Use of certain documents as collateral of credits: more flexible requirements

On April 4, 2006 the Central Bank of the Republic of Argentina (“BCRA”) issued Communication “A” 4522 (the “Communication”) which amends the regulations governing the use of trading deferred payment checks, promissory notes, letters of credit and credit bills (jointly, the “Documents”) as collateral of the credits granted by the financial entities.

The Documents are considered by the BCRA as Class “A” Preferred Guarantees, which constitute the first one of the collateral categories (being the other categories the Class “B” Preferred Guarantees and the Non-Preferred Guarantees), since they entitle the financial entities to recover the owed funds from financially capable third parties, with no need to request payment from the debtor.

Combining the kind of collateral and the debtor’s classification in the so called “Registry of Debtors of the Financial System” (“Central de Deudores del Sistema Financiero”, which classifies debtors into 6 categories based on their financial capability), the BCRA sets forth minimum values for provisions to cover the risks of non-performing loans, when such minimum values determined as a percentage of the amount of the credit are granted in each case by the financial entities. As a general rule, the better the collateral and the classification of the debtor, the lower the value of the provision required to the financial entities.

Before the issuance of the Communication the use of a Document as Class “A” Preferred Guarantee depended, among other things, not only on the credit classification of the issuer, but also on the classification of the debtor who offered the Document as collateral. From the combination of both classifications, a portion of the facial value of the Document was recognized as Class “A” Preferred Guarantee. For instance, if the debtor of the financial entity was classified in category 1 or 2 and the issuer of the Document in category 1, 90% was recognized; if the debtor of the financial entity was classified in category 3, 4 or 5 and the issuer of the Document in category 2, a 70% was recognized; and so on.

However, as from the issuance of the Communication, the evaluation has been limited to the classification of the issuer of the Document, regardless of the classification of the debtor requesting the credit. Thus, if such issuer is, for example, classified in category 1, the 100% of the facial value of the Document will be recognized as Class “A” Preferred Guarantee, independently from the classification corresponding to the debtor offering the Document as collateral.

By means of this amendment the BCRA intends to facilitate the granting of new credits, since it focuses the evaluation in the quality of the collateralized Document and allows a more favourable treatment to financial entities in the setting of minimum values for non-performance provisions.

In this sense, the Communication adopts additional measures of flexibility that eliminate the formal requirement of an affidavit of the debtor under certain circumstances, as well as removing certain limits related to the ratio between the financial entity’s net worth (“responsabilidad patrimonial computable”) and the facial value of the Documents received as collateral.

The BCRA informed that with these new measures it intends to reduce financial costs to encourage the channelling of credit towards the financing of productive investments.