Resolution Reforming Credit Risk Management Standard Articles and Annex 1

Page 1 of 9 Resolution No. CD-SIBOIF-1087-2-DIC4-2018 Dated December 4, 2018

NORM REFORMING ARTICLES 1, 21, 39, 40, 41, 42, 42-BIS, 47, 47-BIS AND ANNEX 1 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 on August 20, 2008, the Standard on Credit Risk Management was approved, contained in Resolution No. CD-SIBOIF-547-1-AGOST20-2008, published in La Gaceta, Official Diary No. 176 and 178, on September 11 and 17, 2008, which aims to establish minimum guidelines to be followed by financial institutions for the evaluation and classification of risk assets according to the quality of their debtors, among other aspects oriented to managing credit risk.

II That it is necessary to adapt the provisions contained in Articles 1, 21, 39, 40, 41, 42, 42-Bis, 47, 47-Bis and Annex 1 of the aforementioned standard, regarding the criteria for the evaluation and classification of investments and accounts receivable; as well as those concerning the recognition and measurement of assets received in payment and adjudicated, and the recognition of moratory interest, in accordance with the new accounting framework applicable to banks and financial institutions, which is based on a combination of International Financial Reporting Standards (IFRS) and prudential regulations issued by this Superintendence.

III That in accordance with the considerations stated above and pursuant to Article 3, items 3 and 13, and Article 10, item 7) of Law 316, Law of the Superintendence of Banks and Other Financial Institutions, and its amendments; contained in Law No. 974, Law of the Nicaraguan Legal Digest on Banking and Finance Matters, published in La Gaceta, Official Diary No. 164, on August 27, 2018, and its amendments.

In exercise of its powers,

HAS ISSUED

The following,

Resolution No. CD-SIBOIF-1087-2-DIC4-2018 NORM REFORMING ARTICLES 1, 21, 39, 40, 41, 42, 42-BIS, 47, 47-BIS AND ANNEX 1 OF THE STANDARD ON CREDIT RISK MANAGEMENT

FIRST: Articles 1, 21, 39, 40, 41, 42 and 47 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 Diary No. 176 and 178, on September 11 and 17, 2008, are hereby amended, which shall read as follows:

Art. 1 Concepts.- For the purposes of applying 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 portfolio and contingent operations that in some way signify direct or indirect financing in favor of natural or legal persons. Also considered risk assets shall be assets received in credit recovery, the investment portfolio, and accounts receivable. Insurance premiums and guarantees receivable from clients and accounts receivable from reinsurers for commissions or reimbursements for claim payments are excluded.

b) Days of Default: For single-maturity credits, the days elapsed since the credit maturity date; for credits payable in installments, the days elapsed since the maturity date of the installment (interest, principal, or combination of principal and interest).

c) Dollars: United States Dollars at the official exchange rate.

d) Total Indebtedness: The sum of credit operations (direct and indirect) and contingent, according to the information available in the Risk Central of the Superintendence and private risk centers available to the financial institution, as well as the information provided by the client.

e) Financial Institution: Refers to banks, financial companies, and insurance companies.

f) 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 they have with the institution.

g) Credit in Judicial Collection: A credit is considered in judicial collection when it is in the process of collection through this legal channel.

h) Debtor: The natural or legal person who has incurred obligations directly or indirectly with the financial institution.

i) General Banking Law: Law 561, General Banking Law, Non-Bank Financial Institutions and Financial Groups, published in La Gaceta, Official Diary, number 232, on November 30, 2005.

j) Credit Exchange Risk: Possibility of suffering losses derived from debtors' failure to pay their credit obligations due to mismatches in their net exposures in foreign currency due to exchange rate variations.

k) Credit Risk: Potential loss due to the failure of a debtor or counterparty to pay in the operations carried out by the institutions.

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l) Over-indebtedness: Level of indebtedness that, due to its excessive nature relative to the debtor's income and payment capacity, puts the fulfillment of their obligations at risk.

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

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

o) Accounting Framework: Accounting Framework for Banking and Financial Institutions.

Art. 21 Evaluation and Classification. For the purposes of the evaluation and classification of the investment portfolio and accounts receivable, financial institutions must:

a) In the case of the investment portfolio, apply the criteria established in the Accounting Framework;

b) In the case of accounts receivable, apply the criteria used for the evaluation, classification, and establishment of provisions for consumer credits.

Art. 39 Recognition and Measurement of Non-Current Assets Held for Sale.- The financial institution may recognize each of the assets received in credit recovery, in any of the following ways:

1. When, as a result of a legally documented agreement, there is a right over the assets and they have a value that can be measured reliably, they shall be recorded in the account Assets Received in Credit Recovery. In this case, the provisions of Articles 40, 41, 42 and 43 below shall apply, or;

2. When the criteria established in International Financial Reporting Standard (IFRS) 5 and the following are met, it shall be classified in the account Non-Current Assets Held for Sale.

The accounting procedure is as follows:

a) Classification to Non-Current Assets Held for Sale (IFRS 5) from the date of asset adjudication.

For initial registration in accordance with IFRS 5, the institution must take the lower of:

i. The amount agreed in the transfer in payment or adjudication at judicial auction, which does not include the remainder, when the base price of the auction is higher than the amount owed for all concepts; this amount being considered the cost of the asset, and its

ii. Fair value (determined in accordance with IFRS 13) minus selling costs (in accordance with IFRS 5).

The financial institution must clear the outstanding balance of the credit against the provision and, in case of existing provision surplus, it must be reversed in the corresponding account of the statement of results, being controlled in the sub-account of Undistributable Current Year Result.

Subsequently, all provisions established in IFRS 5 apply.

b) Reclassification of Assets Received in Credit Recovery to Non-Current Assets Held for Sale (IFRS 5).

This is the case when an adjudicated asset meets the IFRS 5 criteria after adjudication and registration as Assets Received in Credit Recovery.

The reclassification may be made to the account Non-Current Assets Held for Sale and shall be carried out at the lower value between:

i. The initial amount recognized in the Assets Received in Credit Recovery account, without considering its provision, and its

ii. Fair value (determined in accordance with IFRS 13) minus selling costs (in accordance with IFRS 5).

For assets that are reclassified to IFRS 5 in the Opening Balance Sheet applying what is established in IFRS 1 First-time Adoption of International Financial Reporting Standards, the accumulated provision for these shall be reversed in the corresponding sub-account of Transition Adjustment.

The reclassification of Assets Received in Credit Recovery to IFRS 5 may only be carried out in a period not exceeding 6 months, counted from the date of adjudication.

In case of existing excess provision resulting from the reclassification of the asset received in credit recovery to non-current assets held for sale, this must be reversed in the corresponding account of the statement of results, being controlled in the sub-account of Undistributable Current Year Result.

Subsequently, all provisions established in IFRS 5 apply.

c) Changes in the sales plan of the asset classified as Non-Current Assets Held for Sale (IFRS 5).

When there is a change in the sales plan because the IFRS 5 criteria are no longer met, the asset shall be reclassified to the account Assets Received in Credit Recovery, at the book value recognized in the account Non-Current Assets Held for Sale, recognizing from the date of adjudication the provision required in this article, for which it must consider the provision constituted as impairment, and in case of existing provision deficit, this shall be constituted against the corresponding expense account of the statement of results.

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When the change in the sales plan corresponds to assets that were originally reclassified to IFRS 5 in the opening financial statements of January 1, 2018, the provision to be constituted from the date of adjudication shall be debited from the Transition Adjustment account, provided that the specific asset has a positive balance in the said account for this concept. In case of existing provision deficit as required in the final part of this article; this shall be constituted and recognized as an expense in the corresponding account of the statement of results.

Subsequently, the remainder of the positive balance of the specific asset, registered in the Transition Adjustment account, may: i) be reversed against accumulated results until the asset is sold; ii) and while the asset is not sold, it will complement the provision requirement established in this article.

An asset registered as IFRS 5 and reclassified to the account Assets Received in Credit Recovery may not be reclassified again under the scope of IFRS 5.

The provision to be registered for assets that are reclassified from IFRS 5 to the account Assets Received in Credit Recovery may not be less than the following percentages of the asset value registered in the books:

i. Movable Assets:

• 30% minimum provision 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.

ii. Real Estate:

• 30% minimum provision 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.

d) Treatment of Undistributable Results.

The amounts registered in the sub-account of Undistributable Current Year Result and Undistributable Accumulated Results of Prior Years shall be distributable until the sale of the asset that generated them is carried out or 100% provision is registered.

Art. 40 Measurement and Recognition of Assets Received in Credit Recovery.- Assets received in credit recovery shall be measured as follows:

a) Initial Measurement: Assets received in credit recovery shall be measured at the lower value between:

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1. The value agreed in the transfer in payment or the adjudication value at judicial auction, as applicable.

2. The realization value in accordance with the regulations governing the matter of appraisers providing services to institutions of the Financial System, on the date of incorporation of the asset.

3. The balance in the bank's books, corresponding to the principal of the credit plus interest, plus other accounts receivable other than transactional costs. This without considering the provisions accounted for nor the interest cleared prior to adjudication.

The value of the measurement methods in items 1) and 3) above must include the transactional costs incurred in the acquisition of such assets. Transactional 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 registered in accordance with the above, they shall be measured at the book value registered minus the provisions assigned to the asset, as established in the following article. Additionally, in the case of real estate, for any loss in value due to impairment.

Art. 41 Establishment of Provisions.- The financial institution must transfer the respective provisions assigned to the credit to provisions for assets received in credit recovery. In the case where the value determined in letter a) of the previous article is less than the book balance of the corresponding credit, the financial institution must clear the outstanding balance and transfer the remainder of the provisions assigned to the credit to provisions for assets received in credit recovery.

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 to the extent that the assets are adjudicated and in proportion to the value determined in letter a) of the previous article.

Without prejudice to the foregoing, these provisions must be adjusted to what is established in the following letter a):

a) Provisions: The provision accounted for may not be less than the following percentages of the value of the asset registered 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:

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• The provision that the credit had assigned before adjudication as indicated in the first and second paragraphs of this article, up to 6 months from having received the asset in credit recovery.
• 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.

Art. 42 Valuation.- Real estate assets received in credit recovery shall be valued in their entirety at least once a year, unless there is evidence that an impairment loss has occurred.

The valuation of said assets must be carried out based on the estimate of the realization value in accordance with the regulations governing the matter of appraisers providing services to institutions of the Financial System.

All assets whose book value is greater than the equivalent in national currency or foreign currency of one hundred thousand dollars (US$100,000.00) must have valuations carried out by independent appraisers of the financial institution, duly registered in the Register of Appraisers of the Superintendence, with the exception of assets located outside the country.

Art. 47 Clearing.- All credits must be cleared in accordance with what is established in the respective Accounting Framework, on the days of default detailed below:

a) Consumer credits, on the one hundred and eighty-first (181) day of default. The financial institution may clear a consumer credit on day 360, when said credit has constituted real guarantees referred to in items 1), 3) (machinery and vehicles only) and 5) of letter b) of Article 30 of this standard, whose appraised realization value is equal to or greater than one hundred percent (100%) of the amount owed and are in the process of judicial collection.

b) Mortgage credits for housing, microcredits, and commercial credits on the three hundred and sixtieth (360) day of default. Mortgage credits for housing, microcredits, and commercial credits that have constituted real guarantees eligible as risk mitigants 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 amount owed, are excepted, provided they are in the process of judicial collection.

For control purposes, the Financial Institution must maintain for a period of no less than five years, records in Off-Balance Sheet Accounts of the balances originated by the clearings carried out. In case of existing real estate assets received in credit recovery related to cleared credits, the financial institution must maintain the said records in Off-Balance Sheet Accounts indefinitely, until their sale is carried out.

The control of adjudicated assets on previously cleared assets shall be carried out in the off-balance sheet account "For Recovery of Cleared Assets", reversing the corresponding amount registered in the cleared account.

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SECOND: Articles 42-Bis and 47-Bis are hereby added to the Standard on Credit Risk Management referred to in the first section of this resolution, which shall read as follows:

Art. 42-Bis Information to the Superintendent.- Valuations and supporting background information must be available to the Superintendent for review. The financial institution must inform, through a detailed list, all assets received in credit recovery and their respective accounted amounts, with the frequency established in the "Official Information Calendar" sent to all supervised entities. Real estate assets included in the said list must be reflected indefinitely, as long as their sale is not carried out.

Art. 47-Bis Moratory Interest.- The institution shall recognize as an asset the moratory interest of active credits when its policy establishes not to waive them in total or in part. Otherwise, it must register them in the off-balance sheet account of "suspended income".

THIRD: The name of Chapter XVII of the Standard on Credit Risk Management referred to in the first section of this resolution is hereby amended, which shall read as follows:

"CHAPTER XVII - EVALUATION OF ASSETS RECEIVED IN CREDIT RECOVERY"

FOURTH: Annex 1, item V, of the Standard on Credit Risk Management referred to in the first section of this resolution is hereby amended, which shall read as follows:

ANNEX 1 MINIMUM INFORMATION THAT CREDIT FILES OF CLIENT DEBTORS OF THE INSTITUTION MUST CONTAIN ... V. INFORMATION THAT THE FILE OF ASSETS RECEIVED IN PAYMENT MUST CONTAIN

1. Authorization of the instance or official authorized to receive the asset received in credit recovery, expressly approved by the board of directors.

2. Account statement of the loan before and after its settlement.

3. Risk category of the settled loan.

4. Accounting balances of the settled loan including: pending capital, interest registered in asset accounts, clearing reserves, and interest registered in off-balance sheet accounts, including references of cancelled credits and the names of the debtors.

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5. Copies of invoices or fiscal credits and checks for payments to third parties for fees, registration rights, transfer taxes, and other expenses related to the acquisition of the asset.

6. Judge's sentence of the public auction, or the deed of adjudication or the deed of transfer in payment, as applicable.

7. Asset valuation report issued by an authorized appraiser when applicable.

8. Accounting records on the acquisition of the asset, the fair value of the asset, the establishment of reserves, the settlement of the asset, and accounting records related to the asset received in payment.

9. In cases where the loan settlement was partial, document the pending balance of the same and support the policy to be followed regarding said balance.

10. Marketing efforts carried out by the entity.

11. Publication of auctions.

12. Purchase offers presented by clients and justification of the entity regarding its resolution.

13. Minutes on the holding of the auction.

14. Copy of the check received for the sale of the asset if it was for cash; or copy of the notarial document when the sale is with financing.

15. Notarial documents and accounting entries supporting the partial sale of the asset.

16. Minute point of the board of directors where the extension of the time limit for assets received in credit recovery is requested, when they exceed two years, where it is recorded that the board of directors approves and requests the SIBOIF the extension of the time limit; as well as, the response of the said regulatory body to said request.

FIFTH: The provisions established in this standard shall take effect from January 1, 2019; nevertheless, for the purposes of implementation of IFRS 1 - First-time Adoption of International Financial Reporting Standards, financial institutions must apply the present provisions to the first financial statements generated during the transition period, referred to in the regulations governing the matter on the implementation of Accounting Frameworks.

SIXTH: This standard shall enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Diary. (F) S. Rosales C (F) M. Díaz O. (F) Fausto Reyes B. (F) Illegible (Silvio Moisés Casco Marenco) (F) Illegible (Rafael Ángel Avellán Rivas) Secretary

RAFAEL ÁNGEL AVELLÁN RIVAS Secretary of the Board of Directors SIBOIF