With the expedition of “Circular 026 of 2017”, from the Financial Superintendence it launches relief and creates alternatives for debtors, allowing them to adjust to the actual economic cycle.
The economic situation has caused that the income of many companies, especially SMEs and natural persons, have contracted or slighted just as the growth rate has done.
For that reason, several companies and individuals have begun to fail paying their financial obligations, which has been reflected in the growth of the delinquent portfolio, particularly credit card, consumption, and slightly less in microcredit.
When a debtor goes into default it does not mean he is insolvent in order to meet its obligations, with the reduction of the growth in the economy what has happened is that the companies continue to generate cash, but in smaller proportions than before, so does the natural person, whose income was affected by the increase of VAT to 19%, lower real wages and, in the case of independents, less income from fees and services.
Both situations do not mean total inability to pay, it means that in many cases the cash generated, or disposable income, is insufficient to meet the payments and interests under the current conditions, which were agreed when the economy had other perspectives and business and income as well.
The aforementioned “Circular 026” of the Superfinanciera is a very good news and comes in a good moment for users of the financial system and for financial institutions.
For the users of the system with outstanding obligations and who are having difficulties to pay their obligations or are already in debt warning with less than 90 days, gives them the possibility of approaching their financial institution and renegotiate the conditions of each obligation for a single time. These conditions include terms, interest, and form of amortization (monthly, quarterly, semi-annual). The objective is to allow companies and individuals to adjust the payment of interest and amortization of their obligations to the new cycle that the economy is having, without affecting its risk rating and financial access.
Other advantages are, the renegotiation of the obligations does not imply a change in the risk rating in the plants and the new conditions that are defined will not be considered as a restructuring, so the adjusting of obligations to the cycle of business or income does not entail a decrease or negative effect on the risk profile of the clients, it tries to adjust to the new reality of the economy.
Financial institutions also benefit from this new regulation. On the one hand, the Superintendencia allows them to have greater flexibility in the management of the credit risk of the obligations that are already in default, as long as it is less than 90 days, if they make an adequate arrangement with the clients that are in those situations, will avoid having to generate provisions on their assets, which in practice means increased spending and contracting of profits.
For example, in the case of the credit card portfolio, (where the bad debt has increased) if there is a delay of more than 60 days, the entity has to generate a provision of one hundred percent of the balance to capital, which means an expense and a decrease in the value of assets. However, under the new circular you can renegotiate the conditions with that debtor so that it is updated and thus dismantling the provision, that decreases the expense, recovers the value of the assets, and effectively increases the profitability on that obligation.
On the other hand, it allows financial institutions to retain their clients with a good rating, preventing those with a good payment history from losing their rating and institutions are limited to portfolio placement in a limited segment of clients. In addition, it gives them the advantage of mitigating the effects of the slowdown in their business, avoiding that they have to adjust their liquidity and solvency indexes, with the negative effects on profitability.
And best of all, reduce the odious downgrades that need to be done when a credit is ominous and you end up arranging with the debtor for a fraction of the capital after you have charged the provision for a long time.
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