Technical Standards on the Granting of Credits to Persons Related to Banks, Investment Banks, and Savings and Credit Societies

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-06/2024 NRP-74

TECHNICAL STANDARDS ON THE GRANTING OF CREDITS TO PERSONS RELATED TO BANKS, INVESTMENT BANKS, AND SAVINGS AND CREDIT SOCIETIES

Approval: 15/08/2024
Validity: 30/08/2024

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

CONSIDERING:

I. That Article 203 of the Banks Law establishes that banks, as well as their subsidiaries, shall not have in their portfolio credits, guarantees, and sureties granted to natural or legal persons directly related to the administration or directly or indirectly to the ownership of the respective institution, nor acquire securities issued by them in a global amount exceeding five percent (5%) of the paid-in capital and capital reserves of said institution.

II. That Articles 204, 205, and 206 of the Banks Law establish aspects regarding persons and operations related to Banks, as well as the presumption of related operations, directly with the administration or directly or indirectly with the ownership of the banks.

III. That Articles 155 and 161 of the Cooperative Banks and Savings and Credit Societies Law establish that savings and credit societies shall be subject to the provisions of the Banks Law insofar as they are pertinent.

IV. That Articles 19, 20, 21, and 22 of the Investment Banks Law establish aspects regarding persons and operations related to Investment Banks, regarding the presumption of related operations, directly with the administration or directly or indirectly with the ownership of said Investment Banks; as well as, that Investment Banks and their subsidiaries shall not have in their portfolio credits, guarantees, and sureties granted to natural or legal persons directly related to the administration or directly or indirectly to the ownership of the respective institution, nor acquire securities issued by these in a global amount exceeding five percent (5%) of the paid-in capital and capital reserves of said institution. (1)

V. That Article 3, literal c) of the Law on Supervision and Regulation of the Financial System, assigns to the Superintendence of the Financial System the monitoring of the preventive 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. (1)

VI. That Article 7 of the Law on Supervision and Regulation of the Financial System establishes the entities subject to the supervision of the Superintendence of the Financial System. (1)

VII. That Article 99, literal a) of the Law on Supervision and Regulation of the Financial System, stipulates that it shall be the responsibility of the Standards Committee 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. (1)

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 ON THE GRANTING OF CREDITS TO PERSONS RELATED TO BANKS, INVESTMENT BANKS, AND SAVINGS AND CREDIT SOCIETIES (1)

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to provide the minimum guidelines that the corresponding entities must observe regarding aspects related to the granting of credits to persons related directly to the administration or directly or indirectly to the ownership thereof.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Standards are:
a) Banks constituted in El Salvador, and subsidiaries that banks constitute abroad; b) Branches of foreign banks established in the country; c) The Mortgage Bank of El Salvador, S.A.; d) The Agricultural Development Bank, insofar as it does not contradict its creation law or what is established by the Court of Accounts; e) The subsidiaries and joint investment societies of banks constituted in El Salvador; (1) f) Savings and Credit Societies; and (1) g) Investment Banks and their subsidiaries. (1)

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Bank, Investment Bank, and subsidiary shares: When reference is made to the shares or investments of the bank, Investment Bank, or other societies, the subscribed common shares shall be considered; (1) b) Central Bank: Central Reserve Bank of El Salvador; c) Entity: Subject obliged to comply with the provisions established in these Standards; d) Manager: All persons who, based on the entity's organizational scheme, can be attributed the quality of factor, according to the rules established in Articles 271 and 365 of the Commercial Code.

The quality of Manager shall also be attributed to representatives and executives with an equivalent position of foreign bank branches, inspectors of banks appointed by the Superintendence, and inspectors appointed by banks in debtor entities of these; e) Kinship: Family relationship that exists between two or more persons, which can be by blood, affinity, or adoption; f) Board of Directors: Collegiate body or equivalent body in charge of the administration of the entity, with functions of supervision, direction, and control; g) Repealed; (1) h) Related persons: Those who have the capacity to influence credit granting decisions or who have a conflict of interest when making those decisions. The relationship or link can be through participation in the administration of the entity or through share ownership in the same. The link is indirect when it is held through an intermediary person, such person shall always be of a legal nature; and (1) i) Superintendence: Superintendence of the Financial System.

CHAPTER II
RELATED PERSONS

Direct relationship by ownership
Art. 4.- When the natural person shareholder is mentioned in these Standards, it shall be the holder of at least three percent (3%) of the common shares, and those of their spouse, their relatives in the first degree of consanguinity, and the proportional share they correspond to in shareholder societies of the entity shall be considered their own. In the case of Investment Banks, the aforementioned percentage shall be at least twenty percent (20%). (1) The legal persons mentioned as related shareholders are those holding at least three percent (3%) of the common shares of the entity; in this case, the shares of the holding society shall be added to the proportional share they correspond to in shareholder societies of the entity. In the case of Investment Banks, the aforementioned percentage shall be at least twenty percent (20%). (1)

Indirect relationship by ownership
Art. 5.- Persons indirectly related by ownership to an entity are those who are direct or indirect holders of the shares of another that has the character of related to the entity, when the indirect participation is at least three percent (3%) of the shares of the entity and, in the case of Investment Banks, the participation percentage shall be at least twenty percent (20%). The percentage of indirect shareholding shall be determined by establishing the proportionality corresponding to the persons who are shareholders of the society linked directly to the entity in question. (1) When dealing with natural person shareholders, those of the spouses and relatives in the first degree of consanguinity shall be considered as belonging to the same person.

Direct relationship by administration
Art. 6.- Persons directly related by administration to the entity are the directors and managers of such entity.

Related Societies
Art. 7.- Societies referred to in literals a), b), c), and d) of the second paragraph of Article 204 of the Banks Law, and those referred to in literals a), b), c), and d) of the second paragraph of Article 19 of the Investment Banks Law, have the character of related persons, in accordance with the entity to which it is applicable. For the calculation of the percentages referred to in the aforementioned literals, the patrimonial participations of the group formed by the shareholder, director, or manager, those of their spouse and relatives within the first degree of consanguinity, and the proportional share corresponding to the aforementioned subjects when they have social participation in societies that directly or indirectly are shareholders of the entity, shall be considered as belonging to the same person. (1)

On classes and degrees of kinship
Art. 8.- For the purposes of the provisions established in these Standards, the following classes and degrees of kinship are determined:
a) Classes of kinship:
i. Consanguinity: Occurs when the bond uniting persons is of blood, that is, existing between persons who descend from one another, or from a common ancestor. When the line of persons is ascending from the other, consanguinity is in a direct line; and when both persons proceed from a common ancestor, and one of them is not an ancestor of the other, consanguinity is in a collateral or transverse line;
ii. Affinity: Is the kinship that exists between a person and the blood relatives of their spouse or partner. The line of affinity is qualified by the line of consanguinity of the spouses or partners; and
iii. Adoption: Is the kinship that originates, between the adopted, the adopters, and the relatives of these, with the same effects as consanguineous kinship.
b) Degrees of kinship:
i. The degree of kinship by consanguinity is determined by the number of generations, as follows:

1. First degree of consanguinity is the kinship between father and child; and
2. Second degree of consanguinity is that which exists between grandparent and grandchild, and between siblings.
   ii. The degree of affinity is determined by that of the blood relatives of the spouses or partners, as follows:
3. First degree of affinity is that which exists between the spouse, parents-in-law, son-in-law, daughter-in-law, and stepfathers and stepchildren; and (1)
4. Second degree of affinity is that which exists between brothers-in-law.
   iii. In the case of degrees of kinship by adoption, the same effects are established as for consanguineous kinship.

On excepted persons
Art. 9.- The following shall not be considered related persons to an entity:
a) Subsidiaries and offices constituted abroad; b) Salvadoran subsidiaries and joint investment entities, in which entities and subsidiaries have investments; c) Societies that are part of the same financial conglomerate; and d) Autonomous state institutions or companies.

CHAPTER III
CREDIT LIMITS AND CREDITS CONSIDERED FOR THE CALCULATION OF LIMITS

Limit of related credits
Art. 10.- The limit of credits to related persons and of credits considered related, shall not exceed five percent (5%) of the paid-in capital and capital reserves of the entity.

Definition of Credit
Art. 11.- For the purposes of these Standards, credits are considered to be loans, promises to deliver money or pay on behalf of another person, contingent obligations incurred on behalf of the entity's clients, and any transaction that represents credit risk for the entity, whether directly or indirectly. Some of the modalities of these credits are as follows:
a) Loan balances; b) Availability of overdrafts documented with contract and balance of uncontracted overdrafts; c) Discounted documents; d) Sureties, bonds, and guarantees; e) Opening of letters of credit, for import and export, net of prior deposit and prepayment; f) Balances from factoring operations; g) Investments in bonds and obligations issued by the credit subject; h) Investments in repo operations outside the stock exchange; in this case, the repo party shall be considered the debtor; (1) i) Advances that the entity delivers to related persons for the acquisition of goods or for the contracting of services; and j) Any other obligations that have the character of financing or credit.

Credits to related persons
Art. 12.- For the purposes of calculating the limit of related credits established in the first paragraph of Article 203 of the Banks Law and in the first paragraph of Article 22 of the Investment Banks Law, credits to related persons must be considered, determined according to Chapter II of these Standards. (1)

Credits related by presumption
Art. 13.- The limit of related credits includes those established by the Superintendence in the presumption resolution, when it deems that any of the conditions indicated in Article 206 of the Banks Law and Article 21 of the Investment Banks Law are met, or when for other causes not expressed in the examples of said articles, from known facts, it deduces that the credit has been granted by influence of related persons or for their benefit. (1)

Credits to spouses and relatives
Art. 14.- The limit of related credits includes guarantees and sureties granted to spouses and relatives up to the second degree of consanguinity and first degree of affinity of related shareholders, directors, managers, and shareholders who are in the situation established in literal d) of Article 204 of the Banks Law and literal d) of Article 19 of the Investment Banks Law, all mentioned of the bank, as established in the first paragraph of Article 205 of the Banks Law and those mentioned of the Investment Bank, as established in the first paragraph of Article 20 of the Investment Banks Law. (1)

Credits for the acquisition of goods
Art. 15.- Credits granted for the acquisition of goods of related shareholders, directors, or managers of the entity form part of related credits.

Indirect credits
Art. 16.- Also included in the global computation of the aforementioned credits are indirect liabilities, when one of the contracting parties is not a related subject.
For the purposes of these Standards, indirect liabilities shall be understood as obligations that affect persons who, without being the beneficiaries of the credit, have undertaken the responsibility to respond with their assets for the fulfillment of the obligation, as is the case of guarantors, joint debtors, acceptors, drawers, and sureties of bills of exchange, and generally when the acquired obligation implies a responsibility for one of the parties, even if it is not a related subject. For the computation of each of the obligations mentioned in the previous articles, the value of accessories such as: interest, commissions, surcharges, etc., including those accounted for in off-balance sheet accounts, shall be added to each of the obligations.

Excepted credits
Art. 17.- The following direct and indirect liabilities shall not be computed within the global credit limit mentioned above:
a) Credits fully guaranteed with money deposits; when the guarantee covers in its entirety the principal plus accrued interest, regardless of whether they are part of the assets or off-balance sheet accounts. In the case of Investment Banks, credits fully guaranteed with legal tender and other easily liquidated assets shall not be considered related operations; (1) b) Indirect liabilities incurred by persons related to the entity to respond for direct credits granted to persons also related to the entity, in the case where such obligations are computed for the Global Limit; c) Those granted to directors or managers of the entity and their spouses and relatives up to the second degree of consanguinity and first degree of affinity, before they assume such positions. Except that such credits are refinanced, reprogrammed, or modified for the benefit of their debtors; and d) Those granted to related shareholders, their spouse, and their relatives up to the second degree of consanguinity and first degree of affinity, before the shareholder had such quality. Except that such credits are refinanced, reprogrammed, or modified for the benefit of their debtors.

Limit of credits to national subsidiaries
Art. 18.- The sum of credits granted by the entity to national subsidiaries plus the patrimonial participation in them, at no time shall exceed fifty percent (50%) of the value of the entity's patrimonial fund or ten percent (10%) of its loan portfolio, whichever of the two values is lower.

Limit of credits to joint investment societies Art. 19.- The sum of credits granted by the entity to joint investment societies plus the patrimonial participation in them, at no time shall exceed twenty-five percent (25%) of the entity's patrimonial fund.

Limit of credits to foreign subsidiaries
Art. 20.- The sum of credits granted by the entity to foreign subsidiaries plus the patrimonial participation in them, at no time shall exceed fifty percent (50%) of the entity's patrimonial fund or ten percent (10%) of its loan portfolio, whichever of the two values is lower.

Conditions of related credits
Art. 21.- The credits referred to in this chapter shall not be granted on terms more favorable, regarding terms, interest rates, or guarantees, than those granted to third parties in similar operations, excepting from these those granted to managers under similar conditions to the rest of the personnel of the entity in question.

CHAPTER IV
OTHER PROVISIONS AND VALIDITY

Credits related by presumption
Art. 22.- In cases where the Superintendence determines the legal presumption of the existence of related credits referred to in Article 206 of the Banks Law and Article 21 of the Investment Banks Law, the following procedure shall be followed:
(1) a) The Superintendence shall communicate a duly motivated resolution to the entity in question, in order that within a term not exceeding five business days counted from the day following the date of notification, the entity presents its defense arguments; b) In the case that the entity does not present the necessary arguments within the indicated period or if they are not satisfactory to the Superintendence, it shall resolve that the credit is related, within a period of thirty days, counted from the next business day after the deadline granted to present defense arguments; c) If the Superintendence's resolution determines that the credit is related, and thereby exceeds the limit established in Article 203 of the Banks Law, or Article 22 of the Investment Banks Law, as applicable, the entity shall have thirty days counted from the day following the notification, to eliminate the excess; and (1) d) In the event that the entity does not eliminate the aforementioned excess, it must constitute a restructuring reserve for that value and the Superintendence shall impose the corresponding sanction.

Prohibited credits
Art. 23.- Entities are prohibited from granting credits to persons related to an entity, when it is intended for the development or alienation under any title of real estate, with the exception of those granted to directors and managers for the acquisition of housing intended for their own use.

Note to Financial Statements
Art. 24.- External auditors, when issuing their report on the financial statements of the entities, shall indicate in a separate note the set of related credits, in