Resolution Reforming Asset Assessment and Classification Standards for the Production Development Bank

Resolution No. CD-SIBOIF-808-1-NOV22-2013 Date: November 22, 2013

STANDARD REFORMING ARTICLES 1, 5, 8, 9, 11, 12, 13, 17, 19, 24 AND 43 OF THE STANDARD ON ASSESSMENT AND CLASSIFICATION OF ASSETS OF THE PRODUCTION DEVELOPMENT BANK

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

CONSIDERING

I

That Article 33 of Law No. 640, the Law Creating the Production Development Bank (Produzcamos), published in La Gaceta, Official Journal No. 223 on November 20, 2007, states that Produzcamos "will be subject to the surveillance, supervision and auditing of the Superintendent of Banks and Other Financial Institutions"; and that the Board of Directors of the Superintendent of Banks and Other Financial Institutions is authorized to issue special standards on "capital adequacy, asset and portfolio classification, credit granting, special supervision and other areas of regulation specifically applicable to Produzcamos..."

II

That based on the aforementioned authority, it is necessary to reform Articles 1, 5, 8, 9, 11, 12, 13, 17, 19, 24 and 43 of the Standard on Assessment and Classification of Assets of the Production Development Bank, for the following purposes: i) to add a new credit category that groups those credits that do not fall within the concept of microcredits, SME credits or credits to Financial Intermediaries (FIs), but that are identified with the objectives and purposes of the bank in light of what is established in Article 3 of its Creating Law; ii) to establish new criteria for the assessment of credits granted to financial intermediaries (FIs); iii) to accept pledge bonds as real guarantees mitigating risk; iv) to establish at 100% the maximum value applicable to State values considered as liquid risk-mitigating guarantees; v) to include guarantee funds and State guarantees as liquid guarantees; and vi) to clarify the information requirements for credits granted to FIs.

III

In accordance with the considerations set forth above and based on Article 3, numeral 13), and Article 10, numeral 7), of Law 316, Law of the Superintendent of Banks and Other Financial Institutions, and its reforms.

In exercise of its powers,

HAS ISSUED

The following:

Resolution No. CD-SIBOIF-808-1-NOV22-2013 STANDARD REFORMING ARTICLES 1, 5, 8, 9, 11, 12, 13, 17, 19, 24 AND 43 OF THE STANDARD ON ASSESSMENT AND CLASSIFICATION OF ASSETS OF THE PRODUCTION DEVELOPMENT BANK

FIRST: Articles 1, 5, 8, 9, 11, 12, 13, 17, 19, 24 and 43 of the Standard on Assessment and Classification of Assets of the Production Development Bank, contained in Resolution No. CD-SIBOIF-790-1-JUL17-2013, of July 17, 2013, published in La Gaceta, Official Journal No. 152 on August 14, 2013, are hereby reformed, which shall read as follows:

"Article 1. Concepts.- For the purposes of application of the provisions contained in this standard, the terms indicated in this article, both in uppercase and lowercase, singular or plural, shall have the following meanings:

a) Risk Assets: Risk assets shall be understood as all credit and contingent portfolio operations that in some way signify direct or indirect financing in favor of natural or legal persons. Also considered risk assets shall be goods given as collateral, accounts receivable and adjudicated goods.

b) Bank: Production Development Bank (Produzcamos).

c) Board of Directors: The main administrative body of the bank.

d) Portfolio Classification: The action of analyzing and evaluating the recoverability level of the set of credits of each debtor, including the corresponding contingent operations and any other obligation that this person has with the institution.

e) Credit in Judicial Collection: Credit that is in the process of collection through the judicial route. The start of this process is understood to be when the judicial complaint is filed.

f) Credits related to State Development Policies: Corresponds to the financing of strategic programs according to the National Plan for Human Development.

g) Debtor: Natural or legal person who has incurred obligations directly or indirectly with the bank.

h) Financial Intermediaries (FIs): Entities that intermediate financial resources supervised by the Superintendent of Banks and Other Financial Institutions (banks, financial companies, general warehouses); as well as entities specialized in microfinance not supervised by the Superintendent, organized as non-profit associations and foundations, savings and credit cooperatives and other financial entities constituted as joint-stock companies.

i) Bank Law: Law 640, Law Creating the Production Development Bank (Produzcamos), published in La Gaceta, Official Journal No. 223, of November 20, 2007, and its Reforms, contained in Law No. 684, published in La Gaceta, Official Journal No. 92, of May 20, 2009.

j) General Banking Law: Law 561, General Banking Law, Non-Banking Financial Institutions and Financial Groups, published in La Gaceta, Official Journal, number 232, of November 30, 2005.

k) FI Eligibility Criteria: Rating criteria approved by the Bank's Board of Directors, applied to FIs to determine their eligibility.

l) Superintendent: Superintendent of Banks and Other Financial Institutions.

m) Superintendent: Superintendent of Banks and Other Financial Institutions.

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

a) Microcredits - Those are credits granted up to the equivalent in national currency of ten thousand United States dollars (US$10,000.00), at the official exchange rate, granted to a debtor, natural or legal person, whose main source of income is fluctuating and comes from the performance of production, marketing or service provision activities; they do not necessarily have formal documentation or records backing up the income nor registered real guarantees.

b) SME Credits - Credits granted to debtors of the Small and Medium Enterprise (SME) sector, according to the definition given to these sectors by the relevant Law, for amounts greater than the equivalent in national currency of ten thousand United States dollars (US$10,000.00), at the official exchange rate, oriented to finance economic sectors such as: agricultural, livestock, fishing, forestry, artisanal, industrial, agro-industrial, commercial and tourism.

c) Credits to FIs - Credits granted to the financial intermediaries (FIs) referred to in this standard, declared eligible by the bank.

d) Credits related to State development policies: Credits granted in correspondence with the State's development policy. These credits shall be granted in accordance with the credit policies approved by the Bank's Board of Directors and reported to the Superintendent, which must include, among other aspects, criteria for the assessment, classification, provisions, extensions, refinancing, restructurings, maturities and rehabilitation applicable to this type of operation, which must be equal to or greater than the criteria established in this standard for SME credits.

Article 8. Criteria for the assessment of credits to FIs.- Prior to granting credits to FIs, the bank will carry out an assessment of the risk level of the total obligations of the applicant, taking into consideration the eligibility criteria according to internal regulations approved by its Board of Directors.

Article 9. Assessment and classification.- The bank must permanently carry out an assessment of the quality of its risk assets, qualifying them according to the criteria established in this standard, in order to estimate the recoverability of its risk assets and take the corresponding corrective and protective measures. The bank must keep the classifications of its debtors updated, according to the background that indicate variations in the debtor's loss risk level. In no case will unclassified portfolio be admitted. The assessments and classifications of the different types of portfolio will be carried out as follows:

a) Microcredits will be permanently classified based on their payment capacity measured in terms of their degree of compliance, reflected in the number of days of delinquency. To determine the classification, all credit operations contracted by the debtor with said entity will be gathered, so that the risk category assigned to it is the one corresponding to the credit with the highest recovery risk within the same bank, provided that, said credit is classified in categories "D" or "E", and the balance of this represents at least twenty percent (20%) of the total owed by the client within the bank.

b) SME credits will be permanently classified based on delinquency and other factors that warrant their reclassification, and must be reclassified at the moment when, through respective monitoring, deterioration in the debtor's payment capacity or financial conditions is determined. Additionally, at least once a year, the bank's asset evaluation and classification area will carry out a thorough evaluation based on all criteria established in Article 7 of this standard.

c) Credits to FIs will be permanently classified according to the criteria established in Articles 8 and 13 of this standard. Credits must be reclassified at the moment when, through respective monitoring, deterioration in the payment capacity or financial conditions of the FIs is determined. Additionally, at least once a year, the bank's asset evaluation and classification area will carry out a thorough evaluation based on the criteria established in Article 8 of this standard.

Additional provisions resulting from assessments and classifications must be constituted and reflected in the bank's financial statements in the same month they are determined.

Article 11. Scope and criteria for classification.- The bank must permanently classify its microcredit portfolio based on the criteria established in Article 6 of this standard and constitute the corresponding minimum provisions according to the following table:

Classification Days of delay Provision A Normal Risk Up to 15 1% B Potential Risk From 16 to 30 5% C Real risk of expected losses From 31 to 60 20% D High risk of significant losses From 61 to 90 50% E Unrecoverable More than 90 100%

These minimum provisions are without prejudice to the bank's ability to increase 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 X of this standard.

Additionally, for debtors who have constituted eligible real guarantees as risk mitigants referred to in letter b), numeral 1) of Article 25 of this standard, whose appraised realization value is equal to or greater than one hundred percent (100%) of the outstanding balance, the bank may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to them.

Article 12. Scope and criteria for classification.- The bank must permanently classify its credit portfolio to the productive sector based on the criteria established in Article 7 of this standard and constitute the corresponding minimum provisions according to the following table:

Classification Description Provision Category A Normal Risk a) The fulfillment of the debt amortization plan has not presented any kind of objections, except for delays of up to thirty (30) days; b) The total recovery of the loan and interest within the agreed timeframes is not in doubt under any circumstances and there is no indication that such behavior will change in the future; c) The debtor has invested the resources lent by the Bank in their entirety and in strict compliance with the activity or purpose requested. 1% Category B Potential Risk a) Some degree of non-compliance with conditions, such as payment delays of up to sixty (60) days, or extensions that do not exceed a term of six (6) months, resulting from negative situations that may have temporarily affected the debtor, provided that such extensions comply with what is established in Article 27 of this standard. b) Imponderables that may vary their cash flows, and which could be solved in a period not greater than six months, without thereby affecting the expectations of integral recovery of the credits owed, but which, even so, generate a certain uncertainty. 5% Category C Real Risk of Expected Losses a) Delays in payments and obligations of up to ninety (90) days, and extensions that do not exceed a term of six (6) months, provided that such extensions comply with what is established in Article 27 of this standard. b) Financial weaknesses (such as declining trends in profits and sales, or excessive indebtedness), which translate into the income generated by the company not being sufficient for adequate compliance with its obligations and that, if not corrected, these problems may result in a loss for the Bank. 20% Category D High Risk of Significant Losses a) Delays in payments and obligations of up to one hundred eighty (180) days, and credits matured in the same Bank. b) The recoverability of credits is considered doubtful; the debtor's cash flow analysis demonstrates that it is highly unlikely that they can meet all their short, medium and long-term financial commitments; c) The guarantee is considered as the only source of payment and its value will probably only allow the creditor to cover part of the lent value. 50% Category E Unrecoverable a) Delays in obligations of more than one hundred eighty (180) days; b) Recoverability of credits is considered null; manifest situation of insolvency; evidence that there is no operational fund-generating activity capable of meeting its short, medium and long-term financial commitments; c) The debtor has not invested the resources lent by the Bank in their entirety and in strict compliance with the activity or purpose requested; d) The debtor has diverted pledges; e) When the supervised financial institution does not provide detailed information on the capital structure of another company that in turn is a partner of the legal person debtor. 100%

These minimum provisions are without prejudice to the bank's ability to increase 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 X of this standard.

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

a) In the case of guarantees referred to in letter b, numeral 1) of Article 25 of this standard, whose appraised realization value is equal to or greater than one hundred percent (100%) of the outstanding balance, the bank may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to them.

b) In the case of guarantees referred to in letter b, numeral 2) of Article 25 of this standard, whose certificate of deposit value is equal to or greater than one hundred fifty percent (150%) of the outstanding balance, once any pending encumbrances are deducted, the bank may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to them.

Article 13. Scope and criteria for classification.- The bank must permanently classify its credit portfolio to FIs based on the criteria established in Article 8 of this standard, and constitute the corresponding minimum provisions according to the following table:

These minimum provisions are without prejudice to the bank's ability to increase 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 X of this standard.

Additionally, for FIs that have constituted eligible real guarantees as risk mitigants, the following procedure may be followed:

a) In the case of guarantees referred to in letter b, numeral 1) of Article 25 of this standard, whose appraised realization value is equal to or greater than one hundred percent (100%) of the outstanding balance, the bank may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to them.

Classification for Supervised FIs Classification for Non-Supervised FIs Classification Provision Classification Days of delay Provision A+ 0.5% A 1% A (Normal Risk) Up to 15 1% B+ 2.5% B 5% B (Potential Risk) From 16 to 30 5% C+ 10% C 20% C (Real risk of expected losses) From 31 to 60 20% D 50% D (High risk of Significant Losses) From 61 to 90 50% E 100% E (Unrecoverable) More than 90 100%

b) In the case of guarantees referred to in letter b, numeral 2) of Article 25 of this standard, whose certificate of deposit value is equal to or greater than one hundred fifty percent (150%) of the outstanding balance, once any pending encumbrances are deducted, the bank may apply the provision percentage corresponding to the immediate previous lower risk classification assigned to the debtor, without changing the classification that corresponds to them.

Article 17. Eligible Guarantees as Risk Mitigants.- All liquid guarantees referred to in Article 24 and real guarantees referred to in letter b) numerals 1) and 2) of Article 25 of this standard shall be considered as eligible guarantees as risk mitigants.

The provisions of the previous paragraph do not prevent the bank from backing its 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 25 and 26 of this standard.

Article 19. Maximum value applicable to eligible guarantees as risk mitigants. The maximum value applicable to eligible guarantees as risk mitigants shall be the following:

ELIGIBLE GUARANTEE AS RISK MITIGANT VALUATION MAXIMUM VALUE APPLICABLE State Values Market Value 100% Time deposit certificates, bank guarantees, sureties, Stand By letters of credit and any other liquid instrument, backed, accepted, guaranteed 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, guaranteed or guaranteed, including guarantee funds, by Foreign Financial Institutions qualified as first-class. Nominal Value 100% Values (Bonds, commercial paper, and shares) issued by banks and financial institutions of foreign equity capital whose shares are traded on a stock exchange or regulated market and are qualified as first-class institutions. Market Value 1) 80% fixed income 2) 70% variable income Values issued by the central bank or ministry of finance of States with first-class country risk rating. Market Value 90% Debt and capital values of companies with dispersed equity 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 2) 70% variable income First mortgage and/or subsequent grade, provided that it is in favor of the same financial institution, on real estate. Realization Value 70%

The valuations of the instruments or assets referred to in this table shall be determined in accordance with the regulations governing the matter of portfolio valuation, and on appraisers who provide services to institutions of the financial system.

Article 24. Liquid Guarantees.- The following are considered liquid or quick-realization 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 canceled, without significant costs;
2. Have adequate legal documentation;
3. Do not have prior obligations that could diminish their value or in any way prevent the bank from acquiring clear title;
4. Their value is permanently updated.

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

1. State Values: Public debt values 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 bank itself.
3. Instruments issued by financial institutions of the country: time deposit certificates, bank guarantees, sureties, Stand By letters of credit and any other liquid instrument, backed, accepted, guaranteed or guaranteed by financial institutions that during the twelve (12) months prior, have met the minimum required coefficient in accordance with the regulations governing the matter on capital adequacy, have not shown operational losses nor have been subject to a fine for mismatch.
4. Instruments issued by foreign financial institutions: time deposit certificates, bank guarantees, sureties, Stand By letters of credit and any other liquid instrument, backed, accepted, guaranteed or guaranteed, including guarantee funds, by Financial Institutions qualified...