November 1, 2017 / 1:52 PM / in a year

Fitch: Colombia's New Bank Forbearance and Restructured Loans Regulation

(The following statement was released by the rating agency) BOGOTA, November 01 (Fitch) The introduction of a forbearance definition following European standards will minimize losses for impaired loans in Colombia, according to Fitch Ratings. In accordance with those standards, the definition of forbearance focuses on concessions extended to debtors who face, or may face, difficulties in meeting payments. Forborne exposures can be identified in both the non-performing and the performing portfolios. In Fitch's view, the ultimate outcome of the forbearance measures is the repayment of the amount due and not a delaying of the assessment that the exposure is uncollectable, as modifications can only be granted to borrowers that will have the capacity to repay the loan under the new terms. This will require strong discipline in the monitoring process as well as closer surveillance by regulators, including full identification and disclosure of the modified and restructured operations. However, Fitch believes it could be challenging for banks to avoid a reduction in controls and closely monitor all credit deterioration under sub-optimal economic conditions. Changes in the original conditions might help delay the risk of non-payment, but this process does not minimize the risk the client is facing. Colombian regulators will stipulate a process for the forbearance of loans that allows for modifications to initial loan conditions (interest rate, term) when a debtors' payment ability has been affected by the economic cycle or other specific hardships as determined by the bank. This is not considered a restructuring. Banks have to verify whether the modification is viable or not for the customer before granting the forbearance. In Fitch's opinion, the framework is too generous for more risky operations such as microcredit or unsecured retail loans (PDL>60 days). However, it is important to note that the threshold for loan modification will not allow the suspension of accrued interest. With the implementation of this regulation, the Colombian provisioning requirements have not been modified. Currently, banks use a model of expected losses that does not depend exclusively on of the number of days a loan is past due. The regulatory framework already includes countercyclical measures that must be put in place during economic turmoil. As expected by Fitch, asset quality, as measured by past-due loans greater than 90 days, has deteriorated by around 100 basis points in the last 18 months. Nevertheless, this indicator continues to compare favourably with other emerging markets. As measured by the risk evaluation model defined by the regulator, however, asset quality deteriorated significantly, with classified loans (rated in the B, C, D or E categories) reaching 9.5% of gross loans. The loan portfolio categorized in the 'B' rating (acceptable risk) represents 5.7% of total loans and mainly includes, among others, around 500,000 retail loans totalling about COP2 trillion that could be considered for loan modifications. Modifying a loan implies a new assessment of the operation, evaluation of the debtor payment capacity, and a surveillance process that will lead to higher loan impairment charges. Per the local regulator, after loan modifications, the rating of the debtor cannot be better than the rating prior to the modification. As most loans are not likely to present evidence of financial difficulties right after modification, a cure period will be necessary to determine whether the loan has been effectively cured. This cure period is established for both modified and restructured loans. Based on statistics from the Financial Superintendence, modified loans have higher recovery rates of 70% on average versus a rate of 30% for restructured loans. In Fitch's view, it will be necessary for banks to implement adequate internal procedures and reporting to identify and manage potential non-performing clients at a very early stage for the new forbearance rules to be effective. Contact: Sergio Pena Associate Director +57 1 484 6770 Ext 1160 Fitch Rating Colombia S.A. SCV Calle 69A No 9 - 85 Bogota, Colombia Andres Marquez Director +57 1 484 6770 Ext 1220 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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