Institutions classify direct and contingent loans granted to non-financial sector individuals or legal entities as Commercial, Consumer and Housing, according to the destination of the loans. The breakdown of the categories and criteria to rate each type of debtor and portfolio can be found in the regulations of the Superintendency.
Briefly, and to further illustrate the rating criteria used for commercial portfolios is the following description:
Category 1A - Operations with approved self-liquidating guarantees:
Operations fully backed by certain guarantees of very good quality and liquidity, so if the debtor fails to repay the loan, the financial institution can easily recover its money by execution of the guarantee.
Category 1C - Debtors with strong payment capacity:
Customers with valid operations or less than 10 days overdue. They have recorded positive results in the last 3 years and the assessment on their ability to pay is that it will remain very good even if faced with major changes in macroeconomic conditions. Structured credit operations with very good prospects for recovery can be included in this category.
Category 2A - Debtors with adequate payment capacity:
Customers who may encounter some difficulties, less than 30 days behind on their payments or 60 days behind in delivering the information requested. They may have occasional losses.
Category 2B - Debtors with potential problems to pay:
Debtors who may run into difficulties, less than 60 days behind on their payments. Losses in the last three years, if any, are not significant. They may also be less than 90 days behind in delivering the information requested by the institution.
Category 3 - Debtors with compromised repayment capacity:
Debtors with bad credit standing, less than 120 days behind on their payments or in delivering the information requested by the institution. This is the lowest rating for debtors with significant losses over the past three years, or who have bad rating in another institution.
Category 4 - Debtors with very compromised repayment capacity:
Debtors with very compromised repayment capacity, more than 180 days behind on their payments or more than 120 days behind in delivering the information requested by the institution, or with significant losses over the past three years.
Category 5 - Debtors with bad debts:
Debts than cannot be recovered; debtors more than 180 days behind on their payments or more than 120 days behind in delivering the information requested by the institution.
Although it was stated above that we classify the debtor, it is also possible to classify a loan. Moreover, it is possible to classify a loan with a different rating than that of the debtor. This is because institutions can grant loans on a sound and collectible basis because they have very good collateral or liquidity, or because they are structured under certain conditions that make recovery possible under the agreed conditions. In these cases, operations can be classified according to their own risk, independently to that of the debtor. It is common that these loans have better ratings than those of their debtors.
For example, a category 3 debtor (with compromised repayment capacity) could have a category 1A loan (with approved self-liquidating guarantees), this could be the case of an exporter that shipped its products and gave its lending institution an irrevocable documentary credit, confirmed by a foreign bank with good credit rating.
It could also happen that the debtor agrees with its bank to repay the loan in several installments, thus the operation is structured in a way that the bank collects the debtors sales, under certain conditions, to ensure a successful recovery of the debt. This type of structured operation is classified as 1C, independently of the debtor's rating.