Published legislation and draft legislation - Colombia

Instructions on the modification and restructuring of loans

CE 019-2017 FNG / CE 026-2017 SFC

The National Guarantee Fund (FNG) has published this Circular to create a short-term incentive for financial intermediaries to restructure secured debt instruments by novation.

Two new products have been created for this purpose: i) Easy Novations for SMEs, and ii) Easy Novations for Micro-enterprises.  

The maximum sum that can be secured with each the product has been set for each, as has the loan period, the coverage, the portfolio type, the currency, the fee, the minimum sum that can be claimed and the general terms and conditions of the guarantee.

What is more, transactions that need to access these mechanisms can be transferred without having to go through an early cancellation of the guarantee fee, which is put on hold for a year and will be invoiced in subsequent annual instalments of the loan repayment.

These mechanisms can be applied to any of the types of loan-book restructuring established in the recent External Circular 026-2017 issued by Colombia’s Financial Authority, to redefine the loan conditions for borrowers whose repayment capacity and ability to meet the original terms has been impaired.

This Circular issues instructions and introduces the concept of loan modification, in order to make it easier for borrowers to meet their obligations according to their current repayment capacity, without lowering their credit rating, while also opening up access to new funding sources.

The following are some of the conditions for modifying loans:

  • The modification of a loan will not be considered a restructuring and, as such, will not give rise to making loan provisions provided that in the final six months the loan does not suffer consecutive defaults (longer than 60 days in the case of microloans, 60 days for personal loans and 90 days for the commercial and housing portfolio).
  • These loans must be classified according to the guidelines set in the General Accounting & Financial Circular issued by the SFC.
  • The new conditions must meet financial viability criteria that are aligned with the debtor’s capacity to pay.
  • Modified loans must be subjected to special monitoring. Once the debtor’s regular and effective payment is verified (after 9 months in the case of microloans, a year for personal loans and 2 years for commercial and housing portfolio), this monitoring can cease.  
  • Institutions should have in place information systems, policies and procedures to identify, manage and track those transactions that have been modified.
  • If the new credit conditions are not met (30 days’ default), the loan will be classified as restructured.

Turning to loan restructuring, the following stipulations are made:

  • Loan restructuring policies should describe, at the very least, the requirements, tracking and classification mechanisms, approval bodies and the powers of these.  
  • Special classification criteria are set for the restructuring, at the time of the change, and after it is made.
  • Loan restructuring procedures should allow:
    • The real deterioration to the debtor’s capacity to pay to be analyzed.
    • The financial viability of the restructuring to be set in line with the debtor’s capacity to pay.
    • Restructured loans to be classified according to established criteria.
    • Information systems to be in place that identify and track the restructured transactions.
  • When debtors pay on time (after 18 months in the case of microloans, 2 years for personal loans, and 4 years for the commercial and housing portfolio), institutions can de-list the loans from the restructured category.
  • Restructuring is considered non-compliant when the debtor defaults for 30 days or more.
  • Institutions may, over time, allocate a lower risk rating when the debtor’s capacity to pay is verified as complying with the criteria set for improving this rating and when the debtor has also made regular, effective payments of capital and interest during the restructuring (for six consecutive months in the case of microloans and for a year in the other loan types).

Finally, the regulation makes the provision that institutions must provide clients with a comparison which enables them to understand clearly their loan conditions before and after the modification or restructuring.