Author: | Published: 9 Jul 2001
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Up to the first week in June 2001, economic and financial variables continued to reflect the existing uncertainty as to Argentina's ability to resume growth and service its debt. The $29.5 billion debt swap and the recent measures aimed at fostering exports and domestic consumption have dissipated the risk of default and opened a new perspective as regards Argentina's chances of pulling out of a three-year recession. Market agents expect that these measures will result in an increase in the flow of credit to the private sector. In line with the recent reactivating measures, the Argentine Central Bank has adopted new regulations to reduce the operating costs of the financial system. This report contains a summary of the most significant of such rules.

Relaxation on reserve requirements

On May 24 2001, the Central Bank issued Communication A3274 amending the general reserves requirements, the minimum liquidity requirements and the technical reserve requirements in order to reduce banks' operating costs and facilitate borrowers' access to financing at more convenient interest rates.

Following the 1995 crisis, the Central Bank implemented a strong liquidity policy consisting of setting aside significant reserves of assets so as to discourage massive withdrawal of deposits and other liabilities and to provide the financial system with immediate liquidity, if necessary. During the second 1995 semester, minimum liquidity requirements were established (in lieu of existing reserve requirements, the so-called efectivos mínimos). This liquidity policy became more significant with the passing of legal restrictions (Convertibility Law and Articles of Incorporation of the Central Bank) imposed on the Central Bank to act as last resort lender.

Communication A3274 amended the scheme of liquidity reserves, establishing differential reserve requirements for savings and checking accounts and for time deposits. Demand deposits (savings accounts and checking accounts) have shown to be less sensitive to changes in the risk perception of the financial system and are therefore more stable in times of crisis in comparison with time deposits. It remains to be seen how this amendment will increase the loan capacity of the banks and, ultimately, the liquidity of the financial system.

The main amendments introduced by Communication A3274 are the following:

  • reserve requirements (portion of funds that banks cannot lend) (efectivos mínimos) pertaining to demand deposits must be 15.5% (the previous rate was 18%);
  • reserve requirements pertaining to time deposits are increased to 22%, 15% and 10%, depending on the tranches contemplated in accordance with the residual term. The alternatives for US dollar denominated assets are maintained;
  • such reserves may be composed of cash in accounts at financial institutions, demand deposits accounts at the Central Bank and public bonds of the federal government, within the limits established in each case and in the currency that generated them. This will result in a reduction in operating costs for banks having several branches and offices; and
  • a time schedule is provided to attain full implementation of the reserves requirements depending on the currency in which deposits are made. The purpose of this schedule is to facilitate compliance for financial institutions that are exposed to a dephasing of currencies and to avoid potential non-desired future effects in the financial market. Such a schedule facilitates implementation for foreign banks that hold most of their reserves requirements in US dollars and avoids an increase in interest rates in pesos.

Central Bank adds flexibility to rules on debt refinancing

Communication A3285 of the Central Bank recently approved a set of measures to facilitate local banks refinancing debts of companies in payment arrears. In principle, such a refinancing will be granted to companies earmarked to obtain tax reductions under the so-called "competitivity plans" launched by the government to stimulate economic recovery. The new rules change the present debtor rating scheme and add flexibility to the regulations applicable to the provisions banks are required to make for bad debts. The reforms incorporate the proposals recently made to the Central Bank by the Argentine Association of Public and Private Banks (Asociación de la Banca Pública y Privada) and the Argentine Industrial Chamber (Unión Industrial Argentina).

The proposed measures include the following:

  • a refinancing mechanism for commercial debtors undergoing the so-called status three, four and five for a maximum 10-year term. The debtor may be re-rated according to the amortization percentage of the debt subject to re-rating or the number of months as from refinancing. In terms of debtor rating, a one to six system is used (depending on the level of delinquency), where rating one indicates strong performance and rating six indicates an uncollectable credit. Debtors encompassed under category six are excluded from re-rating;
  • if the refinancing debtor pays 10% of its debt, such a debtor is automatically promoted one category, from five to four. Likewise, if the debtor pays installments during a six-month term such debtor is entitled to the same benefit. Subsequently, the percentage varies from case to case;
  • if, subsequent to such a re-rating (except for those debtors that have been re-rated under normal conditions), a debtor incurs arrears in payment of an installment for more than 62 days, such delinquency will result in the automatic reclassification of the debtor (in the month when arrears actually occurred) to the category under which such debtor was rated the month prior to the refinancing. Debtors who have been reclassified under normal circumstances and who subsequently become delinquent will be subject to the general applicable rules;
  • the new rating criteria will also be applicable to debtors of financial trusts encompassed under Financial Entities Law pursuant to the provisions laid down by the Central Bank (including trusts set up pursuant to Article 35 bis of Financial Entities Law). This will also encompass debtors included within the category "uncollectable debt pursuant to technical specifications" to the extent that the obligations thereof are subject to refinancing under the conditions set forth in Communication A3285. The trustee or administrator must obtain prior authorization from the beneficiaries of the trust or management in order to grant refinancing, to the extent that such approval is mandatory under the terms of the trust agreement or the management rules;
  • Communication A3285 establishes a mechanism for gradual recovery of provisions that financial institutions have to set aside in view of the situation of their debtor. If the debtor falls again in arrears, such debtor will return to its status prior to refinancing. In the case of companies that have qualified for competitive plans, the percentages of additional assistance that banks may provide are automatically increased. To such an extent that banks may apply the regular provision rate even if the debtor qualifies under status three, four and five;
  • in the case of refinancing or new financing to companies that are under competitive plans, banks are entitled to apply a 20% reduction in the requirement as to principal. This is subject to the condition that the loan is granted at a nominal annual interest rate lower than 16%; and
  • debtors eligible under the competitivity plans that comply with the requirements established by the relevant authorities included under category two ("with potential risk" or "inadequate performance", as the case may be) may be immediately re-rated under normal conditions in light of the analysis made by the financial institution. The above, bearing in mind that such plans trigger new conditions for the development of the relevant sector of the economic activities that will enhance the future flow of funds and will enable the regularization of delinquencies, even when additional credit is obtained or an adjustment of the contractual provisions is provided for in light of the new conditions.

New payment mechanism for small and medium companies

The Ministry of Economy has recently announced a new draft bill that would amend the legal regime applicable to a negotiable invoice, the so-called factura de crédito, for the purpose of implementing a new payment mechanism for small and medium companies. The new system (similar to the so-called duplicata in Brazil) would enable to delegate invoice collection to the banks and the use of such document as a credit instrument.

The system would function as follows: (i) the seller delivers an invoice with a duplicate copy to the buyer who signs it and returns the copy to the seller; (ii) the signed copy is sent by the seller to the bank which is in charge of collecting it; in turn the seller and the bank agree upon a time term to collect the debt; (iii) the bank grants the seller a credit for the sum stated in the invoice that is debited upon payment of the same; (iv) the bank sends the debtor a bank collection bill (cobranza bancaria de factura de crédito) which will have the same legal effects as a cheque issued by the party who has to pay the debt; and (v) the debtor must settle the collection bill in the bank indicated by the seller.

The main features of the proposed instrument are:

  • the bank collection bill will be delivered to the buyer at least 10 business days prior to the due date of the obligation and may be issued and transmitted through electronic, magnetic or other means pursuant to the relevant regulation;
  • any bank collection bill must be cancelled by the debtor through a financial institution authorized by the Central Bank;
  • a bank collection bill would amount to an execution paper (título ejecutivo) if it is submitted with all of the following elements: (i) the customary receipt of any of the procedures set forth in paragraphs (a), (b), or (c) of Section 10 of Law 24.760; and (ii) evidence of delivery of the goods or rendering of the services that gave rise to the issuance of the invoice;
  • bank collection bills would not be enforceable if the financial institution in charge of its collection receives, up to two business days prior to its due date, due notice by buyer, alleging any of the circumstances set forth in section 4, articles (a), (b), (c) or (d) of Law 24.760 (for example, faulty merchandise, quality defects, differences in stipulated terms or prices), circumstance that must be attached to the bank collection bill by the financial institution and forwarded to the seller;
  • any action by the buyer aimed at preventing or hindering the seller's use of the invoice or the bank collection bill will amount to an unfair practice, the buyer being subject to the penalties provided for by applicable law and the buyer, likewise, being responsible for any damages caused;
  • the Central Bank will establish a public registry to which financial institutions and the public will have access and where the following will be recorded: (i) bank collection bills challenged by the buyer; and (ii) bank collection bills that have not been challenged but that have not been settled in the term fixed thereof;
  • financial institutions authorized by the Central Bank may jointly organize a corporation (sociedad anónima) with the purpose set forth in the previous paragraph and to provide services to third parties and information relevant to the credit and financing.

Cardenas, Cassagne & Asociados

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