Resolution JPRF-F-2023-086: Reform of Credit Portfolio Segmentation and Risk Asset Classification Norms

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Management Governmental Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador Resolution No. JPRF-F-2023-086

FINANCIAL POLICY AND REGULATION BOARD

CONSIDERING:

That Article 66, numbers 15 and 25 of the Constitution of the Republic of Ecuador, in order, recognize the right to develop economic activities, individually or collectively, in accordance with the principles of solidarity, social and environmental responsibility; and the right to access quality public and private goods and services, with efficiency, effectiveness, and good treatment, as well as to receive adequate and truthful information regarding their content and characteristics;

That Article 82 of the Magna Carta contemplates that the right to legal certainty is based on respect for the Constitution and the existence of prior, clear, public legal norms applied by competent authorities;

That Article 226 of the Fundamental Norm orders that state institutions, their agencies, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law, having the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of rights recognized in the Constitution;

That Article 227 of the Supreme Charter provides that public administration constitutes a service to the community governed by the principles of effectiveness, efficiency, quality, hierarchy, decentralization, concentration, coordination, participation, planning, transparency, and evaluation;

That Article 308 of the Magna Carta determines that financial activities are a matter of public order and may be exercised in accordance with the law, with prior authorization from the State; these activities shall have the fundamental purpose of preserving deposits and meeting financing requirements for the achievement of the country's development objectives, and shall efficiently intermediate captured resources to strengthen national productive investment and socially and environmentally responsible consumption, for which the State will foster access to financial services and the democratization of credit;

That Article 309 ibidem establishes that the national financial system is composed of the public, private, and popular and solidarity sectors, which intermediate public resources, which shall have specific and differentiated control norms and entities, responsible for preserving their security, stability, transparency, and solidity;

That Article 13 of the Organic Monetary and Financial Code, Book I, reformed by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation;

That numbers 1, 2, and 3 of Article 14 of the same legal body provide that it corresponds to the Financial Policy and Regulation Board to formulate credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policies; issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system; and issue micro-prudential regulations for the national financial sector;

That Article 14 ibidem further provides that, for the fulfillment of its functions, the Financial Policy and Regulation Board will issue norms in matters within its competence, without altering legal provisions;

That Article 14.1, number 1 of the Organic Monetary and Financial Code, Book I, mandates that the Financial Policy and Regulation Board will regulate the activities and operation of financial entities;

That Article 25, numbers 1 and 2 of the referred Code provides as functions of the Technical Secretariat of the Financial Policy and Regulation Board to prepare technical and legal reports supporting the regulation proposals to be issued by the Financial Policy and Regulation Board; and to perform the analysis of the impacts of the application of regulation proposals, as well as of approved regulations;

That Article 150 ibidem provides that entities of the national financial system shall be subject to the regulation issued by the Financial Policy and Regulation Board;

That General Provision Twenty-Ninth of the aforementioned Code, Book I, provides that in current legislation mentioning the "Monetary and Financial Policy and Regulation Board," it shall be replaced by "Financial Policy and Regulation Board";

That Transitory Provision Fifty-Fourth ibidem, Book I, provides that resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies shall remain in force until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board decide what corresponds, within their competencies;

That the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0095-M of October 31, 2023, submits to the President of the Board the following reports:

i) Legal Report No. JPRF-CJF-2023-055 of October 31, 2023, which concludes: a) State power by public servants may only be exercised through the competencies and faculties attributed to them in the Constitution and the law, as established in Article 226 of the Supreme Norm; b) The Organic Monetary and Financial Code, Book I, in its Article 14 number 2, provides as a competence of the Financial Policy and Regulation Board to issue norms that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system. On the other hand, the aforementioned Code states in Article 14.1 number 1 that it is a function of the Financial Policy and Regulation Board, among others, to regulate the activities and operation of financial entities; c) The Reform Proposal contained in Technical Report No. JPRF-CTSF-2023-018 is framed within the current legal framework, so its issuance is legally viable within the framework of functions attributed to the Financial Policy and Regulation Board.

ii) Technical Report No. JPRF-CTSF-2023-018 of October 31, 2023, concludes that it is necessary to carry out a review and adjustment of the segmentation of microcredits and productive credits, in line with the changes that have occurred in Ecuador's macroeconomic factors over the last 15 years, through the evaluation of the relationship between the sales of productive units within these segments and their characteristic risk levels, with the purpose of ensuring that these units in each credit segment share similar risk characteristics, thus justifying any segment change based on differentiated risk levels. This approach has as its main objective to improve credit allocation, with the purpose of stimulating productive growth, investment, job generation, consumption, and consequently, contributing to financial stability and economic development.

Norms regulating the segmentation of the credit portfolio of entities of the national financial system Elements of risk asset qualification and its classification Risk asset qualification and provision constitution by entities of the public and private financial sectors under the control of the Superintendency of Banks National Financial System Monetary and Financial System Monetary, Financial, Securities, and Insurance Codification, in the terms established in the aforementioned Technical Report No. JPRF-CTSF-2023-018;

That the Financial Policy and Regulation Board, in an ordinary session held by technological means, convened on November 10, 2023, and carried out via video conference on November 15, 2023, reviewed the Memorandum No. JPRF-ST-2023-0095-M of October 31, 2023, issued by the Technical Secretariat of the Board; as well as the aforementioned reports from the Technical Coordination of Financial System Policy and Regulation and the Legal Coordination of Financial Policy and Norms, in addition to the corresponding draft Resolution;

That the Financial Policy and Regulation Board, in an ordinary session held by technological means, convened on November 10, 2023, and carried out via video conference on November 15, 2023, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

ARTICLE ONE. - Substitute the text of numbers 1 and 2 of Article 1, Chapter IX "Norms regulating the segmentation of the credit portfolio of entities of the national financial system," National Financial System Monetary and Financial System Insurance, with the following:

Art. 1.- The national financial system shall have the following credit segments:

1. Productive Credit. - It is granted to natural or legal persons who register annual sales exceeding USD 300,000.00, destined for the acquisition of goods and services for productive and commercial activities.

For this segment of the portfolio, the following subsegments are defined:

a. Corporate Productive. - Productive credit operations granted to natural or legal persons who register annual sales exceeding USD 7,000,000.00.

b. Business Productive. - Productive credit operations granted to natural or legal persons who register annual sales exceeding USD 1,500,000.00 and up to USD 7,000,000.00.

c. SME Productive. - Productive credit operations granted to natural persons or legal persons who register annual sales exceeding USD 300,000.00 and up to USD 1,500,000.00.

2. Microcredit. - It is granted to a natural or legal person with an annual sales level inferior or equal to USD 300,000.00, or to a group of borrowers with joint guarantee, destined to finance production and/or commercialization activities on a small scale, whose main source of payment constitutes the product of sales or income generated by these activities, adequately verified by entities of the National Financial System.

For Microcredit, the following credit subsegments are established:

a. Retail Microcredit. - Operations granted to credit applicants who register annual sales equal to or less than USD 20,000.00.

b. Simple Accumulation Microcredit. - Operations granted to credit applicants who register annual sales exceeding USD 20,000.00 and up to USD 120,000.00.

c. Extended Accumulation Microcredit. - Operations granted to credit applicants who register annual sales exceeding USD 120,000.00 and up to USD 300,000.00.

ARTICLE TWO. - Substitute the text of numbers 1.1 and 1.4, Article 5, Section II "Elements of risk asset qualification and its classification," of Chapter XVIII "Risk asset qualification and provision constitution by entities of the public and private financial sectors under the control of the Superintendency of Banks," National Financial System Monetary and Financial System Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

1.1 PRODUCTIVE CREDIT
It is granted to natural or legal persons who register annual sales exceeding USD 300,000.00, destined for the acquisition of goods and services for productive and commercial activities.

For this segment of the portfolio, the following subsegments are defined:

a. Corporate Productive. - Productive credit operations granted to natural or legal persons who register annual sales exceeding USD 7,000,000.00.

b. Business Productive. - Productive credit operations granted to natural or legal persons who register annual sales exceeding USD 1,500,000.00 and up to USD 7,000,000.00.

c. SME Productive. - Productive credit operations granted to natural or legal persons who register annual sales exceeding USD 300,000.00 and up to USD 1,500,000.00.

For the operational and administrative management of credit files of productive credit debtors, entities of the public and private financial sectors must have:

It is granted to a natural or legal person with an annual sales level inferior or equal to USD 300,000.00, or to a group of borrowers with joint guarantee, destined to finance production and/or commercialization activities on a small scale, whose main source of payment constitutes the product of sales or income generated by these activities, adequately verified by entities of the National Financial System.

Microcredits are divided into the following subsegments:

Retail Microcredit. - Operations granted to credit applicants who register annual sales equal to or less than USD 20,000.00.

Simple Accumulation Microcredit. - Operations granted to credit applicants who register annual sales exceeding USD 20,000.00 and up to USD 120,000.00.

Extended Accumulation Microcredit. - Operations granted to credit applicants who register annual sales exceeding USD 120,000.00 and up to USD 300,000.00.

In operations classified as microcredits, social and public interest housing credit or real estate credit granted to micro-entrepreneurs shall not be included, which must be registered as social and public interest housing credit or real estate credit, as applicable.

With the object of ensuring adequate segmentation of operations and the application of interest rates, entities of the public and private financial sectors shall be responsible for verifying the reasonableness of the amounts required in microcredit operations, according to the classification determined by the Financial Policy and Regulation Board.

ARTICLE THREE. - "Risk asset qualification and provision constitution by entities of the Monetary, Financial, Securities, and Insurance Codification General Provisions:

FIRST. - The application of this norm shall govern for the future, so these provisions shall not be applied to credit operations previously granted, nor even in cases of renewals or refinancings, the segment determined at the time of the original credit grant must be maintained.

SECOND. - Holders of credit operations described in this norm shall be subject to the applicable tax legal framework and other provisions issued by the national tax authority.

THIRD. - The Superintendency of Banks and the Superintendency of Popular and Solidarity Economy shall notify the content of this resolution to their controlled entities.

FOURTH. - Cases of doubt that arise in the application of this chapter shall be resolved by the Superintendency of Banks and the Superintendency of Popular and Solidarity Economy, as applicable.

FIFTH. - Entities of the national financial system shall apply the new parameters established in this norm starting from March 1, 2024.

FINAL PROVISION. - This Resolution shall enter into force from its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board within a maximum term of two (2) days from its issuance.

COMMUNICATE. - Given in the Metropolitan District of Quito, on November 15, 2023.

THE PRESIDENT,
Mgs. María Paulina Vela Zambrano

The preceding Resolution was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on November 15, 2023.- I CERTIFY.
TECHNICAL SECRETARIAT
Mgs. Nelly Arias Zavala