Resolution SBS No. 6941-2008: New Regulation for the Administration of Overindebtedness Risk for Retail Debtors - Compliance Deadline until 31-12-2008

Lima, August 25, 2008
S.B.S. Resolution
No. 6941 -2008

The Superintendent of Banking, Insurance and Private Pension Fund Administrators:

CONSIDERING:

That, the General Law of the Financial System and the Insurance System and Organic Law of the Banking and Insurance Superintendency, Law No. 26702, hereinafter referred to as the General Law, establishes in its Article 222 that, in the evaluation of operations comprising the credit portfolio, the debtor's cash flows, income, and capacity to service the debt, financial situation, net worth, future projects, and other relevant factors for determining the capacity to service and pay the debt must be taken into account; explicitly stating that the basic criterion is the debtor's payment capacity and that guarantees are subsidiary;

That, likewise, paragraph 4 of Article 132 of said General Law establishes as one of the means to attenuate the saver's risks, the constitution of generic and specific portfolio provisions, individual or preventive global ones by groups or categories of credit, and Article 133 of said Law allows generic provisions to exceed 1% of the normal portfolio in exceptional situations such as the presence of an overindebtedness risk among retail debtors.

That, through SBS Resolution No. 808-2003 1, the Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions was approved, which establishes the criteria for granting credits, as well as the minimum provisions that must be constituted for credit risk;

That, through SBS Resolution No. 1237-2006, the Regulation for the Administration of the Overindebtedness Risk of Retail Debtors was approved, which provides that companies must establish in their commercial policies, as well as in those regarding granting, modification, and review of revolving credit lines, explicit criteria and measures that incorporate the overindebtedness risk of retail debtors;

That, subsequently, through SBS Resolution No. 037-2008, the Integrated Risk Management Regulation was approved, in which Integrated Risk Management is defined as a process, carried out by the Board of Directors, Management, and personnel applied throughout the company and in the definition of its strategy, designed to identify potential events that may affect it, manage them according to their risk appetite, and provide reasonable assurance in achieving their objectives, also establishing the necessary independence between the risk unit and the business units;

That, likewise, the Integrated Risk Management Regulation defines credit risk as the possibility of losses due to the inability or lack of willingness of debtors or counterparties, or third parties obligated, to fully comply with their contractual obligations registered inside or outside the balance sheet;

That, through SBS Resolution No. 264-2008, the Credit Card Regulation was approved, which establishes minimum standards regarding the management of credit cards;

That, it is necessary to reinforce the administration of the overindebtedness risk of retail debtors in order to promote sound banking in the financial system and healthy growth of placements;

That, on the other hand, it is necessary to update certain concepts of the Regulation approved by SBS Resolution No. 1237-2006, as a result of the supervision work of this Control Body;

That, furthermore, it is necessary to adapt the regulatory framework established in the Regulation for the Administration of the Overindebtedness Risk of Retail Debtors to the aforementioned norms, approving a new text;

Being in accordance with the opinion of the Assistant Superintendencies of Banking and Microfinance, Risks, and Legal Advice, as well as the Economic Studies Department; and,

In exercise of the powers conferred by paragraphs 7, 9, and 13 of Article 349 of the General Law;

RESOLVES:

Article First.- Approve the Regulation for the Administration of the Overindebtedness Risk of Retail Debtors, hereinafter referred to as the Regulation, which forms an integral part of this Resolution.

Article Second.- Modify the Accounting Manual for Companies of the Financial System, in accordance with what is provided in Annex No. 1 of this Resolution, which will enter into force starting from the information corresponding to the month of December 2008.

Article Third.- Grant a compliance period until December 31, 2008, for companies to adapt to the provisions of the Regulation approved in Article First.

Article Fourth.- Upon expiration of the compliance period indicated in the preceding article, the Regulation for the Administration of the Overindebtedness Risk of Retail Debtors approved by SBS Resolution No. 1237-2006 shall be void. Thereafter, companies will make available to the Superintendency the measures approved by the Board of Directors for adaptation to the Regulation and their degree of implementation.

Register, communicate, and publish.

FELIPE TAM FOX
Superintendent of Banking, Insurance and Private Pension Fund Administrators

REGULATION FOR THE ADMINISTRATION OF THE OVERINDEBTEDNESS RISK OF RETAIL DEBTORS

CHAPTER I
GENERAL PROVISIONS

Article 1st.- Scope
This standard applies to multiple-operation companies included in paragraph A of Article 16 of the General Law, to financial leasing companies, to mortgage administrator companies, to the Bank of the Nation, to the MIVIVIENDA Fund, and to the Agropecuario Bank, hereinafter referred to as companies.

Article 2nd.- Definitions
For the application of this Regulation, the following definitions shall be considered:

a. Revolving credit lines: Those credit lines in which amortized amounts are allowed to be reused by the debtor. The total amount of revolving credit line is equal to the sum of the utilized and unutilized revolving credit line. 2

b. Unutilized credit line: Results from the subtraction of the approved, registered, and communicated amount to the client of a revolving or non-revolving credit line, minus all obligations acquired by the client under that line including direct debt and accrued interest. 3

c. Exposure equivalent to credit risk: Conversion of a potential debt into a direct debt through a factor that multiplies the potential debt.

d. Direct debt or direct credits: Represents the financing that, under any modality, financial system companies grant to their clients, originating on their part the obligation to deliver a determined sum of money, in one or several acts including, inclusive, obligations derived from refinancings and restructuring of existing credits or debts.

e. Potential debt or indebtedness: Indirect credits and other obligations contracted by retail debtors resulting from guarantees and sureties granted by them to third parties.

f. Indirect credits or contingent credits: Represent the guarantees, surety bonds, bank acceptances, letters of credit, approved but undistributed credits, and unutilized credit lines, granted by financial system companies. 4

g. Total debt or indebtedness: For the purposes of this standard, the sum of retail debt of all types (to small businesses, micro-enterprises (MES), revolving and non-revolving consumption, and housing mortgages) and potential debt.

h. Retail debtor: Natural or legal person who holds direct and indirect credits classified as to small businesses, micro-enterprises, revolving and non-revolving consumption, and housing mortgages.

i. Accounting Manual: Accounting Manual for Companies of the Financial System approved by SBS Resolution No. 895-98 of September 1, 1998, and its modifying norms.

j. Policies and Procedures Manual: Credit policies and procedures manual referred to in paragraph 4 of Chapter IV of the Regulation for the Classification of the Debtor.

k. Retail obligations: The sum of direct and indirect credits of small business, MES, revolving and non-revolving consumption, and housing mortgage types in the financial system, plus accrued interest and other obligations contracted by retail debtors. 7

Literal substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.
Literal substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.
Literal substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.
Literal modified by SBS Resolution No. 14353-2009 of 10/30/2009 Literal modified by SBS Resolution No. 14353-2009 of 10/30/2009

l. Regulation for the Classification of the Debtor: Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions, approved by SBS Resolution No. 808-2003 8 and its modifications.

m. Overindebtedness: Level of indebtedness in the financial system that, due to its excessive nature relative to income and payment capacity, puts at risk the repayment of obligations of a retail debtor.

n. Superintendency: Superintendency of Banking, Insurance and Private Pension Fund Administrators.

o. Non-revolving credit line: That credit line in which amortized amounts are not allowed to be reused by the debtor. 9

Article 3rd.- Responsibility of Companies and the Board of Directors
Companies must adopt a risk management system for overindebtedness that allows reducing said risk before and after granting, perform permanent monitoring of the portfolio in order to identify overindebted debtors, and include the periodic evaluation of control mechanisms used, as well as corrective actions or improvements required, as appropriate.

In this sense, it shall be the responsibility of the Board of Directors or equivalent body, the establishment and review of formalized policies and procedures for the identification, measurement, treatment, control, reporting, and monitoring of the risk derived from the indebtedness levels of their retail debtors and ensure that Management adopts the necessary measures to supervise and control these risks. This responsibility includes compliance with the provisions contained in this Regulation.

In line with what is provided in the Integrated Risk Management Regulation, the Board of Directors must ensure:

a) That the company has an organizational structure that contemplates total independence between risk areas and business areas. In line with this, the different functions and responsibilities of said areas must be clearly defined and delimited, with the aim of avoiding possible conflicts of interest that could affect the adequate performance of their functions.

b) That incentive systems for staff performance do not generate conflicts of interest with risk management.

c) That, in case modifications are made to the objectives, guidelines, policies, and procedures for the administration of retail credit risk, or new activities are undertaken based on changes in the business environment, such modifications must be approved by said body based on a prior evaluation of the credit risk involved in said modifications.

CHAPTER II
PRUDENTIAL REQUIREMENTS FOR THE ADMINISTRATION OF OVERINDEBTEDNESS RISK FOR RETAIL DEBTORS

Literal modified by SBS Resolution No. 14353-2009 of 10/30/2009 8 SBS Resolution No. 808-2003 left without effect by SBS Resolution No. 11356-2008 Literal incorporated by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.

Article 4th.- Overindebtedness risk management
Companies must establish an appropriate internal environment for the administration of credit risk of retail debtors, starting from an organizational structure that guarantees the timely identification, measurement, treatment, control, and reporting of overindebtedness risk as well as its adequate monitoring.

Likewise, companies must establish in their credit policies, as well as in those regarding granting, modification, and review of revolving and non-revolving credit lines, explicit criteria and measures that incorporate the overindebtedness risk of retail debtors, which must be approved and reviewed at least annually by the Board of Directors. 10

In this sense, companies must take into consideration, when granting new retail credits, or modifying the amount of existing credits and/or lines, as part of their risk acceptance criteria, the payment behavior and total indebtedness of the debtor in the financial system, as well as all updated available information that allows evaluating the payment capacity and total indebtedness.

Additionally, in line with an adequate credit monitoring process, companies must equip themselves with systems and procedures that allow adequate monitoring of the level of total indebtedness and the payment capacity of their debtors, capture relevant information, and generate timely and reliable reports.

In this way, companies must be capable of identifying those debtors who are in a situation of overindebtedness and take corrective actions regarding this, for which they must establish their own methodology for administering overindebtedness risk, which must be formally approved by the Board of Directors and incorporated into credit management.

Article 5th.- Prudential measures for the administration of overindebtedness risk
In accordance with what is provided in the preceding article, in order to exercise prudent management of overindebtedness risk, companies must at least comply with the following criteria, which may be verified through the application of alternative practices of equivalent effect:

a) Take into account the total indebtedness of the debtor (and their spouse, when their income is included in the analysis) with the entity and with other companies of the financial system in the calculation of total debt in order to determine their borrowing capacity and their status as overindebted. Regarding MES and small business debtors, personal and family indebtedness that microentrepreneurs, small entrepreneurs, micro-enterprises, and small family businesses might have must be considered, provided that the considered family members are active participants in the business. 11

b) Consider among the risk-differentiating variables the number of institutions with which retail debtors have contracted obligations, as well as the total debt/net annual income or total debt/net monthly income ratios as selection and/or alert factors, applying a criterion consistent with the clientele's risk profile, segmented by income level.

c) For revolving and non-revolving consumption credits, consider appropriate quota/income levels to determine borrowing capacity, adequately differentiated by product and income range, using realistic assumptions when converting credit balances into quota equivalents. For MES and small business credits, take into account the degree of adequacy between debt levels and real financing needs and the business cash flows. 12

d) Perform the complete evaluation process for granting credits for all credit modalities, including line expansions. In this sense, a new evaluation must be considered that includes the borrowing capacity at the date and payment behavior in the system, among other factors.

e) Consider for the granting of housing credits, a loan-to-value ratio consistent with the risk profile of the customers.

f) For the case of revolving and non-revolving credit lines, a maximum level must be set based on the customer's payment capacity and their total indebtedness in the system. 13

g) In campaigns for increasing credit card lines, or for customer acquisition for consumer credit products, greater prudence must be exercised if customers not classified as Normal are selected.

h) The analysis and periodic evaluation of the evolution of portfolio quality must be included as part of the monitoring of credit portfolios, not only based on historical delinquency and other risk discrimination factors but also based on the date of credit concession (harvest analysis) in order to be able to take corrective measures. In particular, this analysis must be applied with special emphasis on the results of campaigns for increasing credit card lines, or for customer acquisition for consumer credit products.

i) To take into consideration the existing risk due to the potential indebtedness of retail debtors, their exposure equivalent to credit risk will be calculated. The methodology to be applied will depend on each company, taking into account available information, and must be adequately supported and incorporated in the corresponding Policies and Procedures Manuals.

j) In the case of joint retail debtors and to the extent of available information, each of the persons constituting them must be monitored and individual exposures aggregated in order to monitor joint debt in the system. For the calculation of the debt in the system of a person with joint debt, the fraction of debt by simple division among the number of joint debtors will be assigned.

k) When credit card lines include the possibility of line usage through cash withdrawals, indicators and alert systems must be available for monitoring the use of the line through said withdrawals, as well as for the application of credit risk reduction measures that are necessary.

l) Establish a monitoring system on the retail portfolio that allows identifying those debtors who incur in overindebtedness risk after the approval of their operations in the company, in order to take preventive and/or corrective actions based on the monitoring reports generated.

12 Literal modified by SBS Resolution No. 14353-2009 of 10/30/2009 13 Literal substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.

m) Perform at least annually a sensitivity analysis and stress tests on the retail portfolio considering at least two scenarios of adverse economic growth, in order to determine the impact on portfolio quality and on the company's income and solvency, and define the corrective actions to be adopted against each scenario regarding growth targets and risk acceptance criteria. The result of said analysis must be reported to the Board of Directors.

n) In the case of revolving credit lines granted in the form of credit cards, identify debtors who only make the minimum payment, and establish specific monitoring mechanisms to take the corrective measures that may be necessary.

Article 6th.- Risk Unit and Internal Audit
The Risk Unit will be responsible for monitoring overindebtedness risk, and will inform via a quarterly report to the Board of Directors on the following aspects:

a) exceptions to adopted policies;

b) monitoring of the set of overindebted clients and actions taken by General Management in order to reduce the company's exposure with said debtors; and,

c) monitoring of portfolio quality, and particularly that corresponding to customer acquisition campaigns for consumer credit products and line increases by credit cards, when applicable.

Such report will be available to the Superintendency.

The Internal Audit Unit, provided that retail credit activity is significant in the company and based on its risk profile, must include the examination of compliance with this standard in its annual activity plan and as part of its usual activities.

Article 7th.- Provision requirement for companies failing to comply with this standard 14
Companies that fail to comply with the provisions of this Regulation must, for provisioning purposes, calculate the exposure equivalent to credit risk applying a twenty percent (20%) factor to the unused amount of revolving and non-revolving credit lines of MES, small business, and consumption type. On said exposure equivalent to credit risk, the provision rates determined in the Regulation for the Classification of the Debtor will be applicable. 15

The credit line amount used for the calculation referred to in the preceding paragraph must correspond to the last approved amount communicated to the client.

Additionally, those companies that fail to comply with the provisions of this Regulation must constitute an additional generic provision of 1% on direct debt. Such provision will be applicable to direct consumption debt (revolving and non-revolving) and/or MES and/or Small Business of clients classified by the company as Normal, as appropriate. Companies may exclude from the application of said provision vehicle credits and financial leases, provided there is sufficient evidence of good management of the set of their elements. 17

14 The provision requirement of this article is suspended by Resolution No. 3155-2020 of 12/17/2020 15 Paragraph substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.
16 Paragraph substituted by SBS Resolution No. 5570-2019 of 11/27/2019, effective from 01/01/2021.
17 Article modified by SBS Resolution No. 14353-2009 of 10/30/2009

Article 8.- Clarifications on the application of the Regulation for the Classification of the Debtor
The equivalent exposure to credit risk of unused credit lines of the Small Enterprises and/or SMEs and/or Consumption type (revolving and non-revolving) will be subject to the provisions of the Regulation for the Classification of the Debtor, with the exception of the calculation of the 20% debt in the financial system for purposes of alignment of debtor classification among companies within the financial system referred to in Chapter I of said Regulation.

Article 9.- Control procedures by the Superintendency
As a result of the supervision of compliance with this Regulation, carried out on-site and/or off-site, the Superintendency may order the application of the provisions mentioned in Article 7, when it considers that the administration of over-indebtedness risk does not correspond to what is provided in this Regulation.

Article 10.- Application of the Transparency Regulation to the amount of credit lines
The obligation of prior notification of modifications to contractual conditions referred to in the Regulation on transparency of information and applicable provisions to contracting with users of the financial system is not applicable to variations in the amount of credit lines, when dealing with clients whose level of indebtedness or behavior leads companies to presume a potential deterioration of their credit quality. The entity may arrange for the reduction or closure of the credit line with subsequent communication to the client of such fact.

18 Article substituted by Resolution SBS No. 5570-2019 of 27/11/2019, effective from 01/01/2021.

ANNEX No. 1
MODIFICATIONS TO THE ACCOUNTING MANUAL FOR COMPANIES OF THE FINANCIAL SYSTEM
I. Chapters III "Chart of Accounts" and IV "Description and Dynamics of Accounts" of the Accounting Manual for Companies of the Financial System are modified, as follows:

1. For the purpose of registering additional generic provisions for direct SME and consumption credits, related to the inadequate administration of over-indebtedness risk, the following analytical accounts are incorporated into Chapters III "Chart of Accounts" and IV "Description and Dynamics of Accounts" of the Accounting Manual:
   1409.02.06 (Generic provision for over-indebtedness risk)
   1409.03.06 (Generic provision for over-indebtedness risk)
   4302.02.06 Generic provision for over-indebtedness risk
   4302.03.06 Generic provision for over-indebtedness risk

2. For the purpose of registering provisions for the equivalent exposure to credit risk of the unused amount of revolving credit lines, related to the inadequate administration of over-indebtedness risk, affecting analytical accounts 2701.01.01 and 2701.02.01, the sub-account is incorporated:
   4305.06 Provision for over-indebtedness risk

3. The first paragraph of the description of account 1409 "(Provisions for Credits)" is substituted as follows:
   "In this account, generic and specific provisions for direct credits are recorded in accordance with the provisions issued in the Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions. Likewise, provisions for foreign exchange credit risk and additional generic provisions related to the inadequate administration of over-indebtedness risk shall be recorded in accordance with the provisions issued by the Superintendency."

4. The following is incorporated into the Dynamics of account 1409, in the Credits section:
   i. - For the constitution of additional generic provisions related to the inadequate administration of over-indebtedness risk.

5. The first paragraph of the description of account 2701 "Provisions for Contingent Credits" is substituted as follows:
   "In this account, generic and specific provisions for contingent or indirect credits are recorded in accordance with the provisions issued in the Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions, and provisions related to the inadequate administration of over-indebtedness risk in accordance with the provisions issued by the Superintendency."

6. The first paragraph of the description of account 4302 "Provisions for Uncollectability of Credits" is substituted as follows:
   "In this account, charges for generic and specific provisions for direct credits are recorded in accordance with the provisions issued in the Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions. Likewise, provisions for foreign exchange credit risk and additional generic provisions related to the inadequate administration of over-indebtedness risk shall be recorded in accordance with the provisions issued by the Superintendency."

7. The description of account 4305 "Provisions for Contingencies and Others" is substituted as follows:
   "In this account, charges for generic and specific provisions for indirect credits are recorded in accordance with the provisions issued in the Regulation for the Evaluation and Classification of the Debtor and the Requirement of Provisions, country risk provisions, and those related to the inadequate administration of over-indebtedness risk, as well as other contingencies, in accordance with the norms issued by the Superintendency."

8. The following is incorporated into the Dynamics of accounts 4301, 4302, 4303, 4304, and 4305, in the Debits section:

• For the constitution of provisions for over-indebtedness risk.

II. Chapter V "Complementary Information" of the Accounting Manual for Companies of the Financial System is modified, as follows:

1. The methodological notes of Annex No. 5 "Debtor Classification and Provisions Report" and its complementary annexes are modified, in the following terms:

a. The first and second paragraphs of note 2 of Annex No. 5 are substituted, according to the following:
"Indicate the amount of credits, contingent liabilities, and financial leases of the company's portfolio according to the corresponding classification of the debtor. Without prejudice to the distribution of credits, contingent liabilities, and financial leases carried out in items C to J of Section I, the classification of the debtor is unique. In case the debtor's liability with the same company includes credits of various types, companies must process this information previously so that the classification of the debtor is based on the classification of the credit that presents the highest risk category, without considering those credits (operations) of consumption or SMEs that the debtor maintains with a balance less than S/. 100. For example, a debtor who has in the same company an SME credit for an amount of S/. 99 classified as Deficient and a mortgage credit for an amount of S/. 1000 classified as Normal, will be considered as a Normal debtor, both for the amount of the SME credit and for the amount of the mortgage credit. This process of consolidation of information must be available to this Superintendency."

b. The second paragraph of note 33 of Annex No. 5 is substituted, according to the following text:
"Additionally, the report of provisions for direct credits shall not include the additional generic provisions related to the inadequate administration of over-indebtedness risk in accordance with the Regulation for the Administration of Over-indebtedness Risk for Retail Debtors, nor the provisions for foreign exchange credit risk in accordance with the Regulation for the Administration of Foreign Exchange Credit Risk. Likewise, indirect credits (contingent credits) shall not include those made for the equivalent exposure to credit risk of unused revolving credit lines, related to the inadequate administration of over-indebtedness risk, in accordance with the Regulation for the Administration of Over-indebtedness Risk for Retail Debtors."

c. The first paragraph of note 1 of Annex No. 5-C is substituted, according to the following:
"Indicate the amount of credits, contingent liabilities, and financial leases transferred in trust according to the corresponding classification of the debtor. Without prejudice to the distribution of credits, contingent liabilities, and financial leases carried out in items C to I of Annex 5-C, the classification of the debtor is unique. In case the debtor's liability with the same company includes credits of various types, companies must process this information previously so that the classification of the debtor is based on the classification of the credit that presents the highest risk category, without considering those credits (operations) of consumption or SMEs that the debtor maintains with a balance less than S/. 100.00."

2. Annex A "Risk-Weighted Assets and Contingent Credits" of Report No. 2 of the Accounting Manual is modified, as indicated below:

a) Item 9 of item I Assets with 0%- Risk Factor 0.0 is incorporated, as follows:
Less: Provisions for over-indebtedness risk
Corresponding to the provisions related to the inadequate administration of over-indebtedness risk, registered in accounts 1409.02.06 and 1409.03.06, as well as in account 2701.01.01, for credits belonging to this category.

b) Item 2 of item II Credit Assets with 10%- Risk Factor 0.1 is incorporated, as follows:
Less: Provisions for over-indebtedness risk
Corresponding to the provisions related to the inadequate administration of over-indebtedness risk, registered in accounts 1409.02.06 and 1409.03.06, as well as in account 2701.01.01, for credits belonging to this category.

c) Item 8 of item III Credit Assets with 20%- Risk Factor 0.2 is incorporated, as follows:
Less: Provisions for over-indebtedness risk
Corresponding to the provisions related to the inadequate administration of over-indebtedness risk, registered in accounts 1409.02.06 and 1409.03.06, as well as in account 2701.01.01, for credits belonging to this category.

d) Item 9 of item IV Credit Assets with 50%- Risk Factor 0.5 is incorporated, as follows:
Less: Provisions for over-indebtedness risk
Corresponding to the provisions related to the inadequate administration of over-indebtedness risk, registered in accounts 1409.02.06 and 1409.03.06, as well as in account 2701.01.01, for credits belonging to this category.

e) Item 15 of item V Credit Assets with 100% Risk is incorporated, as follows:
Less: Provisions for over-indebtedness risk
Corresponding to the provisions related to the inadequate administration of over-indebtedness risk, registered in accounts 1409.02.06 and 1409.03.06, as well as in account 2701.01.01, for credits belonging to this category.