guarantees, among others:

1. State Securities: Public debt securities issued or guaranteed by the Central Bank of Nicaragua or the Ministry of Finance and Public Credit; as well as guarantee funds and State guarantees.
2. Instruments issued by the same financial institution: Time deposit certificates.
3. Instruments issued by financial institutions of the country: Time deposit certificates, guarantees, sureties, Stand By letters of credit, and any other liquid instrument, backed, accepted, guaranteed, or secured by financial institutions that during the twelve (12) months prior, have complied with the minimum required coefficient in accordance with the regulations governing the matter on capital adequacy, have not shown operational losses, and have not been subject to fines for disengagement.
4. Instruments issued by foreign financial institutions: Time deposit certificates, guarantees, sureties, Stand By letters of credit, and any other liquid instrument, backed, accepted, guaranteed, or secured, including guarantee funds, by Financial Institutions qualified as first-class in accordance with the regulations governing the matter on deposit and investment limits.
5. Debt and equity securities of foreign financial institutions: Securities (Bonds, commercial paper, and shares) issued by banks and foreign financial institutions with dispersed share capital whose shares are traded on a stock exchange or regulated market and are qualified as first-class institutions in accordance with the regulations governing the matter on deposit and investment limits.
6. Securities issued and/or guaranteed by States with first-class country risk rating.
7. Securities issued by first-class foreign companies: Debt and equity securities of companies with dispersed share capital whose shares are traded on a stock exchange or regulated market and such issuances are qualified as first-class investments in accordance with the regulations governing the matter on deposit and investment limits."

SECOND: This standard shall enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Journal.

(f) Ovidio Reyes (f) V. Urcuyo V. (f) Gabriel Pasos Lacayo (f) Fausto Reyes B. (f) illegible (Silvio Moisés Casco Marenco) (f) illegible (Freddy José Blandón Argeñal) (f) U. Cerna B.

URIEL CERNA BARQUERO Secretary of the Board of Directors SIBOIF