Non-performing loans under Mexican banking regulations in light of the Covid-19 pandemic

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Michell Nader S
Nader, Hayaux & Goebel, Mexico City
mnader@nhg.com.mx

Adrian Lopez G
Nader, Hayaux & Goebel, Mexico City
alopez@nhg.com.mx

Josè Raul Jasso P
Nader, Hayaux & Goebel, Mexico City
jjasso@nhg.com.mx

Mexican commercial banks are required to classify their loan portfolios following the criteria set forth in the Mexican Banking Regulations (the ‘Regulations’)^[1] issued by the National Banking and Securities Commission.^[2] Exhibit 33 of the Regulations provides the general accounting principles that Mexican commercial banks must observe to classify their assets, including non-performing loans.

A loan would be classified as non-performing if there is a payment default with respect to such loan. The classification of non-performing loans will depend on the nature, amortisation and interest payment of the loan, as well as on the period during which a payment is overdue. Loans with bullet payments will be deemed non-performing if they are overdue for at least 30 days; interest-only loans and amortised loans will be non-performing if an amortisation is overdue for 90 days; revolving loans will be non-performing after failure to pay in full for two consecutive monthly billing periods; and loans payable on demand will be non-performing immediately upon payment default.

Pursuant to the Regulations, any sort of bank loan or credit must be classified non-performing, among others, if the borrower is declared insolvent in accordance with Mexican Bankruptcy Law,^[3] unless either the loan is not on default and is acknowledged as necessary for the continuity of the debtor’s operations during the concurso insolvency procedure, or the loan covers the management and protection costs of the bankruptcy estate.

Non-performing loans must be reserved by banks. Reserves are calculated pursuant to either the standard method set forth in the Regulations, or the internal models prepared by each bank and approved by the Mexican banking commission. In any case, the reserves are determined based on the credit exposure, the perceived likelihood of default, the severity of the loss and the term of each loan. The amount of the reserves varies depending on the nature and classification of the loan and can reach 100 per cent of the loan in certain cases (including when the borrower files for, or is placed into, a concurso insolvency proceeding).

The Regulations provide, as a general principle, that restructured loans must be considered non-performing until evidence of continued payment exists. The Regulations provide for ‘continued payment’ requirements for each kind of loan and vary depending on the elapsed term of the loan and the payments made by the borrower at the date of restructuring or renewal. The continued payment test is usually met if the loan is current 90 days after the restructure.

Banks are strongly incentivised to work with borrowers to help them restructure their loans as quickly as possible. A timely restructure will allow banks to reclassify such loans as performing loans and ease the capitalisation burden associated with such loans. If banks and borrowers of non-performing loans cannot restructure the loan, banks will be obligated to exercise remedies (including foreclosing on collateral) and reserve the relevant loans. By restructuring, banks mitigate the costs of reserving and placing heightened scrutiny with respect to their loans surrounding the non-performing area and avoid incurring further litigation costs.

In anticipation of the economic stress of the Covid-19 pandemic on bank loans, the Mexican Bank Association petitioned the Mexican banking commission to issue guidelines facilitating the deferral of loan payments, streamlining other restructuring measures, and maintaining the capitalisation of commercial banks. In response to such petition, the Mexican banking commission issued temporary guidelines intended to deal with the potential stress of the pandemic on bank loan portfolios and bank capitalisation requirements (the ‘Covid-19 Measures’).

The objectives sought under the Covid-19 Measures include facilitating the restructuring of a number of bank loans while maintaining their status as performing loans (including for the purposes of credit bureaus), and allowing banks to maintain their capitalisation by using their capital preservation buffers without affecting their liquidity (and without submitting a capital preservation plan if less than 50 per cent of the buffer is used).

Pursuant to the Covid-19 Measures, non-performing loans may be restructured without observing a number of requisites set forth in the Regulations (including, notably, the preparation of a credit file as if the loan was granted anew) if such loans were classified as performing by 20 February 2020, and the restructuring takes place by 30 June 2020.

Mexican banks are required to disclose in their 2020 and 2021 financial statements the effects of the restructurings made pursuant to the Covid-19 Measures.

Borrowers that will not be solvent after applying for restructuring pursuant to the Covid-19 Measures should consider filing a ‘pre-package plan’ business reorganisation. This provides a simplified proceeding that allows the insolvency court to issue an insolvency declaration based on a Restructuring Agreement that has the approval of creditors holding at least 40 per cent of the debtor's outstanding indebtedness. This eliminates the otherwise applicable requirement for an examiners' assessment of the debtor's books and accounting records before the judge can declare the debtor as subject to a concurso insolvency proceeding. Also, a Restructuring Agreement could be entered into by the debtor and its creditors during the liquidation stage if the borrower is not economically viable.

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