Summary
Through the investigation it is shown that the percentages of provisions currently established are overvalued with respect to the level of past due that the institution has, and that it is not possible to cover them with the level of profits, it was also established that there is no adequate risk link to the interest rate and a methodology for classifying the interest rate of the Bank's financial assets is introduced.
Framed in the context of the Cuban economy, it presents novel approaches to the implementation of a weighted average interest rate matrix for the bank's financial assets and details a methodology to achieve the effective linkage of the interest rate to risk.
Keywords: Risk, and Credit assets.
Introduction:
The introduction of discountable payment instruments, incentives and penalties for debtors through discounts or collection of interest for late payment, improvement of commercial and financial management and other formulas to accelerate money turnover will be implemented, achieving a functioning of the banking and non-banking financial entities, in accordance with those purposes.
At present, Cuba is in the process of economic transformation, in order to insert itself in international markets and lay the foundations for a future sustained development of the country's economy. One of the key aspects to achieve this end is the elevation of business efficiency, for which it is important, not only the changes that must take place in the management of companies, but also the improvement of their financial environment, essential to achieve the objectives to be pursued. The new demands of the domestic economy and the development of finance on an international scale require a process of continuous improvement of the Banking System, guaranteeing its greater modernization and competitiveness.
Thus, in this context, new variants of loans arise, new financial products that lead to a greater analysis, from the point of view of the risk exposure that this entails and the need to create viable mechanisms to reduce said risks.
The granting of loans is the main activity of many banks. Loans require banks to judge the creditworthiness of borrowers. Such judgment by banks has not always proven to be accurate, and a borrower's creditworthiness can decline over time due to various factors. Consequently, a major risk that banks face is credit risk or counterparty default with contractual agreements.
Agreement 228/98 of the Central Bank of Cuba (BCC), introduced the issue of the policy of provisions that the commercial banks of the system had to execute, based on the Basel Accords, as a way to face the possible risks of losses in assets risk, which is basically made up of bank loans granted to customers. Said provisions must be calculated at the branch level on a quarterly basis and in turn, the province will make a condensation of that level of provisions received from its branches and send it in a consolidated way to its Central Office, said funds must be reserved on account of the Bank's profits.
Problem to solve:
The provision policy that exists today in the Bank cannot be covered with the current level of profits and there is no effective link between the interest rate and risk.
Objective:
Propose a methodology to vary the percentages of provisions currently highlighted, evaluate the Bank's risk exposure and achieve a higher return on financial assets through the application of the proposed methodology that links the interest rate to risk.
Hypothesis:
If the provisioning policy is changed, and the risk is linked to performance, the Bank will be in a more advantageous financial situation that would allow it to cover its risk provisions from its profits.
Chapter I Theoretical foundation.
I.1 Conceptual Framework.
I.1.1 Theoretical aspects on risks and provision policies.
Principle 8 in The Core Principles of the Basel Accords of September 1997 states: “Banking supervisors must be satisfied that banks have established and adhere to appropriate policies, practices and procedures to assess the quality of assets. and the adequacy of provisions and reserves for loan losses "
According to Pedro Pablo Villasante, General Director of Supervision of the Bank of Spain: “Provision policies must take into account the experience of managers and the need to anticipate economic cycles, and above all, the need to protect the quality of the assets, the solvency of the entity, the confidence in the business and its continuity "
At the discretion of the Chilean Superintendency of Banks and Institutions "Financial institutions must keep their entire loan portfolio permanently evaluated, in order to constitute in a timely manner the necessary and sufficient provisions to cover the losses due to the eventual unrecovery of the credits granted"
According to Horacio Fernández Castaño and Fredy Ocaris Pérez Ramírez, Magisters in Applied Mathematics at EAFIT University, Medellín, Colombia in their article: The logistic model: a statistical tool to assess credit risk, states: “The risk as the probability of obtaining An unexpected result, it is necessary that in its study mathematics must be taken into account to model optimization processes, since the characteristics of the variables are reflected by stochastic processes. It is necessary that this situation be included in the approach and for this the following should be considered as pillars: Statistics, Stochastic Processes, Simulation, Time Series and Econometrics "
Según la opinión de los autores, el tratamiento del riesgo y la política de provisiones debe ceñirse al conjunto de los criterios antes señalados, conjugando la experiencia de los gestores, con los análisis históricos de los clientes e incorporar modelos estadísticos matemáticos automatizados que ayuden a registrar y modelar la ocurrencia de sucesos inesperados, pero esta política debe permitir una flexibilidad que la convierta en un instrumento efectivo de análisis de riesgo. En el caso particular de Cuba ajustado a las realidades sociopolíticas de nuestro sistema económico.
Risk. (From the it. Risico or rischio, and this from the ar. Clas. Rizq, which provides the providence). m. Contingency or proximity of damage. - 2. Each of the contingencies that may be the subject of an insurance contract. - a ~ and luck. loc. adv. Said to undertake a company or to enter into a contract: Submitting to the influence of luck or event, without being able to claim for the action of these. - run ~ something. fr. Being exposed to being lost or not verified. □ V. group of ~, population of ~.
In credit institutions, the concept of risk appears when it assumes, through intermediation, the responsibility of meeting its obligations with savers and investors, which will largely depend on the repayment in time and form of the bank's debtors. In this correlation between liabilities and assets of the bank at any time, unwanted events can occur. If borrowers do not repay their debt, the bank would still be obliged to repay and pay its creditors, reducing expected returns or assuming losses. The risk here, then, is the probability of this happening.
Risk analysis, in economics, estimation of the risks implicit in an activity. All decisions that are made involve a certain degree of uncertainty or risk. Therefore, it is important to evaluate those inherent, for example, to the investment required to expand a business before carrying out said operation. The two essential elements are the identification of possible risks (which also implies their quantification) and the evaluation of these. Identification depends, to a large extent, on the information available; the evaluation of a combination of mathematics with the analyst's subjective assessment, since the analyst must weigh the probability of the risk occurring. Calculating the maximum and minimum risks is a simple task to some extent; what matters is to accurately assess the real risk:the possibility of the intended result occurring. When measuring risks, it is important to determine the degree of control (if verified) that is exercised over said risks.
The quality of the information a company has can be increased if funds are devoted to research; for example, conducting research to determine the market share that can be obtained for a new product in a certain location. The money invested in improving the information increases the costs of the activity that you want to undertake. Therefore, it will also be necessary to assess to what extent it is worth investing additional amounts to improve the information available.
Risk analysis is not a static process. Conclusions should be reviewed when additional information is obtained or when circumstances vary. It is normal to compare between different possible options, contrasting the risks and potential returns; the contrast hypothesis that is always used is the so-called "zero hypothesis", that is, the option to do nothing.
Risk analysis consists mainly of calculating the probabilities of the occurrence of diverse valuation events. The most profitable options are always the riskiest, so the final decision will depend on the risk aversion of the manager or decisive agent. If it is high, you will choose the option that implies the lowest possible losses.
Credit Assets: All credit rights that the financial institution has on the client for any type of financing granted to it.
Client: Any natural or legal person that can become a credit subject according to what is established by current regulations.
Credit: It is a risk asset, whatever the modality of its implementation, through which the financial institution, assuming the risk of its recovery, provides or undertakes to provide funds or other assets to a specific Client or guarantees against third parties the fulfillment of obligations contracted by him.
Interest: payment made for the use of someone else's money. In economics, it is considered, more specifically, a payment made for raising capital. Economists also consider interest as the reward of saving, that is, the payment offered to individuals to save, allowing other people to access this saving. For economic theory, interest is the price of money.
State Entities: State companies, unions, budgeted units, investment units of a State nature, and any other entities linked to the Central State Budget.
Entities: Includes state entities, organizations, associations and Cuban commercial companies not linked to the Central State Budget.
Loan Portfolio: includes balances in favor of the institution for direct loan operations granted to clients. All financing granted by the institution is included, whatever the modality in which they are agreed or contracted, classified as current or expired.
Outstanding loans: the principal balances of the loans that are up to date in compliance with the payment plan are recorded. Also included are renegotiated and restructured loans.
Overdue loans: the principal balances of the loans that are in arrears are recorded.
Provision for loan portfolio: the amount of provisions that must be accounted for due to the possibility of losses caused by loan uncollectibility is recorded. They are established based on the evaluation of each specific loan of those that make up the portfolio and based on the guidelines established by the Central Bank of Cuba.
Renegotiated Debt: That whose repayment terms have undergone running, maintaining the same interest rates without applying the capitalization of interest.
Restructured Debt: That whose terms and conditions have been modified, mainly due to a deterioration of the Client's financial situation, or to allow a reduction in the interest rate, or a capitalization of accrued interest.
Central Bank of Cuba License: Document issued by the Central Bank of Cuba where the scope and class of operations that the financial institution can carry out and any other provisions that must be adjusted in the exercise of the financial intermediation business are established.
Financial Services: All those provided by financial institutions covered by the License granted by the Central Bank of Cuba.
There are different types of risk that are classified as:
- Credit risk
Consequence of the possible breach of the reimbursement obligations by the borrowers. Cause of most banking crises.
It is the possibility of incurring losses due to the total or partial breach by the Client of the contractual obligations contracted with the financial intermediary, having implicit the risk of insolvency. It is the typical financial risk associated with loan, credit, guarantee and other operations.
Credit risk is in turn divided into:
Insolvency Risk:
Understood as the lack of repayment of credit operations at maturity, which is reflected in two aspects:
- Delinquency: implies the transition to the active accounting situation of doubtful loans, fixed income securities and other doubtful balances, whatever their holder, instrumentation or guarantee, whose repayment is problematic. Insolvency: as a synonym for very doubtful collection. Credit investments, fixed income securities and other debit balances, past due or not, whose holders will be considered as such and will be immediately derecognised from the assets of the balance sheet, with a transfer to suspensive accounts and application of the provisions that were already constituted are declared bankrupt or bankrupt or suffer a notorious and irrecoverable deterioration of their solvency. Country Risk : Liquidity Risk Exchange Rate Risk Interest Rate RiskOperational Risks Contagion Risks Legal Risk
Risk measurement
The measurement of risk with debtors must consider the exposures (real or contingent) originated by all the transactions carried out by the financial institution.
The exposure levels acquired must be reported by units and types of risk so that the Risk Committee and the highest level of management of the financial institution have a complete view of the scales and concentrations at any time.
Such reports must allow the calculation of the possible loss of capital at the financial institution level, as well as at the level of each unit, so that it is known to all managers.
The Board of Directors of financial institutions approves the liquidity and risk concentration limits on the basis of what is established by the Central Bank of Cuba. The aforementioned limits must be periodically reviewed due to variations in the credit and liquidity status of clients, and must be directly related to the risk management strategy of the financial institution.
Classification of risk assets
objective
Establish the evaluation method to be used to assess the risk level of the current loan portfolio, applicable to state companies, basic cooperative production units, agricultural production cooperatives and small farmers, which maintain credit relationships with Banco de Crédito and Commerce, in accordance with the Regulations for the Classification of Credit Assets and Provisions Policy implemented by the Central Bank of Cuba.
Provisional Funds and Categories
Although the classifications are determined mainly by the relationship between the behavior of payments to the Bank and the financial situation of the debtor, the essential characteristics of each of the categories established by the Central Bank of Cuba for legal entities and their provision funds, They are:
- Minimum: Corresponds to those debtors who timely comply with their financial obligations, the authorized funds were applied to the requested purpose, the guarantees are validated and the solvency and liquidity have not deteriorated, an aspect that is reflected in the fulfillment of the originally agreed payment schedule. Provisions Fund: 0%. Low: Corresponds to debtors who have shown non-compliance with the originally agreed payment schedules, and although the funds have been applied to the requested purpose and the guarantees are validated, the solvency and payment capacity have been or may be temporarily affected. Provisions Fund: 1% Average:Corresponds to debtors whose projected cash flows are insufficient to cover the agreed payment schedule, or the analysis of the information shows significant deficiencies that compromise their level of efficiency, even though the guarantees are validated. Provisions Fund: 20%
- Medium-High: Corresponds to debtors whose projected cash flows are insufficient to meet financial obligations, have arrears in payments or only partially comply with them. Likewise, the probability that they will be able to reverse their payment defaults is low, even though the guarantees are sufficiently liquid to recover all the resources owed. Provisions Fund: 30%.
- High: They correspond mainly to debtors with a difficult financial situation and their cash flows are not sufficient to meet their financial obligations in a reasonable period of time, which forces them to restructure current financing, without there being any possibility of improving this continuous deterioration. Likewise, the guarantees established do not cover the amount financed plus interest, or only allow the recovery of a part of the resources granted through extrajudicial or judicial collection. Provisions Fund: 50% Unrecoverable:Corresponds mainly to debtors of manifest insolvency, whose assets are scarce or null to meet their financial obligations or whose capacity to generate resources depends on third parties and these have a very weakened financial position. Likewise, the guarantees established or permanent equity are of little or no value with the amount owed, are significantly depreciated or impaired or are not properly perfected. Provisions Fund: 100%.
As a summary there is the following table:
Table 1 Classification of credit assets
| Classification | Provision fund (%) |
| Minimum | 0 |
| Low | one |
| Medium | twenty |
| Medium-high | 30 |
| Tall | fifty |
| Irrecoverable | 100 |
Source: Credit and Commerce Bank
This classification will meet two fundamental criteria:
- Behavior of payments. Financial situation.
For the first of the criteria there will be the following classification patterns:
Very Good: If interest or principal payments are current, with a 7-day grace period, and there is no evidence that the current loan balance includes any amounts capitalized from previous loan refinances. In the cases of loan repayments due to discounts on bills of exchange and other effects, said payments will be considered up-to-date during the term of said effects.
Good: Yes, the interest or principal payments have not been in arrears for more than 30 days or in which there is some evidence of interest capitalization. Arrears in financing payments that exceed 30 days, but in which there is certainty that they can be recovered before 90 days following the date of their classification, will also be classified in this concept, from compensation from sources very safe, such as: «Unique Income Account in foreign currency of the State, Insurance, Compensation Fund or exceptionally clients of extraordinary security.
Regular: Financing in which the principal and the interests have not presented arrears of more than 60 days or in which there is some evidence of interest capitalization.
Unsatisfactory: If the delay in the interest or principal payments exceeds 60 calendar days or in which there is some evidence of capitalization of interest or refinancing of previous loans.
The classification matrix resulting from the combination of the results obtained in the two points set out above to establish the quantitative rating of the entity is set out below. There is also a qualitative rating based on the experience of the manager serving the entity, which may be different from the quantitative one. In that case it must be properly argued.
Table 2 Cross classification matrix
| Behavior of payments
Financial situation |
Very good | Okay | Regular | Unsatisfactory |
| Very good | Minimum | Low | Medium | Medium-high |
| Satisfactory | Low | Medium | Medium | Medium-high |
| Good | Medium | Medium | Medium-high | Tall |
| Regular | Medium | Medium-high | Tall | Irrecoverable |
| Unsatisfactory | Medium-high | Tall | Irrecoverable | Irrecoverable |
Source: Credit and Commerce Bank
This matrix gives the following probability percentage:
Table 3:% probability
| Classification | Probability% |
| Minimum | 5 |
| Low | 10 |
| Medium | 30 |
| Medium-high | 25 |
| Tall | fifteen |
| Irrecoverable | fifteen |
Source: self made
The methodology to arrive at the classification of credit assets is based on the methodology that will be exemplified below:
Table 4: Measurement and scoring parameters. Credit asset classification
| Parameters | Punctuation |
| Borrower's financial situation | 0-50 |
| Administration of the entity | 0-15 |
| Market conditions | 0-13 |
| Status of guarantees | 0-10 |
| Other relevant factors | 0-12 |
Source: Credit and Commerce Bank
Table 5: Analysis factors for the classification and scoring of credit assets
| Factors to be analyzed | Punctuation |
|
fifty |
| 1) Favorable behavior for all reasons | 0 |
| 2) Favorable behavior of more than 50% | twenty |
| 3) Unfavorable behavior of more than 50% | 35 |
| 4) Unfavorable behavior for all reasons | fifty |
|
fifteen |
| 1) Good | 0 |
| 2) Regular | 7 |
| 3) Bad | fifteen |
|
13 |
| 1) Acceptance by contract of all production | 0 |
| 2) Acceptance by contract of all production, dependent on a single customer or supplier | 3 |
| 3) Partial acceptance of production by contract, does not depend on a single customer or supplier | 5 |
| 4) Partial acceptance of production by contract, depends on a single customer or supplier | 10 |
| 5) No hiring of production | 13 |
|
10 |
| 1) Enough | 0 |
| 2) Insufficient | 5 |
| 3) Obsolete | 10 |
|
12 |
| 1) None | 0 |
| 2) Impacts from natural phenomena and fires covered by insurance | 6 |
| 3) Impairments for insurance coverage | 12 |
Source: Credit and Commerce Bank
The financial ratios that must be calculated to determine the borrower's financial situation can be found in Annex I of this work.
Chapter II: Analysis of provisions and interest rates at BANDEC Las Tunas
II.1 Characterization of the entity
Banco de Crédito y Comercio (BANDEC) is a banking financial institution, established according to Agreement No. 3215 of November 12, 1997 of the Executive Committee of the Council of Ministers under Decree-Law No. 173 “On banks and financial institutions non-bank ”. BANDEC operates with a General License granted by the Central Bank of Cuba.
The General License granted by the Central Bank of Cuba authorizes BANDEC to carry out all types of financial intermediation business in national currency and in foreign currency in the national territory and abroad; it is therefore empowered to perform functions inherent to universal or multi-service banking.
The corporate purpose of Banco de Crédito y Comercio (BANDEC) is defined in the General License granted by the Central Bank of Cuba, through Resolution Number 1 of 1997 dated August 5, 1997 and ratified in the Bylaws of the Banco de Crédito y Comercio, approved by agreement No. 254 of the Board of Directors of the Central Bank of Cuba dated December 5, 1998 and put into effect by Resolution No. 36 of December 9, 1998 of the President of BANDEC.
According to the legal regulations set forth in the preceding paragraph, Banco de Crédito y Comercio is empowered to carry out all types of financial intermediation business.
Mission:
BANDEC is a financial institution with universal banking functions, aimed at providing companies, cooperatives, institutions and individuals with security, advice and profitability in the management of their financial resources, which contributes to satisfying the development needs of its clients for the benefit of the National Economy, through various services and financial instruments, that mobilize and channel internal and external savings; supported by the qualification of its employees and the application of technological advances.
View:
We are the best commercial bank in the province, which is distinguished by operating with international standards of efficiency in its management, high reliability, excellence of its services and professionalism of its employees, an institution with simple and agile structures, promoter of financial innovation and technology, advanced automation, which applies a business approach based on comprehensive attention to customer needs.
II.2 Proposal for the variation in the percentage of provisions and the tsaa / risk link.
Next, the level of Portfolio, provisions and past due by quarters will be compared.
Table 6: Comparison of Portfolio, provisions and past due
Unit of measure: thousands of pesos with one decimal place.
| Trimesters | Total portfolio | Provisions | % of provision | Overdue | % Delinquency |
| September 05 | 362,870.2 | 44,005.5 | 12.1 | 1,386.2 | 0.38 |
| December 05 | 390,780.8 | 47,131.1 | 12.1 | 1,198.2 | 0.31 |
| March 06 | 389,952.3 | 30,280.2 | 7.8 | 2,248.6 | 0.58 |
| June 06 | 419,872.9 | 36,281.1 | 8.6 | 4,573.2 | 1.09 |
| September 06 | 427,596.1 | 40,691.2 | 9.5 | 7,470.1 | 1.75 |
| Average | 398,214.5 | 39,677.8 | 10.0 | 3,375.3 | 0.85 |
Source: self made
As can well be seen, for the past due levels with which the Bank has worked, an expression, as already mentioned above, of realization of credit, liquidity and insolvency risks, the provisions are well above the executed levels of those risks. Therefore, the level of provisions must be more adapted to the actual exposure of these risks, but with the current provision percentages established for the different asset classifications, and the confirmation of a Portfolio mostly classified as Medium Risk, this becomes impossible and In the opinion of the author of the research, based on observation and three years of experience, this conservative position affects the level of profits to be contributed at the institution level.
Likewise, through the investigation, it was found that there is currently no control mechanism that allows knowing, according to the original risk classifications of the credits, how many of these came to fruition as they had to have been renegotiated, restructured or carried overdue. This is considered an important element since it could be the case of credits that were classified as Low Risk, therefore, according to current provisions, 1% of that asset must be provisioned and they came to be realized as past due or otherwise have the case of a credit classified as High Risk, which requires a 50% provision that could have been collected on the terms and dates agreed with the client.As the institution of a control mechanism such as this lacks, a correlation between the risk classification and the occurrence of risk cannot really be established, which is the purpose of the provision and risk policy itself.
Another element found in the research is that the provisions of the classifications do not make a difference between the loans that will be granted in the short, medium and long term, therefore there is no vision of the uncertainty related to risk, because it does not make a difference in time, it is classified equal to a loan that is granted in the short term, which is up to one year, if it meets the parameters established to classify it, for example, as Medium Risk, to another that is granted for five years that would be classified as long-term and it behaves the same parameters that would qualify it as Medium Risk.
Therefore, based on the approaches made above, four fundamental questions are proposed:
- Establish a matrix for determining the weighted average interest rate of the Portfolio, to know the level of interest income that can be expected with that level of Portfolio. That the percentages of provisions currently established are modified, adapting to the realization of those Risks, whose expression responds for the particular case analyzed to credit, insolvency and liquidity risks and on average should not exceed the percentage of the weighted average interest rate, since this average interest rate offers the expected return of the Portfolio, The main source of bank income, the income of which will depend on whether the provisioning levels can be covered Implement a control mechanism that allows knowing the trajectory of the loan granted until its collection,seen from the point of view of risk classifications Modify the risk classification elements in such a way that it distinguishes and takes into account the principle of uncertainty linked to risk over time. This classification element should allow, over time, to modify the risk analysis as it approaches maturity and becomes short-term.
This average interest rate matrix would be calculated as follows:
Table 7: Weighted average interest rate
| Average Interest Rate of the Loan Portfolio | |||
| Interest rate | Loan Balance | Share of total | Weighted rate |
| 0.13 | 0.0 | 0.0000 | 0.00000 |
| 0.12 | 0.0 | 0.0000 | 0.00000 |
| 0.11 | 256.4 | 0.0012 | 0.00013 |
| 0.10 | 118.9 | 0.0005 | 0.00005 |
| 0.09 | 3,786.2 | 0.0172 | 0.00155 |
| 0.08 | 0.0 | 0.0000 | 0.00000 |
| 0.07 | 65,484.4 | 0.2981 | 0.02087 |
| 0.06 | 147.7 | 0.0007 | 0.00004 |
| 0.05 | 53,504.5 | 0.2436 | 0.01218 |
| 0.04 | 147.8 | 0.0007 | 0.00003 |
| 0.03 | 96,220.7 | 0.4380 | 0.01314 |
| Profitable Portfolio | 219,666.6 | 1.0000 | 0.04799 |
Source: Credit and Commerce Bank
This matrix includes all the possible interest rates that can be granted, considering a maximum and a minimum horizon of these rates. In the second column, the loan balances that correspond to the rate ranges are recorded, dividing the loan balance by the profitable total gives the participation in the total, which is multiplied by the range of the interest rate and offers me the weighted average rate. A procedure must be created to automate the obtaining of this information, since it is extremely cumbersome to perform it manually, since in this matrix the rates that represent ¼ percentage points must also be considered, rounded by default for the previous determination. which produces inaccuracies.
Therefore, when doing the analysis of this average rate, it is found that the Bank's Portfolio does not even achieve the minimum base rate established of 5%, this offers the Portfolio's ability to generate interest, and it is observed as The measures that were guided by the Executive Committee of the Council of Ministers that established a single rate of 3% for all new loans that were granted to entities that were classified as affected by the drought influence its performance. It is also influenced by the amounts that have been approved for specific entities that, regardless of the amounts or risk classification thereof, come centrally with an established rate that is generally also 3%.
The proposal made by the author for the percentage of provisions are the following:
Table 8: Proposed modification% of provisions
| Classification | Provision fund (%) |
| Minimum | 0 |
| Low | one |
| Medium | 5 |
| Medium-high | 7 |
| Tall | 10 |
| Irrecoverable | 100 |
Source: self made
This proposition would result in the following amount of provisions for the last quarter covered:
Table 9: Provision percentage according to proposed modification
Unit of measure: thousands of pesos with one decimal place.
| Sectors | Total | Minimum
0% |
Low
one % |
Medium
5 % |
M-High
7% |
Tall
10% |
Irrecp.
100% |
| Business | 7,192.4 | 0.0 | 553.8 | 6,096.8 | 0.0 | 541.8 | 0.0 |
| CPA | 269.8 | 0.0 | 49.7 | 220.1 | 0.0 | 0.0 | 0.0 |
| CCS and Ag | 245.9 | 0.0 | 27.7 | 216.5 | 0.0 | 1.7 | 0.0 |
| Farms | 261.8 | 0.0 | 26.3 | 206.6 | 0.0 | 28.9 | 0.0 |
| UBPC | 2,961.9 | 0.0 | 545.4 | 2,416.5 | 0.0 | 0.0 | 0.0 |
| Escrow | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| PMA * | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Total | 10,931.8 | 0.0 | 1,202.9 | 9,156.5 | 0.0 | 572.4 | 0.0 |
Source: self made
The modification proposal presented in Table 8 will be closely linked to the proposal of a methodology that links the interest rate to risk through the loans granted. This proposal is shown in Table 11. In this way, it would be guaranteed that the loans granted under the Medium Risk classification, which has been the majority in the analyzes carried out, would yield at a higher level than the provisions required for that classification, as well as those classified as Minimum and Low. The Medium-High, High and Unrecoverable would partly cover their own provisions and the rest of the excess of what the other classifications yield.
In the case of loans that become past due, if their classification is lower than Medium-High, the amounts corresponding to those past due must be classified in this category, remaining for a period of up to 6 months, after which if they are not Once these funds have been recovered, they must be transferred to the immediate higher category, in this case High, they would also remain for a period not exceeding 6 months, after which, if these amounts have not been collected and belong to the Individual Farmers sector, will lead to Unrecoverable provisioning 100% of those amounts. In the case of other sectors, they will remain in the High classification until they are collected. For credits that are classified as Minimum or Low, in case of maturity, renegotiation or restructuring, they go to the immediately superior category.
In the event that a loan that was originally granted under the High risk classification and has become past due, it will remain in that same category for a period of no more than 6 months, if these amounts are not collected, they will be transferred to the category of Unrecoverable, with the same conditions referred to in the previous paragraph related to the type of sector in question.
Since the province is in a position to make its own provisions based on its profits, it is proposed to create that level of provisions over a period of 5 years, taking 20% of that amount from the provision calculated at the end of December each year. from the profit account and passing it to Equity Reserves, and within this to Other Reserves, in the last year 20% would not be taken but the difference between the accumulated to date and the level of provision calculated for that last year. From that moment on, this Reserves account would grow or decrease based on the level of provisions that is calculated.
Next, the credits approved with basic rates in the period covered by the investigation will be analyzed.
Table 10: Approved credits
Unit of measure: thousands of pesos with one decimal place.
| Branch offices | Amount approved | Medium risk | High risk |
| sea cow | 9,469.9 | 0.0 | 0.0 |
| Puerto Padre | 37,459.9 | 9,757.6 | 0.0 |
| Menendez | 14,543.7 | 1,780.2 | 0.0 |
| Majibacoa | 3,427.1 | 1,305.8 | 0.0 |
| Tunas I | 14,182.4 | 2,537.5 | 0.0 |
| Tunas II | 8,929.0 | 0.0 | 0.0 |
| Jobabo | 5,278.9 | 0.0 | 0.0 |
| Colombia | 15,418.8 | 1,990.5 | 2,310.3 |
| Amancio | 14,770.1 | 1,200.5 | 0.0 |
| Address Prov. | 91,624.3 | 11,004.7 | 0.0 |
| Total | 215,104.2 | 29,576.9 | 2,310.3 |
Source: Credit and Commerce Bank
As can be seen from the analysis in Table 10, of the total amount of loans granted at basic rates with different risk levels, there is an amount of $ 31,887.2 MP, which were approved at a basic rate of 5 or 7% for capital of work or investment, as appropriate, whose credit classifications showed medium or high risk, mostly medium risk, as can be seen. Therefore, these amounts were approved at the same rate as the credit amounts whose classifications carried minimal or low risk, evidencing that there is no adequate relationship of the financial principle referred to risk and profitability, which assumes that the higher risk higher profitability and vice versa.
Resolution 59/99, which establishes the link between the interest rate and risk, offers a margin of ± 2%, being able to increase the rate by ¼ of a point, but leaves it at the discretion of the manager, that is, it is not mandatory compliance, so it is proposed that these rates be set according to risk as described below:
Table 11: Proposal to modify the interest rate according to risk
| Classification | Working capital rate | Investment | Default rate |
| Minimum | 5 % | 7% | two % |
| Low | 5 % | 7% | two % |
| Medium | 5.25-7% | 7.25-9% | 2.25-4% |
| Medium-high | 6.25-7% | 8.25-9% | 3-4% |
| Tall | 7% | 9% | 4 % |
| Irrecoverable | 7% | 9% | 4 % |
Source: self made
These rates are within the parameters established by the aforementioned resolution, but it delimits them according to the credit risk classification that is made by the Business Manager to each new request received. Its flexibility will allow differentiating, even within the classification itself, those clients who have a better financial situation from others, according to the qualitative analysis that complements the quantitative one. In the case of the Irrecoverable, its classification would be achieved over time, since it would not be feasible to grant a loan with little probability of repayment.
In the case of clients whose risk classifications show minimal or low, if the Manager considers it pertinent, due to the client's conditions, the type of credit or other considerations, it can discount that basic rate, taking it to a minimum of 3% for Working Capital or up to 5% in the case of investments, which would be an incentive for clients in the sense of showing, through their credit history, an advantageous financial situation, which allows them to minimize the cost of their financing.
For the Bank, the application of this proposal would undoubtedly bring an improvement in its financial situation, since interest income would increase and clients could be expected to be more serious when assuming their payment commitments with the Bank., under the perspective that otherwise, the cost of its financing would increase.
The mere fact of increasing 0.5 percentage points to that monetary mass that was approved under conditions of medium and high risk, would offer in one year the equivalent of $ 159.4 MP as interest income.
Conclusions:
- The methodological proposal manages to link the interest rate with the risk in an effective way, by varying the percentages of provisions currently highlighted in correspondence with the level of risk. The percentages of classification of Credit Assets yield a provision that is overvalued in comparison with the level of past due. The asset classification matrix does not take into account the principle of uncertainty linked to risk, it does not make a distinction between the classification of short and long-term loans.
Recommendations:
- Apply the methodology of risk-linked interest rates as described in the research Apply the proposal to modify the provision percentages indicated in the research Incorporate into the risk classification matrix the elements necessary to differentiate the risk of short and long-term loans, this must take into account the transit of the long-term loan.
Bibliography:
- Alvarado G. Javier: Guarantees in rural loans, Alide / FAO. Lima, Peru, 1996 Development Bank in Latin America: Approaches and Perspectives, ALIDE-IDB / MIF, Lima, Peru, 2006 Banco Bilbao Vizcaya Argentaria: Manual of Instructions and Procedures. Madrid, 2000 Central Bank of Cuba: Instruction 39/2006, Graphic impressions, 2006 Bank of Montevideo: Manual of Instructions and Procedures. Montevideo, 2002 Credit and Commerce Bank, Manual of Instructions and Procedures. Bayos, Manuel and Benites Miranda. Dictionary of economic terms. Havana: Editorial Pueblo y Educación, 1980 Bittel. L and Ramsey. Management Encyclopedia / 06. Centrum, Year 1Borrás Atiénzar, Francisco and others: CUBA: BANKING AND INSURANCE, An approach to the business world. Alicante, 1998 Buide Llópez, Manuel and Flores Pérez Rodolfo:Evolution of banking in the Republic of Cuba. National Center for Bank Improvement. Havana, 1988 Compendium of documents produced by the Basel Committee on Banking Supervision, Volume III, Bank for International Settlements, Basel, Switzerland, 1997 Estévez Iliana, Garayburu de la Fuente, Nelson: Compilation of materials on bank credit. User information. La Habana, 1996Garayburu de la Fuente, Nelson: Analysis and Interpretation of Financial Statements. Particularities in the Banking Sector, Impresiones Gráficas, Havana, 2006Gerlach, Stefan: Monetary policy and the behavior of interest rates, BIS - Basle, 1996La Torre Llorens, Luis: Risk Theory and its applications to the Insurance Company. Editorial Mapfre, 1992 Myers, Stewarte, Brealey, Richard A.: Principles of corporate finance, 5th, ed. McGraw-Hill, Madrid,1998 General rules for the granting, control and recovery of bank credit to the state sector. National Bank of Cuba. Havana, 1983 Economic Resolution V Congress of the PCC. La Habana, Political Editorial of the CC of the PCC, September, 1997 Magazine of the Central Bank of Cuba, quarterly publication. July-September 1998 No.2. Ed. Pontón Caribe SA 1998Santandreu, Eliseo: Management of credits, collections and unpaid, Ediciones Gestión 2000, Barcelona, 1994Soberón Valdés, Francisco: Parliamentary Hearing, Palace of Conventions, April 18, 1996Soberón Valdés, Francisco: Conference at the International Congress Accounting and Finance, CONTAHABANA'97. Palacio de las Convenciones, February 27, 1997 Soberón Valdés, Francisco: Financial Management and Risks in Business Agreement.The restructuring of the national banking system. Havana, 1995 Tunisia Blanco, Dunia; Galgeras Gil, Daysi; García Lorenzo, Dunia; del Toro Ríos, José Carlos; Caballero Pulido, Margarita; Borrás Atiénzar, Francisco: Institutions and Financial Markets, Selection of Topics, Editorial Félix Varela, La Habana, 2005Vázquez C. Banking operations. Ed. EDERSA. Madrid, 1985 Villaante, Pedro Pablo: Good Provisions Practices in Banking Supervision, III Regional Conference Public Sector-Private Sector, Regulation and Development of the Financial Sector: Practical Applications, Washington, DC, 2005Havana, 2005Vázquez C. Banking operations. Ed. EDERSA. Madrid, 1985 Villaante, Pedro Pablo: Good Provisions Practices in Banking Supervision, III Regional Conference Public Sector-Private Sector, Regulation and Development of the Financial Sector: Practical Applications, Washington, DC, 2005La Habana, 2005Vázquez C. Banking operations. Ed. EDERSA. Madrid, 1985 Villaante, Pedro Pablo: Good Provisions Practices in Banking Supervision, III Regional Conference Public Sector-Private Sector, Regulation and Development of the Financial Sector: Practical Applications, Washington, DC, 2005
Annexes:
| Financial ratio | Acceptable variable |
| § Required Working Capital | Positive value |
| § Effective Working Capital | Approximately the same as above |
| § Solvency | Greater than 1 and the same previous period |
| § Liquidity | Greater than 0.5 and the same previous period |
| § Leverage | Greater than 1 and less than previous period |
| § Stability ratio | Greater than 0.5 and the same previous period |
| § General indebtedness | Less than 0.5 and same previous period |
| § Debt with the Bank | Less than 0.3 and same previous period |
| § Overall profitability | Positive and greater previous period |
| § Financial profit | Positive and greater previous period |
| § Rotation of interests | Greater than 1 and the same previous period |
| § Working Capital Rotation | Greater than 1 and the same previous period |
| Inventory turnover cycle | Less than 90 days and the same previous period |
| § Collection cycle | Less than 30 days according to contracts |
| § Payment cycle | Less than 30 days according to contracts |
| § Cash conversion cycle | Minor previous period |
| § Cash turnover | Greater than 1 and the same previous period |
| § Sales dynamics | Longest previous period |
Resolution 5th Congress of the Communist Party of Cuba, Political Editorial of the CC of the PCC, September 1997.
Compendium of documents produced by the Basel Committee on Banking Supervision, Volume III, Bank for International Settlements, Basel, Switzerland, 1997
Compilation of Standards, Banks and Finance, Superintendency of Banks and Financial Institutions, Chile, 2003
Pérez Ramírez, Fredy Ocaris, Fernández Castaño, Horacio: The logistic model: a statistical tool to assess credit risk, Medellín, Colombia
Microsoft ® Encarta ®2006 (DVD) Dictionary
"Risk analysis." Microsoft® Encarta® 2006. Microsoft Corporation, 2005.
"Interest." Microsoft® Encarta® 2006. Microsoft Corporation, 2005.
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