These amendments strengthen the regulatory framework on risk diversification by establishing maximum financing limits applicable to Clients (“Clients”) (both individuals and legal entities) of Popular Financial Companies (for its acronym in Spanish “Sofipos”), with the purpose of promoting a more safe and sound management of financial risk.
Key Points of the Reform
1. For the purpose of diversifying risks in their operations, Sofipo’s may grant financing subject to the following limits:
(i) In the case of individuals, the aggregate amount of financing granted to a Client or to a group of individuals forming part of the same common risk (“Common Risk”) may not exceed 10% of the Sofipo’s net capital;
(ii) In the case of legal entities, the aggregate amount of financing granted to a Client, to a group of Clients or to a group of individuals forming part of the same Common Risk may not exceed 15% of the Sofipo’s net capital; and
(iii) In the case of other Sofipos, the amount of any liquidity loan or group of liquidity loans outstanding from a lending Sofipo may not exceed 10% of its net capital.
2. Common Risk is determined by consolidating the financing granted to the borrower together with that of the individuals related to such borrower, which vary depending on the type of debtor, according to the following:
(i) In the case of individuals, it comprises first-degree relatives, spouse, common-law partner, as well as economic dependents;
(ii) In the case of legal entities, it includes shareholders holding more than 50% of the voting rights, companies within the same corporate group, board of directors, the chief executive officer or general manager, as well as the relatives and economic dependents of such individuals; and
(iii) In the case of Sofipos, it comprises shareholders holding more than 5% of the voting rights, members of the board of directors, and the chief executive officer or general manager.
Conclusions
1. The main purpose of these reforms is to prevent Sofipos and other entities from facing insolvency or from concentrating an excessive percentage of their portfolio in a single debtor, whether directly or indirectly.
2. Consequently, such entities must assess their debtors by taking into account the group to which they belong in order to ensure risk diversification when granting loans.
Practical Recommendations
1. Conduct in consolidated basis an analysis of the loans to be granted to individuals who may be related, in order to ensure that the portfolio remains diversified within the permitted limits established by the applicable regulations.
2. Clearly and thoroughly document that the analysis of each borrower was conducted considering the group to which such borrower belongs and that, based on such analysis, the corresponding risk level was duly allocated, thereby preventing any violation to these reforms.
