Technical Standards for the Evaluation and Classification of Credits Granted by Development Banking

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

THE COMMITTEE OF STANDARDS OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That in accordance with Article 3, letter c) of the Law on Supervision and Regulation of the Financial System, it is the responsibility of the Superintendence of the Financial System to proactively monitor the risks of the members of the financial system and the manner in which they manage them, ensuring the prudent maintenance of their solvency and liquidity.

II. That Article 7, letter n) of the Law on Supervision and Regulation of the Financial System, establishes that the Development Bank of the Republic of El Salvador, formerly the Development Bank of El Salvador and formerly the Multisectorial Investment Bank, is a member of the financial system.

III. That in accordance with Article 35, letter d) of the Law on Supervision and Regulation of the Financial System, the directors, managers, and other officials holding positions of direction or administration of the members of the financial system, must conduct their business, acts, and operations complying with the highest ethical standards of conduct, acting with the due diligence of a good merchant in their own business, being obligated to comply with and ensure that in the entity they direct or work for, the adoption and updating of policies and mechanisms for risk management are fulfilled, including among other actions, identifying, evaluating, mitigating, and disclosing them in accordance with international best practices.

IV. That Article 99, letter a) of the Law on Supervision and Regulation of the Financial System, stipulates that it will be the responsibility of the Committee of Standards to approve technical standards, instructions, and provisions that the laws regulating the supervised entities establish must be issued to facilitate their application, including aspects inherent to risk management by the supervised entities.

V. That by Legislative Decree No. 847, dated September 22, 2011, published in the Official Journal No. 197, Volume No. 393, of October 21 of the same year, the Law on the Financial System for Development Promotion was issued.

VI. That by Legislative Decree No. 653, dated June 4, 2020, published in the Official Journal No. 117, Volume No. 427, of June 9 of the same year, the Law on the Financial System for Development Promotion was reformed, changing its name to the Law on the Development Bank of the Republic of El Salvador, among others.

VII. That Article 34 of Legislative Decree No. 653 dated June 4, 2020, establishes that the Central Reserve Bank of El Salvador through its Committee

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

of Standards will issue the necessary technical regulation for the application of said Law, which must be carried out taking into account the nature of the Development Bank of the Republic of El Salvador.

VIII. That one of the objectives of Development Banking is to facilitate access to financing that contributes to promoting the development of productive sectors, in accordance with public sectoral policies, of micro, small, and medium-sized enterprises, job generation, and consequently the economic and social development of the country.

THEREFORE,

by virtue of the regulatory powers conferred by Article 99 of the Law on Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR THE EVALUATION AND CLASSIFICATION OF CREDITS GRANTED BY DEVELOPMENT BANKING

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to regulate the evaluation and classification of risk assets, according to the quality of the debtors, especially their behavior and payment capacity, and to require the establishment of minimum health reserves for the respective credits.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Standards are the entities that carry out development banking operations and that by Law are under the supervision of the Superintendence of the Financial System, and where applicable, insofar as it does not contradict their creation law and what is provided by the Court of Accounts.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Risk Assets: are credits for productive purposes granted directly or indirectly, guarantees, sureties, discounted documents, bonds, and other debt securities acquired, and any form of direct or indirect financing or other operation that represents an obligation for the entity;

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

b) Development Banking: banks or financial institutions that support economic and social development, channeling resources mainly in the medium and long term, assigning resources to public and private banking in lines of financing and guarantee to productive sectors, especially to sectors of the economy traditionally excluded or neglected by commercial banking, including access to education and business training; and that within their funding mechanisms does not include the capture of deposits; c) Central Bank: Central Reserve Bank of El Salvador; d) Low-amount credit: refers to credit applications submitted by Salvadoran natural persons, destined for productive activities, up to ten minimum wages of the commerce and service sector; e) Credits: in the text of these Standards, it shall be understood as credit risk assets; f) Entity: subjects referred to in Article 2 of these Standards; g) Board of Directors: collegiate body in charge of administration, with functions of supervision, direction, and control of the entity; h) LEFAC: Special Law to Facilitate Access to Credit; and i) Superintendence: Superintendence of the Financial System.

CHAPTER II
RESPONSIBILITIES OF THE BOARD OF DIRECTORS

Art. 4.- The Board of Directors of the entity shall be responsible for ensuring compliance with these Standards; authorizing internal policies for credit granting and the establishment of sufficient internal controls to guarantee their compliance. The aforementioned policies must include at least the elements indicated in Annex No. 1 of these Standards and must be communicated to the Superintendence within a period not exceeding ten business days after approval.

For the case of entities that carry out indirect credit operations, they must define in their internal policy the evaluation and classification of the institutions through which they will carry out said operations.

Likewise, entities must establish in their internal credit granting policies, expedited origination mechanisms, based on the simplification of requirements and procedures, for credits destined for productive activities referred to in the LEFAC.

Each entity will define in its internal policies what it will understand as productive activities, taking into consideration what is established in Article 2, letter d) of the LEFAC.

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

CHAPTER III
GROUPING, EVALUATION, AND CLASSIFICATION OF CREDIT RISK ASSETS

Art. 5.- For the purposes of evaluating and classifying credit risk assets, they will be grouped by sector and company size in accordance with what is established in Annex No. 5 of these Standards.

Art. 6.- Entities must have 100% of their credit risk assets properly classified at all times.

To determine the classification of a debtor, each entity will gather all credit operations contracted by the debtor with said entity, so that the risk category assigned to it is the one corresponding to the credit with the highest risk of recovery.

The Superintendence may require that the entity assign a debtor the category of another debtor, when there are well-founded criteria that make it presumable that between both debtors there are ownership, administration, or business linkages.

Evaluation and classification of credits
Art. 7.- The evaluation and classification of credits for companies in the categories defined in Article 16 of these Standards, each entity will do so in accordance with the content of the Annexes of these Standards. It is a matter of technically evaluating the quality of each debtor as a credit subject, especially their behavior and payment capacity, determining the percentage of the credit that is presumed could be lost or not recovered considering the debtor's background.

The evaluation and classification of the credits referred to in the LEFAC, will be carried out in accordance with the content of the Annexes of these Standards and the information requirements established in the LEFAC.

For the evaluation and classification of low-amount credits referred to in the LEFAC, each entity will consider what is established regarding the days of delinquency corresponding to company credits established in Annex No. 3 of these Standards.

Art. 8.- Each entity must evaluate its fifty largest debtors from its credits on a monthly basis. The rest of the credit debtors must be evaluated according to the periodicity established in their own policies, which must not be greater than one year; however, notwithstanding the above, it must evaluate and reclassify debtors or groups of debtors at the moment when, through respective monitoring, deterioration in the payment capacity and financial conditions of the debtor is determined.

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

Art. 9.- A file must be opened for each debtor containing all legal and financial documents related to the application, analysis, approval, and monitoring according to the following:
a) For credits whose balance is less than three hundred fifty thousand dollars (US$350,000.00), it must be established in their policies what documentation will be required for the granting of credits, as well as for the respective evaluation, which will be subject to review by the Superintendence; and b) For credits whose balance is greater than or equal to three hundred fifty thousand dollars (US$350,000.00), the information detailed in Annex No. 2 of these Standards will be required as a minimum, as well as compliance with the respective policies.

What is provided in this article will apply to credits granted for productive activities referred to in the LEFAC, considering for such credits the information requirements established in said Law. The aforementioned credits must be adequately identified.

Art. 10.- In operations with periodic amortization installments, the date of the first maturity for the purposes of classifying the operations will be the one corresponding to the oldest installment of which, at the date of evaluation, any amount remains unpaid for principal or interest.

Treatment of guarantees
Art. 11.- For the purposes of the requirement of health reserves, the risk of a debtor will be determined by subtracting from the total balance of obligations, the value of the guarantees that back them and that correspond to those detailed in Articles 12 to 14 of these Standards; in addition, the criteria for accepting guarantees must be in accordance with the policies approved by their Board of Directors and the minimum valuation practices through the corresponding norms.

In cases where the same guarantee backs the granting of one or more credits to different debtors, the value to be considered for said guarantee, for the purpose of establishing health reserves, will be proportional to the outstanding balances of the credits granted to the debtor.

Art. 12.- For the purposes of the previous article, the following guarantees will be considered:

Table No. 1
TYPE OF GUARANTEE Percentage to consider
Cash deposits 100%
Monetary deposit certificates duly pledged and that have been opened in local banks or in banks first-line foreign or in non-bank financial intermediaries supervised by the Superintendence.
100%
Sureties and Guarantees from local banks or first-line foreign banks. 100% Sureties and Guarantees from guarantee funds administered by the Development Bank of the Republic of El Salvador.
100%
Pledges on fixed income securities, issued in the country or abroad, with a high degree of liquidity and that have an international classification of "investment grade". 100% Trust Guarantee where the Trustee is the Development Bank of the Republic of El Salvador, prior notification to the Superintendence. 100% Pledge bonds issued by General Warehouses of Deposits supervised by the Superintendence. 70% First mortgages on real estate, duly registered; however, for those guarantees with preventive annotation and sufficient documentation for registration, a maximum period of six months is granted to conclude the registration process, from the date of granting the guarantee.

Categories Ranges Percentage to consider
From A2 to C2 70%
D1 and D2 60%
E 1/ 50%
Note 1/ Includes categories E1, E2 and E3 that apply for debtors in Own Account or self-employment; Micro and Small enterprise.

Art. 13.- Mortgage guarantees must comply with what is established in the respective current regulation, including their valuation.

Movable guarantees
Art. 14.- In the case of movable guarantees, the percentage to be considered in the calculation of the health reserves referred to in Article 11 of these Standards, cannot be greater than 50% of their value. To consider the aforementioned guarantees, they must comply at least with the following:
a) That the guarantee to be received is on movable goods given in pledge without displacement, such as machinery and agricultural equipment; b) That the values of the goods given as collateral are supported by ownership documents; c) That the guarantee is valued annually; and d) That adequate maintenance is given so that said guarantees maintain the same conditions in which they are received in pledge.

Art. 15.- Due to the fact that one of the characteristics of development banking is to contribute to correcting market failures, the level of credit concentration by sector could vary, including its risk profile, which requires special treatment for debtors in Own Account or self-employment; Micro and Small enterprise, as well as the definition of the prudential delinquency index for this size of enterprise. Which will be established in the entity's internal policy, considering that this indicator reveals the level of risk of the entities to recover a credit.

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

CHAPTER IV
ESTABLISHMENT OF HEALTH RESERVES

Risk Categories and Reserve Percentages
Art. 16.- Each entity must establish minimum health reserves for its credit risk assets, subtracting from the balance of each debtor the value of the guarantees that back them established in Articles 11 to 14 of these Standards, classifying said debtors and applying them reserve percentages in accordance with the following detail:

Table No. 2
Risk Categories and Reserve Percentages
Category % of reserves Medium and Large category % of reserves Own account or self-employment; Micro and Small enterprise A1 0% A1 0% A2 0% A2 0% B 5% B 0% C1 10% C1 5% C2 20% C2 10% D1 40% D1 20% D2 60% D2 30% E 100% E1 40% E2 60% E3 100%

The percentages established in Table No. 2 above do not limit that the entity may voluntarily establish health reserves.

Restructurings and refinancings of debts
Art. 17.- Extension shall be understood as the prolongation of the payment term of an obligation, without issuing a new contractual document and without any change in the credit reference.

Restructured credit shall be understood as the modification in the amortization conditions of the original credit, possibly including modification of the term, without issuing a new document and without any change in the credit reference.

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

Credits that have been extended, reprogrammed, or that have been the subject of any other legal or financial arrangement that modifies the originally agreed conditions, will be called restructured credits.

The above concepts are exempt from those modifications that due to macroeconomic conditions and not due to problems attributable to the debtor, the entity adjusts the interest rate. As a consequence of the above, the entity may modify the credit term to maintain the installment amount.

Art. 18.- Refinanced credit shall be understood as a credit granted that cancels total or partially other credits with delinquency or payment capacity problems and that change the conditions of the previous credits.

Credits destined for agricultural purposes whose originally agreed conditions are modified by exogenous conjunctural factors to the debtor that affect said sector in a systemic manner, such as climatic conditions, among others, in accordance with what is established in their internal policy, may maintain their risk category, during the period that such conjuncture lasts.

Art. 19.- Debtors whose original credits are restructured or refinanced, will retain their risk category in accordance with the criteria defined in Annex No. 1 of these Standards, provided that the debtor satisfies by its own means, before the restructuring or refinancing, the total of the interest owed at the date of the transaction, without these last being the product of new financing, direct or indirect.

Debtors with restructured or refinanced credits that do not meet the previous condition will be classified in category C2 or a higher risk category, in accordance with the symptoms they present.

Debtors of the corporate sector are exempt from the provisions established in the previous paragraphs of this article, who must be classified according to the risk category corresponding to the symptoms they present at the time of refinancing or restructuring, established in Annex No. 3 of these Standards.

If the restructured or refinanced operation that does not meet the payment of the total interest owed continues with delays in the payment of the established installments, for reasons of prudent and sound risk evaluation practice, it will be classified as D1 or a higher risk category, in accordance with the symptoms whenever the following occurs:

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

a) Six months have not elapsed from the new agreed term, for credits destined for investment, and three months from the new agreed term for credits destined for working capital; or, b) Six months have not elapsed from the new agreed term in credits for housing or consumption.

Likewise, for qualification purposes, in the file of these debtors, the accumulated delinquency of said credits must be recorded, at the date the restructuring or refinancing is carried out.

Credits that due to exogenous conjunctural factors to the debtor and that affect their payment behavior in a systemic manner, such as climatic conditions, and are restructured or refinanced, it will not be a necessary condition that the debtor satisfies by its own means, before the restructuring or refinancing, the interest owed at the date of the transaction, in accordance with what is established in their internal policy.

Reclassification of restructured or refinanced credits Art. 20.- Debtors with credits that have been restructured or refinanced may be reclassified to a lower risk category if they meet the conditions of said category and additionally the following:
a) Evidence a regular service of their debts of at least six months of the new agreed term for credits destined for investment, and at least three months of the new agreed term for credits destined for working capital; and b) Cancel at least five percent (5%) of the principal.

"Regular service of their debts" and "normality in their payments" is considered the service of the debt, capital and interest, with a delay not greater than fourteen calendar days for credits for companies.

The above conditions will be required in the first reclassification that is carried out to the risk category that corresponds to the debtor, according to the criteria described in these Standards.

Art. 21.- Debt consolidation shall be understood as credits granted to pay obligations that the cl

NASF-09

CREDITS GRANTED BY DEVELOPMENT BANKING

Approval: 10/12/2020
Validity: 04/01/2021

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