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PURSUANT TO PROJECT 515-72~7
UGO MELLONl
f4LVARO QUIROS
SAN JOSE. COSTA RICA
AUGUST 1987
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) II.
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IV.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
1 2 3 4 5
PURPOSE METHODOLOGy BACKGROUND FINDINGS CONCLUSIONS AND RECOMMENDATIONS Stli3!1ES T 1 ON:=:
FINDINGS
1 LURN AbH~EM~NI LUM~Ll~NL~
COFISA & AID RESPONSE TO PREVIOUS EVALUATION
3 PORFOLIO REVIEW
A) ADDITIONALITV B) RISK PROFILE C) DEVELOPMENT IMPACT D) LOAN ADMINISTRATION EFFECTIVENESS E) PROBLEM LOANS F) PROFITABILITy G) PIPELINE
4 INSTITUTIONAL DEVELOPMENT
A) GENERAL B) ENHANCEMENT OF DEVELOPMENT FUNCTION ::) 1 NS T I TUT IONAL CAPABI LI TIES D) FINANCIAL ANALYSIS
5 COLON AID LINE
b AID TRUSTS
A) GENERAL B) INDIVIDUAL TRUSTS C) CUNCLUSIONS ~N~ RECOMMEND~llONS UN TR~Sl~
CONCLUSIONS. SUSTAINABILITY AND LESSONS LEARNED
A' CONSL US 1 or JS B) SUSTAINABILIT,
RECOMMENDATIONS
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1. EXECUTIVE SUMMARy
PURPOSE
The purpose ot thIS study IS to
ReVIew CO+ISa"S complIance wIth the loan and trust acreements
entereo Into wIth H.l.D.
) - Evaluate Cotisa"s operatIons in as ~ar as they relate to the
fulfilmer.t of AID private sector development strateo",' tor Costa
Rica WhlCh 1S. essentlaliv. to promote AJ the Costa Rican
pr 1 V.;lte sector: Employment: and. C, Non traditlonal
e:": ports.
- Evaluate Cofisa s response to prevlous evaluatIons; ana.
- Make pertlnent suooestlons and recommendatlons.
) ME1HODOlO~~
ThrouohcLit the Report we wlll refer to "(.of15a" on =- consolIdated
.) bases eYen thouch there are three maln entitles In the Cotlsa
~roup: Corporaclon de Financlamiento IndustrIal. the holdino
company In Costa Rlca. Banco de Cof1sa (Costa Rica) ~nd Cofisa
) Inter"natlonal (Panama). They all utili:e AID tundInc.
various occaSlons and worked closely WIth project dlviSlon )
extenslvely revIewed the loan acreemerlts.
1
EXECUTIVE SUMMARY
amendments thereto. Implementations letter~ and trust aQreements •.
studIed the credIt and documentatIon fl:es and pored throuQh
information reports to and from the manaoement. We Interviewed
with borrywers and with customers of the trust department and met
wIth twc of the directors. See annex 4 for a lIst of people
intervIewed durIng our reVIew.
the InformatIon we required. ThIS oreatlv faCIlItated our task.
WhIle Coilsa has orown appreciably o~er the past year. 76
employees versus 51. it has manaqed to ret31n an enVIronment of
lntormallt\, and of easy access to top people that ma~ e~ 1 t a .)
deSIrable place In WhICh to work.
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In September 198~ Cofisa was qranted two loans bv AI~. a US! 10
millIon and the colon equivalent to USS 5 millIon at the tIme.
) The lc=al currency facllitv was dIsbursed CGmrnenCln~ In October
l q e3. ~ut due to serIous finanCIal problems COflS3 encountered at
about the same time. caused bv dIsputes WIth Its borrowers over
theIr ~ellqatlons to Coflsa in dollars and COflS~ sown torElon
lIabilIties to It~ foreiQn lenders. and because 0+ an u~tavorable
(to Coflsa. 1 COLlr t rLtll no at a time of m~s~ive de facto
, ." devaluatIons. the dollar loan did not commence dIsbursement untIl
mid 1995. By that tIme a final aareement with Coflsa s forelqn
I
j creditor banks had been reached. In AprIl 1985. '. Due to the disarray ~aused amona its staff \a declIne from 5~ In
EXECUTIVE SUMMARV
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1979 to 30 In 1984> bv the uncertalntv of the protacted dl$putes
with its borrowers and the neaotlatlons wIth forelan credItor
) banks. It took Cofisa some time to rearoup and beain utili=lng
the funding made available bv AID. Because of thIS SItuatIon AI~
had conceded an extension In the deadllne from 9-85 to 1~-8b for
Coflsa to draw down all the fund~ made available to It.
It commltted us:! 10MM in over C.{) IndIvIdual loar.5 to 41
borrolrJers. over 80% of WhlCh were project loan~. L~lthIn an 18
month perIod. In retrospect. we belle~e CO+Isa may well have made
these c~mmItments In too short a tIme. WIth the result that it
was unable to dIgest fully and select projects accordlno to
su~ficlently prudent bankina practIce. We say thiS In comparlno
Cofisa"s performance WIth the PrIvate Investment CorporatIon
(P.I.C.>. a paraII el organl=ation that In the whole of 1986
just apprcved one development loan WIth Just about the same staff
level dedlcated to project lend,na. WhIle the comparIson may not ,)
be q~Jite faIr. as PIC was a new oroanl=atlon that went throuoh
serIOUS oraanl=atlonal problems durIng 198b. It stIll 5erves to
illustrate the pOInt of perhaps undue haste. Hnother
conSIderatIon In this regard IS the lack of credlbllit\. 't"rom
It ha5 since recovered. that Coflsa had In the publIC
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which it had to contend.
FINDINGS
Findlnas ~re summarl=ed below. enumerated In the same seQuence as
EXECUTIVE SUMMARy t.
they ~ppear In AID scope ot work dated June 19. 198;. These arc
elaborated on 1n areater detall in sectIon 11.
1) COMPLIANCE
Cofisa manaoed to comm1t the entlre f 10MM of AID fund~ by the
AID extended deadline 0+ 12-31-86. A sectorial Ilst1ng.
contalnlnq tenor. fIx, emplovment. value added and other mlcro
econom1c parameters relatina to the ettects 0+ Hiu loans to
) Cotisa lS tabulated 1n Anne:: 2. Over 9U%. of all comm1tted USS
loans ,41 dS 0+ nOl'llJ are tor nan 'traditional e::part5 ana only
11% are short term lone vear or less} . lhe oreatest.
) sectorial concentration is 1n the lndu~trlal sector with L~.5%.
of the total portfollO: w1thln th1S sector. toe. the portfolio
is well diversified amona steel. plastlc. ceramics and small
) boats manufacturlno. amono others.
For lts dollar porfolio funded bv AID. Coflsa ha~ thus
satisfactorIly compIled with the AID mandate of concentratlna )
on develo'Jment loans aimed at f1nanclno non tradltlonal e::port
produclna activlt1es and emplovment. Cofisa. has 1n severa!
instances. taken on a disproportionate share of the risk VlS a 'J
vis the promoters w1thout taklna. except ln two cases out of
forty one. an eQuitv option (Bromelia and Seriplast!.
.J As for Its colon/AID funded portfolIo. even thoLloh
restrictlons on Coflsa are not so strictly deflned as for the
US* funding. we conclude that_ ~t lea£t recently. Lotlsa has
not. on an overall baSIS. ~ept to development lend1no to the
extent w~rranteed by the conceSSionary terms of thiS tundlnQ.
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EXECUTIVE SUMMARY
The colon loans w1th1n th1S local
somewhat development o~es: however.
currency portfo!l~ are
the portion devoted to
actual lend1nQ. as opposed to Just sltt1ng 1n 1nterest bearlnQ
short term investments In the Balsa or deposited 1n banks. IS
currently (July 23) less than half the AID funds il 116
mi IlIon vs. 11237 mi liion/. Even allowlno for reserve
labout 5.6%) Cotlsa has Just too much of these funds employed
money market operatIons least m1111 on) .
Manaoem=-nt is fully aware of the sltuatlon.
that It is due to several development projects that dId not
materlall=e as had been antIcIPated.
should soon chanae.
and said the p1cture
Cofisa has been unable to sell the US:! 4('(1.00(' eqUIvalent ot
new stock to non shareholders. as required under the terms of
the aareement with AID. Arranaements were made wIth local
stoc~ brokers who too~ out adS In local newspapers over the
past ,'ear'. On 1 y I es: than tt-IE' equi val ent to US! ...:'.'. u·~·(·
has been sold. The return of approxlmatelv 0% In the
cash dIVidend on the otferlna price IS just not suftlclentJv
attractive 1n view of altern~tlve available investments.
Wtll!e some ot the statt have ta~en courses •
structured tra1ning proQram for all off1cers 15 not currently
review. We have suggested some additIons to It but It seems
to be an adequate start. ~s for other main par~meters to
EXECUTIVE SUMMARY
Whl~h Cofisa was reQulred to adhere.
obtained AID walvers.
2) RESPONSE TO PREVIOUS EVALUATIONS
it has complled wIth or
One of the cbserv3tlons from last year"s eV3luatIon was the
lack of delecatlon In credIt authorIty to the Cofisa
management. ThlS situatIon has not chanced. But an
Up r.'e~artment." In recoanition of the Importance 0+ belng
close to a project borrower as had been mentluned In the
DreV10U~ evaluatIon.
Credit lines for commercIal loans are beinc lncreaslnqlv
e:tabllshed. A seasoned banler with lona InternatIonal credit
experlence has been apPOInted over the past year to head a
beefed up project/credit dIviSIon. Establishment of an
Account Officer corps. or e~en the beginnlnq of such ~ystem.
ho~~ever • has not occured. Sugoestions to AID have baSically
been heeded e~cept. perhaps. for the pollcino 0+ the colon
portfolIo and its development contents. as stated 3bove.
3) PORTFOLIO
a) Additionallty.
Given Cofisas 93 sublcans WithIn Its AID Dollar and Colon
p or t tc~ i lOS. amountIng to ~otdl commltmen~s equlvalent to W~J
12.6 million, we limited our detailed review to twentv-one
of outstandinQs/.
sectorIal sample.
We feel that thIS IS a representative
We also brieflv reviewed the fIle: of the
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EXECUTIVE SUMMARy
rem~lnlng most SIQnlflca~t loans and vIsIted Sl~ productIon
facilItIes and spo~e with ten promoters and manaaers.
In the SIX plants we vIsIted It was manIfest that the loan by
Cof1sa made the crucIal difference In the project aOlna ahead.
A case could possIbly be made for Cartex Manufacturera. a
clothlno assembly operation w1th a US. 500.U00 loan pred1cated
t h:·t
would have materlallzed e,en 1n the absence of a Coflsa loan.
We lllej the proJect. hOL..;ever. and It is undenl3tle that the
e~lste~ce of Cotlsa monev weiahed heavily in the parent
comc~n~ S declSIon.
In a sprlnkle 0+ USZ loans. SLICh as '( anber • In· ... ·erslones Zeta
and LAICA. it 15 somewhat Questionable whether a Cot1sa loan
was actually indispensable to the proJect~ qlven the strenqth
0+ the borrowers. However. these are more than o+tset by many
other loans where Cofisa. as said~ IS tak1nQ a
d1sproportlonate portIon 0+ the r1s~. such as. amana others~
~rbol Grande. Costa RIca Expeditions. 0.5. TextIles. Paco. and
Flores Intercont1nentales.
l.Je conel ude. theretore. that the Cotisa tollar loans are
overwhelminqly developmental 1n nature. and that. aenerallv
the projects +1nanceO would not have come ~o pa~s
had It not been for Cofisa·s flnanc1al aSs1stance.
b) Risk Profile •
WhIle Cofisa·s ~IO funded portfolio has a hiah percentaae ot
non performing loans (421. for the US. and 19% for th@ Colonl,
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EXECUTIVE SUMMARy
.. oil Slan1t1cant port1on (71~.> of these "past due" loan~ 15 due
to the unusually long delay by the BCeR in prov1dlnq the
exchanae and detract~ from the return to Coflsa on the AID
fundIng. Cof1sas portfolio IS well dlversifled by econom1C
sector .. nth an lamost. 50/50 m1:,: between nel.. and e::1st1na
ventures.
c> Ue~elopment Impact.
The multlpller effect of Cofisas loans IS already beCOmlnQ
apparent.. lts dollar port.tollo has aE It.S
purpose the financInQ 0+ exports •. w1th a tot.al d1rect
employm~nt generatIon at over 1600 people and annual exports
e¥p~cted to exc~ed US$ 2b mlliion upon complet1on of the
The porttollo 1S well d1versif1ed wIth no more than
23% 1n anyone sector.
The d~ta provIded In the quarterly reports IS bas1cally
accurate even It it had been somewhat optlmlst1C as regards
ant1c1pated activitv 1n the Forelqn Debt Swap Market and PCCR
approval to Coflsa Panama as a f1rst order foreign InstItutIon
(f1nallv rece1ved 1n Julv>.
Carte:: • Interplast. and Seriplast1c were 1dent1fied as the
protects lnvolv1nQ the most substantial transfer ot new
technoloQY to Costa R1ca.
Due to Cofisa's hav1ng exhausted the US. lOMM lana term loan.
and WIth no sian1flcant reflows expected for one to two
8
EXECUTIVE SUMMARy
years~ and also conslderlno the already 5ubstantlal amount ot
non perfOrmlnQ loans. there are at present no actIve procrams
to promote development lending. Management states that there
are four development colon loans on stream that should also
take up the "ldle" local currency funds.
The qualltv of credit analysis has improved considerably over
capabIlIty ot a borrower to produce suffICIent cash flow with
whIch to repay a loan. Complete standardl=atlon of all credIt
elements to achIeve unIformIty of format 1 naIl credl t
presentatIons IS qraduallv being implemented.
Coflsa s fraqmented loan accountability detracts considerably
from an etflclent and etfectlve follow up and antIcIPatory
posture. There is a Follow Up Department at [OflS3 and thIS
is a conSIderable improvement; however~ Follow Up offIcers
have no say In structurlno, apprOVlnq or even recommendIng
credIts. Indeed. other than for the CredIt Commlttee. loans
are not recommended by any partIcular offIcer. l-Je bell eve the
most etfective way to ensure accountabllltv and nurture credIt
staff ~rowth and maturity is to make the officer corps feel
respon5lble for loans they have recommended. The i nordl nate
amount of non oerformlnc loans at Coflsa attests to thiS.
Loan documentatIon IS thoroughly reVIewed by legal counsel.
who puts hlS seal of approval on It. We h~~E se~n n~ lnstan~e
ot loans haVIng been disbursed WIthout proper approval. We
had the dIstInct impress~on. however. that collectIon
EXECUTIVE SUMMARY
procedures may not be as str,ctly enforced as they should be;
letters by management, then legal counsel do CO out at recuJar
well defined Intervals. Borrowers, however. do not appear to
be unduly bothered. Perhaps a stifter penalty 1nterest rate
should be imposed on late payments, and strIctly enforced. Or.
at the very least. more v1gorous actIon from the Folow Up
staff could be Implemented.
Cotlsa is processIng loan applicatIons talrlv expeditlousl~.
ta~lng on average a month to Olve prospect1ve borrowers a
fInal answer. whIle tor a commercIal borrower It may take only
a fel.., days. As for fle::iblilty 1n asslst1nc 1tS project
borrowers. we glve Cofisa hIgh marks. It has beEn workIng
closely w1th Its borrowers in fIndIng addlt10nal partners and
1n aSslstlng them wIth theIr financIal prOJectIons, among
other th1ngs.
eJ Problem Loans.
rhere are nIne loans IdentifIed WIth varIna decrees ot
problems in the dollar portfol1o, for a total prInCIpal amount
ot US:f. ::.4 MM. Total loan principal WIth Interest past due 70
days or more (now on zero accrual) total US:t· 4 -. .Ji.. millIon
lnobodv seems to know why 70 days are used as the cutotf tor
carrV1no loans on a ca~h basis. I nstead of the mot-e Llsual QI.'
) days: this is SImply the way it's been done for many years'.
Of the US$ 4.2 mil!.~n on zero accrual. almost US$ 3 millIon
(7:!1.) • is due to Central Bank delay in processlnQ the F I X.
j U~ing a rough estImate that 10% of bad debts may ultlmatelv
result in wrIte offs taft~r taking all coll~teral). the US!
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EXECUTIVE SUMMARy
b14.UO\.' bild debt prOYl Sl on appears adequate. Thl s reserve for
bad debts is beIng augmented by the US$ 200.000 AI~ provls1on
that had been segregated in the Cofisa net worth accounts.
While the colon portfolio shows "only" 19'1. of non perform1ng
.l oans. thls IS an even better representatlve fIgure of colon
problem loans in that the great majority are past due for
several months and do not have the "e:-:cuse" of some doll ar
loan~ of having to wait for the avaIlabIlity of torelcn
e;:chanQe trom BeCR.
f) Profitabllity.
Wlthout anv allowance for bad debt reserves trom thls ~ear's
earnIngs, annualIzed net profits would be C. 39.b mIllIon. or
4.71. p.a. on the AID funded assets. Thls is somewhat lower.
even allowing tor considerably hIgher adminIstratIve costs
than for reqular commercIal loans. than a spread ot eaSIly 8%
p.a. on the cost of funds would lead us to assume.
Furthermore. allowing for the same bad debt reserves on ~lD
funded loans. as assumed by Coflsa manacement In its
prOJect1ons last year. but not yet reg1stered. we would end up
with a net overall profit of only C. 13.75 millIon on total
AID furodlnQ (l.n~ p.Ci.'.
• On the Trust funds. the annualized profits of C. 23.3 million
• profIt on all AID related activities would be C. 37.25 million
(6.b~. p.a. on its average net worth and b2% of its annual net
• 11
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EXECUTIVE SUMMARY
profit. after debt"debt provlS10ns).
-- One note on reported profits
The above figures are extrapolated from those provIded to
us by Cofisa. We must note. however, that, In our vIew.
Co~isa constantly underestimates earnlnQS on Its US$
portfolIo, on which it IS not accruln9 interest due to
borrower S beIng late. If we were to write thIs amount,
~bout US. 300.000 lrouohly C. 20 million) back Into the
annual profit. thIs would rise to C. 57.25 millIon. or 72~
ot restated total Cofisa earnings vs. AID fundinQ of 40~
plus Trust activities.
g} PIpeline.
As AID dollar funds havp oeen all committed and requests for
debt rescheduling have alreadv started comIng in. wIth most of
these loans still in the grace perIod. there 15 ObVIously no
need for any pIpeline of projects waitlnq for flnanclnq.
While some expected projects for Colon fInancing have fallen
throLIgt-., causing the l::I.lsually high availability In the AID
Colon tunds. Cofisa management maintains that there are more
than suffICient projects In the wings to take care of thIS
~co~rent surplus •
4} ORGANIZATIONAL STRUCTURE / INSTITUTIONAL DEVELOPMENT
Coflsa can now offer full bankinq servIces lexcept for current
accounts. as limIted by law) and take advantage of medIum term
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EXECUTIVE SUMMAR~
fundlna available through the BCCR. Includlna the new
"A.I.R.R." program funded by AID. &anco de Coflsa was
chartered about el~ht months ago and now, wIth t~IS new
entity. wit~ the Costa Rican Flnanclera (the holdlno company)
and wIth the Panama F1nanciera. the Cofisa oroanlzatlon has
been converted 1nto a "min1 fInancIal conglomerate."
WhIle Cofisa has gone through a major reOrqanl=at1on 1n the
past two years with more emphas1s on prote:sional cred1t
capab1lit1es. the overall heavy cont1nu~d depencence on the
Board of-D1rectors tor day to day dec1s1ons. and. above all.
the lack of accountab1lity for cred1ts cont1nues to detract
from effectiveness • The high percentage ot non perform1ng •
loans attests to th1S.
Management 1S capable and exper1enced. The faIrly new General
Manager with long and successful 1nternatlonal experIence is
closely assisted by two capable General Assjstants WIth many
years experience in Cofisa and who are well respec~ed
1 ocall v. On the technjcal side, officjal staff quallty ,s
oLltstanding from the professional as well a: academ1c
st andco1 r.t. Conslderlng the thin local ava1lab1lltv of top
notch people, Cof1sa has done quite well in its staff1ng. It
has agronomlsts, arch1tects and econom1sts w1th the capabillty
to analyze. structure, and adm1nister development lendIng.
Cofisa has establ1shed consjderable expertise 1n development
lendlno and is building on It. Wh1le the overall d1rect
fundIng from AID is expected to contInue declinlno 1n relatIve
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EXECUTIVE SUMMARY
terms as Cof1sa diversIfies and grows (It IS down to 40~ from
44% Just nine months ago) development lendIng will remaIn an
important part of Cofisa's activities. Manacement is fully
cogni=ant of 1tS importance. especially considering that Costa
Rica wIll have to rely on thIS type ot funding for the
fore~eeable future as the flow of unsecured forelon commerc1al
Financially Coflsa"s performance 1S less than excIting.
earnlnc a 10:-·' ...JI. return on averaqe net North but when
1 t 150
one
considers that: a) it 1S a colon denominated organization
(wlth safe market yields of eas1ly 25% on short term Colon
investments) ; b) it has not yet passed provis10ns tor bad
debts: and. c) that 1t had extraordinary calns so tar th1s
year, the return becomes even less exciting.
Part of the reason for this low return on equIty 1S the low
leverage (debts to equity) of only 2.6. Th1S is too low for a
flnanclal institution. greatly limiting the potentlal return
on equity (the averaoe leverage for a private Costa Rican bank
1S 1n the range of b to 7). But at the same time. thIS
presents stronq capital1zation characterlstlCs. With 3 good
capacIty to ab=~rb potentIal loan wrlte ofts. Financially
speak1ng, one of Cof1sa"s pr1me concerns should be to leverage
up, thereby permItting stronger return on equltv potentlal
that woulci COlnpare more favordblv to oli-Ier 10Lesl b~rlk=.
5. COLON AID LINE
WIth fIfty-two current borrowers for a total ot ~ 120 mlillon,
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EXECUTIVE SUMMARy
the portIon loaned out ~mounts to just 50% of the total amount
funded by AID. WhIle Management has states that thIs IS a )
temporalIty unexpected sItuatIon and the AID line should soon
be fully utIlized. we note that throughout most of the year
AID Colon funding has been far from belnQ fully utilIzed In )
outr ight loans. While 19% of loans In the nonpertormlng
.;. ...... - . .-. --- .. '. .... - ... - ... '- - -
the less than 2.5% reserves appear somewhat inadecuate. )
Ev~n for the amounts actually loaned out. we saw. overall.
less development lending than for the dollar portfolio. We
) looked at seven such loans In detall. Loans to borrowers such
as Productos de Concreto, Manufacturera de Cartaqo. and
Cafetalera Las JOYltas do not appear to be develo~mental;
besides. the Information on file was In manv cases far less
complete than for the dollar portfolio ma~lno It much more
diff1cult to form a precise opinion as to Qual1ty of the colon
) portfolio.
6) TRUST ACTIVITIES
Cofisa has been bUilding up considerable e::pert1se 1n Il'I:maOlng
trust funds on behalf of AID. At present. Coflsa 1S trustee
tor three AID trusts: e 1.000 million to Fedecoop; e ~15
ml1110n tor hous1ng construct10n= plus a second hous1no trust
cf ~ 278 millIon to fund the Private Bankina Sector for
onlend1ng to 'fInance low CDS't h 01..15 1 no plirCllasers.
Addi t I ona11 y, Cof1sa is the aqent for a fourth trust tor ~
259 mi1110n. the Africa Palm Fund. In this last trust Banco
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EXECUTIVE SUMMARy
lnterfin i~ the trustee.
Based on our conversatIons wIth the trust otflcer. on revIew
of the agreements. on visits (four) to tne actual hOUSIng
projects and on revlewlnq of several reports \both Internal
and submitted to AID perIodically> we conclude that Lotlsa IS
baSIcally adherelng to the terms of the
1-.-j • (,."\ -
Trust
audit of Cofisa s complIance wIth the terms ot
aqreerrlents.
0" ~O:l::::' ..
the trust
aoreements. we concentrated our revIew on the effectIveness of
Coflsa = ad~lnistratlon and on the pr01'ltabllltv ot the tru~t
accounts.
These trust funds are under the day to dav responslbllltv ot a
graduate archItect who has experIence in trust actIVItIes. and
one assIstant. Thev are aSSIsted by the accountIng and
collection department. with the Board of DIrectors revIewIng.
appro"'1 ng. or rejectIng all i ndl vi dLlal houslng proJe~ts
submitted bv two intermediaries, o. V. A an dO. V.I. These two
organIzatIons were contracted at the request. a.nd or. terrr:s
approved b \>' • AID. A Coflsa director spends an avera~e of two
full days a week on Coflsa's trust buslnes~.
Cofisa s Trust Department has introduced varIous comprehenSIve
reports on the status of each trust. tne amount d I sbLlr sed.
funds temporarily invested on account of the trusts and on the
vC:lr lCJLl: hOLlSlrlQ projects wltrlin the trusts. T hIs 1 n for ma t.l CJ~)
is readily avail.ble and ~ept constantly updated.
Cofisa's own estImate on trust bUSIness protitabllity 15
lb
EXECUTIVE SUMMARY
around e 850.000 per month excludlna commissions on funds
Invested through Cof~sa~ own broker. PreCISion ~s to
profltability here is not possible sInce cost allocations by
department are not available. other than In educated
"ballpark" E'stimates. But accordlnq to these estimates. the
figure appears to be reasonably accurate. As to the Balsa
expense that would be Incurred anyway by the Trusts an~ thus
are not relevant to the calculatlon of trust proflt~~lllty.
they do represent earnings to Coflsa arislno from Its
mana~lng the trust funds.
We briefly reviewed the trust investments which appear to ha~e
so far vlelded a higher than antlclpated return. and. In view
) of the expected dlsbursements do not. on the whole, appear to
have been rolled over more than necessarv. BeSIdes. these
funds currently make up only about less than 20~ of the total
) funds under management.
CONCLUSIONS AND RECOMMENDATIONS
It is doubtless that the dlrect fundlna of Cofisa bv HID plevea a
role In reestabllshlng Coflsa as a solid tln~ncl31
lnstltutlon.
) salutary changes that conditions attached to the loans forced on
As lts manaaement states. Cofisa lS now a radically
chan~ed orqani=ation from what It was Just three years aco. lne
fundlng also aSSIsted Ccfisa to reaaln the publIC
which had been badly sha~en bv events that took Loflsa to the
17
EXECUTIVE SUMMARY
brInk by earJy 1984. AID fundIng has enabled Cofjsa to bUlld
considerable eMpertlse in develop~ent finanClnQ and. whIle It has
found this path strewn wIth many uncharted danQers. or because of
it, Coflsa has grown Into a much more solid InstitutIon.
But, the local bankIng tleld has Qrown much more competltl~~ than
three years ago with more fInancial entitles vlelng for a slIce
ot the pIe that IS not lncreaslnq perceptlblv. keed per C:3Pl ta
natIonal Income has been kept from f3111no In the best ot years
and IS not E?::pected to rISE? bv much. S'tlJ.j
depend on multInatIonal and bIlateral assistance.
de~elopment purposes. The expertIse Coflsa has qalned should be
nurtured and e::panded whIle. SImultaneously cultlvatlnc Its
commercIal banking bUSIness WhICh so tar this year has pro~ed to
be very remunerative.
liJe have several recommendatIons to permlt Coflsa to ~::paild trom
Its professIonal base. despIte the overall very competitIve
enYlrOnment in a market that wIll, at best. remaln sluqqi~h. The
main recommendations. which should be Introduced WIthIn the next
12 months and fully implemented by 1988 vear end. are:
- Nurture Its offIcial staff contingent bv deleqatlng.
qrClduallv ~nd systematical Iv. Irror E? and
authorIty to them. This should be achieved bv brlnOlnQ the
best of them into the decjslon makIng process, both In the
credIt and operatIons areas.
- ~s an Inteoral part of thIS nurturlno. bUlld up an ~=count
• 19 ,) 'l't i
\'/\
•
• .)
EXECUTIVE SUMMARY
Of+Jcer corps wIth Dfficer~ a~siQned and responsIble for QIVen
accounts and havlna defInIte responSIbIlItIes In manaQlng.
ad~Jnlsterlng. and marketIng relatIonshIps. This Implies~ in
tIme. building up a professIonal group of ban~ers WIthIn the
staff~ with IncreasIng credIt accountabIlIty deleQated to
them. from credIt initIation to fInal repaymen~. ThIS also
implIes haVIng the Board gradually but sy~tematlcaJlv abandon
Its sole dIrect credIt authorIty. and snare the credIt
thIS approval authorltv. ThIS would permIt the board to
concentra~e more In the areas o~ establlsnlno polICIes ana
strateales to dIrect sound portfolIO orcwth. and of
supervlslng the management of this portfolIo.
- SchedulIng Training Programs. both WIthIn and outSIde
Coflsa. WIth all offIcers taking at least one course a year.
whatever theIr real or purported degree 0+ knowledae. We lIve
in a very dynamIC envIronment; new technIques and ways of
dOIng bUSIness are constantly developing. ane a revIew ot the
baSICS IS always helpful.
- Standardl:e Credit PresentatIons WIth the same elements In
the same sequence for all presentatIons. lhlS includes
aagregatlng total amounts of commlttments whether or not
disbursed to anv one borrower bv any company In the Coflsa
group as the determInant of credit JurIsdIctIon •
those who make the mark should be rewarded and Qlven
1ncentlves to continue; the board should Investlqate
19
• )
)
• )
•
• , ;
• )
• )
EXECUTIVE SUMMARY
approprlate and competItIve compensat10n levels and practlces
to make sure that the good people 5tay.
SUGGESTIONS FOR AID
- AID should review its requIrement that only non shareholders
purchase the mandatory US. 4(~.000 worth of stock it wants
Cofisa to sell, especIally In view of the present Loflsa
earnlnQs cnaracterlstlcs that render thIS optIon unrealistiC
at the present time.
- ~lD should police more closely the full emplovment of lt~
colons funding line.
- For trust actiVitIes, AID could consider placinQ an
incentive on Cofisa and OVI/OVA to use the fundlnc In the
housina trust to finance hOUSing constructIon and finanCIng by
ultimate buyers; as of now. the trust fees to Coflsa and
OVI/OVA are the same whether or not these funds are Just
sittIng In money market instruments or workinc to increase
the supply of low cost houses.
20
)
)
•
•
• . )
11. FINDINGS
1. COMPL 1 ANCE WITH LOAN AGREEMENT AND 1 MF'LEMENT AT 101.J LE £1 ERS ------------------------------------------------------------
We believe Cofisa has. in the aqqreqate. compIled wlth the thrust
of the bas1c ObJect1ves sP-t by AID 1n Qrant1ng the Joans: lts USf.
AID funded portfollo lS overwhelmlnqly developmental wlth more
larqer share of the rlsk V1S a V1S the promoters and wlthout.
e:·:cept t~JO cc?ses. the compensatlna ent1cement of stoc I~
optlons. Over 8')'1. of the pOt-tfollO lS to e::port orlented and
labor lntenslve proJects. All loans are to the prlvate sector.
See anne:·:::: for a sectorial, emplo','ment. and fIX oeneratlon
and project de~elop~ent stagE breakdown.
In determininq that Cofisa has. overall. compIled with the
mandate on AID fundino we consldered the concept ot
"additlonality" to Its portfolIo. That lS. development loans to
be such must be loans that a commerCIal lender would not have
entered lnto WIth commercial sources of funds.
As to the maln spec1tics Cofisa had to comply w1th. TolloWlnQ 1S
a schematlc comparlson of maln requlrements and degree ot
complIance.
21
FINDINGS
MAIN STIPULATED AID REDUIREMENTS:
REQUIREMENT COMPLIANCE OR PRESENT POSITION
Coflsa to provide .5 mIllIon Coflsa's own net worth IS 1n
from 1tS own resources. e::cess of US:!' 9.3 mIllion.
Prepayment It Coflsa s posItIon WhIle Loflsa fInancIal POSItIon
1mproves substantially. has improved appreciably. in
tne past tw~ years~ Al~ ~Un~lnq
still makes up 40% of total
resources (and 62% of earnIngs)
and .. n 11 keep on beIng a
substantIal part for the
foreseeable future. At any
rate. as a Costa F·a can
Institution. Cofisa could not
possIbly obtc\l n compar~ble
tLmdi no trom other outsIde
commercIal sources.
On best eftort basIs. obtaIn Cofisa has sold so far the
additlon~l pald In caoltal eOlll val ent of less th2'n
• ) equIvalent to US$800.000. US:f'20.000. While efforts are
c:ont i nlll no t,o place the
rem.:\! nder • they are not
• ) e:: pec:ted to bear much ot a
response. Cofisa's earn1nqs at
• '-" ~.I .........
• )
FINDINGS
Staff tralnlno & Improvement
of manaoement system.
23
about 1~% p.a. of net worth do
not compare favorably wIth
alternatIve YIeld of easIly 25%
(in the thin Costa Rican eQulty
marJ::et> • See recommendatIon
for a posslble solutIon.
Management lnformatlon systems
with up to date computer prlnt
outs on many facets of credIt
and operatlons have been
implemented over the past two
years. As for staff tralnlng.
officers have been sent to some
courses organi=ed by CINDE and
the bankers' association, but
most of the training In the
credit area has been on the
Job.
LaJe have not seen a staff
tralning program tor 1981 and
beyond, wlth speclfics alms as
to whlcn people ShOUld be
trained and for what.
Our that
tralnlng has been accompllshed
than what was originally
· .... _-_ ... _ ....
FINDINGS
Use retlow tor the same pur
poses as the orIginal funds.
Procurement and ocean trelcht
stIpulation for loans fundlng
by AID.
24
enVISlonpd when the Coflsa loan
contract was Sloned. Part ot
the reasor. has been the
the dlfflcultv in
approprIate proqrams, and In
sparIng staff time.
unJ. y over tr-Ie past. te\"I monttl~
has Coflsa utilized the full
u5..i ,l') mIllIon loan. for ac. 't l c.: cd ,l y
all subloans are still in the
grace perlod. Several requests
for rescheduling have alreadv
been recel ved from varIous
borrowers and some have already
been conceded; therefore~ not
much has been available tor
relendino. In the colones/ClNDE
11 ne ~o,je found. however. at
least ebOMM not utlll:ed at
present in lendlnqs.
We dId not look in detail at
compliance. Cofisa seems to
have adhered but a full reVIew
would be requ1red to confirm
full compllance wlth thIS
)
)
)
• )
• )
• )
FINDINGS
b5/35 non traditlonal versus
traditIonal exports financing.
30/70 short versus lon~ term loans.
CommercIal rates Charoed to
subborrol'llet- s.
Flrmlv establIsh that US$
borrower~ have an unequIvo-
cal US$ obl1gation to Cofisa
and cannot ever sat1sfy it
vIa payment 1n Colones.
25
Cofisa amply complYlnQ w1th
82/18 as of 6/30/87.
Ditto with 10/90 at 6130/87
Lompj1~d both 1n $ and L. wlth
the $ rate at LIBOR + 3% whIch
1S the maXlffium rate allGw~d Ly
the Cent~al Bank for fore1gn
indebtness registration.
While. of course. all practical
contact with a $ borrower are
from Cofisa San Jose. Coflsa
has set up a Panama office from
whlch $ loans are booked with
qu~rters. staff tele:·: and
b1lllng from Panama on account
ot Cofisa Intl. Panama. Durino
OLlr reVlel-l. Coflsa F-'anama
recelved BeCR lono
recognition as a FIrst Order
Foreign Financial Institution.
which recognItIon flnally. sets
the officIal seal to Cofisa
dollar lendIng.
.-)
• )
• )
FINDINGS
ApPoIntment of a seasoned.
senior credlt offlcer and set-
tIng up a structured follow up
system for all credlts.
Develocment of loan DollCY and
manaaement intormatlon system.
2b
ThlS has baslcally been
accomplished.
A dr.::tft cr-edlt Dc,lie-.
procedures manual h3s been
sLlbml tted by the project
division head to senIor
management for reVl e,~ and
comments. l-oJe have revIewed It
and consider It a good start.
We would llke. however. to see
added to It two complete
samples of actual credit
presentations. one tor a
commerClal and one for a
project loan ''IIi th complete
finanCial analYSIS and the
necessary attachments. Models
of what a presentatIon should
complete. wlth a clear
of the total e::posure of
Coflsa. lnc:ludlnQ new amount
)
)
)
)
)
)
)
)
FINDINGS
Ouarterly reports to AID.
J5~).000 IlmIt per subborrower
2% reserves on Qutstandlnq AID
funded subloar.s.
27
applied for. wIth the headlng
laId out In what should become
a standardized sequence for all
credIt presentatIons.
These are
submItted.
belng
Data
reoularly
contalned
there1n are ba~lcal1Y accurate
even 1+ 9 1n retrospect.· they
appear a Olt too optlffilstlC
such as In the case of expected
activlty on the forelgn debt
swap front and the expected
BeeR approval of Cofisa Panama
as first order. Also. we
believe the report should name
the borrowers involved when
glvlng e::amples 0+ portfolio
actIvlty
Only two excesses tor NhICh
approval obtaIned by A.l.~.
Cofisa Panama has a $614.uVO
bad debt reserve versus a
total portfollo of about f 14.8
mIllIon
Coflsa
(Includlno AID fIOMM,.
has segre~ated an
• )
• .)
• )
• \ ..
• )
• )
FINDINGS
addltional the
net worth accounts for AID
reserves, and these are now 1n
process of beinQ wrltten down
in accordance wlth normal
banking practlces.
No shareholder to own more This is belnq compIled with.
than 5% [oflsa stock.
3% risk mlnlmi:atlon fund set Ditto.
aSide each year and placed in
an escrew ~ccount in favor or
AID.
Mar kl no of "AID assisted" ItJe ScHII ttus on thE 51:: prOjects
posted on premises of debtors. we visited.
SeqreQated earnlnQS by source Compl i ed I.,i tho
of fundlng.
2. COFISA 5 AND AID'S RESPONSE TO THE PREVIOUS EVALUA1ION
CDFISA
A, CredIt Policy Manual: Deslqn and Implementation.
A Credlt PolIcy Manual has been drafted and IS now with
management for review and comments to draw up the final
version to be presented to the Board for approval. We
28
)
)
)
)
)
)
)
)
FINDINGS
revlewed the draft whIch seems to be an adequate beQlnnlnQ.
We waul d. hO''Iever, 11 ke to see at 1 east two e:: amp 1 es of actual
credIt presentations thereIn Included.
8) Target CredIts.
We were shown plans/projectIons for a year ahead. fhese are
basIcally projections ot Income and expenses but do not
Incluoe specIfic target accounts to go after nor the Input
from the lending platform In consonance with a ":ero based
bLICiget 1 ng" pr oce5S.
C) Deleg~ted Loan Approval Authority.
It stIll does not eXIst 1n any real mean1ngful sense. Top
management has an unsecured lendIng authoritv of colon 1
mIllion (less than US. 16,000) in a financial instItutIon WIth
total consolidated assets of US$ 33.1 million. Thet-e are no
delegated credIt limits to a credit committee or to key credIt
offIcers or supervIsors.
There IS a credIt commIttee, as had been reQUIred in the ~I~
agreement. and it is a valId and valuable change for a Costa
Rican credit Institution. The credit commIttee is composed of
four senior offIcers. includIng the head of the proJect
deptartment (Credits) and two dlrectors wl+h credlt
e::per I ence. But the Credit Committee only recommends credits.
whIle the Board passes on them.
Cofisa 5 Board is a working Board that holds lengthy meetings
every t-Jee\::. It is composed of nine senIor and well reqarded
29
FINDINGS
bU5inessmen. of which only three can be saId to have
professIonal credIt experience.
OJ Implement Follow Up Systems for All Terms Loans.
This has been done. A Follow Up Department. composed of two
people who reqularly VISIt borrowers. reviews the progress ot
prOJects. or lac k of it, and obtains or soliCits up to date
on assistance to borrowers, actually assisting them In drawing
up and updatlno proJectIons and Olvlnq advIse on flnanclal
aspects. The Follow Up D~ptartment, however. onlv enters Into
the scene when a loan IS approved. It has no dIrect vOIce on
ho~ a loan should be structured.
E) Set Up CredIt Lines for Revolving Uses.
ThlS has been done. espeCially now that ~anco de Coflsa has
been established. as of la~t November. These lines are for
commercial borrowers and a commitment fee IS charged on
unut1ll=ed portIons of the line of credIt. LInes are
per10dlcally rev1ewed tor renewal or changes. It 1 S a tooi
that. JudICIously used. should do much to assIst the new
) Banco de Coflsa 1n its expansIon.
F) Annual Review of Long Term Loans.
~ reVlew ot credlt tlles revealed that thlS 1S belng done )
sporadlcally, although there is practically no reVlew of colon
• informatlon in the credit flIes. In the colon portfolIO, thls
sltuatlon presents llttle change from what was found last
30 )
)
)
)
')
FINDINGS
year. We are told that this SItuatIon IS belno change1 wIth
all term faCIlItIes havIng been put on a regular. at I east
annual. reV1ew. ThIS, we believe. IS essential. especlally 1n
obtaInIng up to date financIal InformatIon on all term
borrowers. and in achievlnq an antIcIpatory posture.
G) Create the Position of Credit Head.
- .. -- ---,.---_ :.... __ ._\-JI;'-- ....
credl t professi onal who now heads what 1 scalI ed the "f.'roJect
DIVISIon" L-lith a total staff of eioht. In turn subdiVIded Into
three departments: 1) The CredIt Department (three people.
headed by an experienced credIt officer): 2) the Follow Up
Department (two people. he3ded by an exper1enced credIt
anolvst. and an appraIser>; 3) the Trust Department ( t L'l/O
people. with an architect in charQe who has good experience 1n
hOUSIng proJects). The Project Dlv1slon Head. e::perienced in
International banks. has brought and is brlnglnQ1mportant and
needed Innovations to Cotisa. espec1ally as they relate to
streamllng credit analysIs and standardizIng credIt
presentatIons.
H) Account Officers Corps.
ThIS concept. prevalent In standards and procedures of
i nternat 1 anal
is still beyond the fIeld of vision of many Costa RIcan Banks.
Coflsa has not chosen to reorganize alonQ these lInes.
II Budgetlnq System.
A system 15 In place WIth 15 profIt centers to prOject lncomp
31 ,'\ ~j"
FINDINGS
and d1rect costs for the year aheac. Indirect. not allocated
costs. however. ma~e up 40% of total operat1ng costs. ~s of
) th15 tlme the system 1S still not sophisticatFi. I t .. IOU! d be
helpful if the information system labeled the amount of
earn1ngs from Cofisa·s own resources Slnce dl~ldends are
) allowed onlv from these sources. ThIS would avold any
amb1cuitles when analv:inq dividend payouts.
HJ Coflsa to Take the InitiatIve 1n Processinq FOrelCln E::chanqe )
Allocations of the Central Bank for its Borrowers.
ThIS IS be1ng done.
) A. 1. D.
AI REflc~s Ut1li:ed Soley for Same Purposes as Or1Clnal Funjs.
Coflsa understands this reqUIrement as it is spelled out In
the or1g1nal loan agreement; hOL'IIever. there have bEen no
appreciables reflows of prinCIpal yet. Reflows of Interest on
a portfol10 of US. 10 mill10n amount to about US. 1 mlllion
. 1 per vear (10%: LIBOR + 3%) .
Bj Careful Wat=h of Short vs. Long Term PortfolIO ReqUIrements.
Coflsa is well w1thin the loan agreement (Whlch reqUIres a
:.5.'65 tTll::) WI th a current 2()/80. However. AID mioht here WIsh
to reconsIder the Issue, and negotIate it with C=+lsa. sinCE?
now that the full US. Iv mIllion has been placed. t.here 1S no
real need to perm1t ong01ng short term lend1no WIth these
f LH I (j:' • e;;c.e~t per haps t.o of inance non t.raOI t.Iona! e:;por ters
such as D1seNo y tonstrucclOn Naval where thIS structur1ng 1S
deemed to be the most appropr1ate.
32
FINDINGS
C) SubstItution of Monltorlng to Verify Development OrIentatIon
and Conditlons Instead 0+ RequIrements 0+ ueteH 1 ed )
DocumentatIon and ReceIpts on How Individual Loans Are Made.
NothIng much appears to have been done by Al~ In the respect.
However~ now that the fIrst use of the USS 10 mIllIon has b~en .)
made, Cofisa understands these documentary requlrements to
) 3. PORTFOLIO REVIEW
As of b/7b Coflsa had 93 subborrowers funded wIth AI~ loans: 41
in USS and 52 in colones. Of the 41 in USS, only 5 are short
term. u~ toone year. WIth USZ Qutstandlnq of f 9.85 mIllion
and a colon portfolIo equlvalent. at the current exchange rate.
to US! 2.2 million. the dollar portfolio is by far the ffiOSt
signifIcant, al so consi deri ng the f orei gn e:: cr'clnge r 1 sk aspe::t.
l&Je r eVl ewed 22 subloans 1 n detal I I. see at tact-led 1 nd 1 VI dual reVl e~'J
forms) and took a cursory loo~ at most of the other loans. See
attachment 2 for a sectorIal breakdown of the HID funded
portfolIo.
On the portfolIO evaluatIon elements:
A> ADDITIONALIT)'
We met WIth 10 r~presentatlves 0+ six US dollars and colon
~ubborrowers which included three US. two Costa RIcan and a
Fer U.l clll c.ompany. lnelr operatIon ranqed ~rom plastIc. a~qs,
ornamental plants. clothing fa::tory. earthernwear products and
bot tl e5. Four of the six projects were new enterprIses whIle
FINDINGS
two represented sub~tantlal expansIons.
On the basIs of the fInancial informatlon reviewed. the
IntervIews and our knowdledge of the Costa RIcan +inanCl~1
scene. we can unequlvocally conclude that possIble only 1 VI.
and surel y not more than 2('7. of comml tments bool.: ed COLIl d tla .. 'E.'
ta~en place if lt hadn't been for AID fundlnq. H caSE mIght
f ... : ~ ~ ::. • :. ~ _ ~ : -' ; ' ..
owned subsidlarv of a strong US parent. on whose guarantee the
loan IS predlcat2d. on whether the Investment would have talen
place anywav e~en wlthout AID monev. l.Jhll e cannot be
unequl v.:lcall y stated el ther ~Jav. the e:: 1 stence 0+ ':':1 D funds
was a weIghty factor ln the parent's declslon.
There are some other stronq borrowers. li~e ~anber. L~l[~. and
InverSlones Zeta. whose finanCIal strength miniml=e~ the
credIt rIsk usually assumed as synonymous WIth strIctly
develcpment lendlng. ?is we C.re. however. talkIn9 0+ US:!'
lendIng. it is dnubtful that even these strano borrowers would
have been able to obtain US! fInancing had It not been tor AID
funded loans. All borrowers we VIsited. except one. planned
to e::port 1001. of thel r prOdLl'::tl on.
There are some short term credit facilIties offered to coffe~
exporters. lhese are tradItIonal exports. and hence commerCIal 'I )
fInanCIng ventures. While thIS IS permitted withIn the terms
I !
of the loan agr eement. LIp 'to a ma:: 1 mum ::;':':'.. I t does not appear
• I j that these relatIonshIps contInue to be JustIfIed WIthIn the
ObjectIves o~ the Coflsa proJect. AID could conSIder ~sklno
·34
)
'\ J
• )
• " )
• )
FINDINGS
Cofisa to allocate these f~nds to deveJopm~nt tundlno now that
there are no e:: cess doll ar funds (i. e. now that the full USf
10 million has been drawn). Coflsa could" then contInue WIth
the coffee e::port lines, but utIlIZIng Its own funds.
Ec) RISk PF:OFIlE
Because of the developmental nature of the portfolIo. the rIsk
8r-·~ ..
Not surprlslngly, slgnificant amounts of past due obllgatlons
e::ist at thIS time. See the "Problem Loans" section belol'J.
We revlewed three appll~atlons rejected recently. We concur l~
the re)ectlons; one was a short term loan in colones to a
heaVllv Indebted borrower. allegedly to finance the purch2se
of raw materIal, WIth only the raw materIal Itself oftered In
support whIle another was a US. 550.000 proposed loan to
another heavily Indebted borrower that recentlv took over trom
a failed company. with only 60% of support offered In real
estate and a chattel mortgage of doubtful realIzable value.
WIth the advent of the new project dlvislon head. much more
emphaSIS IS now being placed, as it should be. on the
borrowers prospective capacity to generate the wherewIthal
to repay a loan as agreed, as opposed to mostly relYIng on
the value of the collateral as had been largely the ~ase.
Nevertheless. given the overwhelmingly development portfolIO
proper that support to Coflsa commltqents should loom large In
the deCISIon of whether or not to grant credIt.
35 .\
\/\ '.
FINDINGS
WhIle some loans are amply collateralIzed. the oreater
proportion do not have suffIcIent outsIde support. In several
loans. Cofisa has apprecIably more at ris~ than the promoters
and has in only two loans (of 41) an optlon to convert some of
the loan into equIty. In many cases. therefore, Coflsa is In
the Cl~sslcal unwarranted POSItIon of ta~lng most of the rIsk
net Interest spread. an effectlve 4 to 5~ maXlmum per annum
while the promoters end up WIth many tImes that amount.
The degree of rlsk Coflsa can take IS also. ot cOLlrse. a
fLtnction of ttH? e::pected retLtrn. When the AID loan to Cotlsa
was conceIved. back in 1982. expected net lnterest spreads to
Cof1sa were substantIally h1gher than they are now: Ltp to
twice current levels tor a net spread ot eaSIly l ·~"·i _ .. p.a.
l&Jtu I e It 15 impOSSIble to quantlfv the addItlon~1 rIsk
afforded by a h1gher spread. It IS true that WIth a ~~ spread
) Cofisa should reasonablv be e::pected to take on a sc.mel-4hat
lower rlsk than it could WIth a 12% spread.
'\ Cofisa does have a good mIX of finanCIng ot new prOjects to
expanSIon ot gOIng concerns with almost 50% 0+ Its dollar
portfolio to seventeen new ventures ot Its 41 dollcO\r
bor rower- s; thIS means, too, that the largest loans are to new
prOJects.
C) DEVELOPMENl IMPACT
See annex 2 for a schematIc layout of the portfolIo and 11s
foreIgn e::change generatIon. employmerit and se~torial
)
)
• ")
• )
FINDINGS
breakdown. The well dlverslf1ed us. portfolIo 1S eV1dent 1n
that there is no sectIon W1th over 23% 0+ the portfolIO.
Whll e the f 1 gLlres on peopl e supported and e>:pected + I::
generatIon for yet unfInIshed prOJect5 are still somewhat
soft, is undeniable that Cofisa's loans are h~vlng a
substantIal mLlltlpller effect on the Costa R1can' economy·
lhe US$ 10.6 MM 1n loans should generate at least USl ~b MM
in annLlal e::ports and qenerate 1.6(10 d1rect Job;. l.Je spot
checked these tlgures durlnq our Inter~leW5 wlth present
borrowers and found them to be reasonably accurate. (See the
anne:: for an IndIcatlon of those subprOJects that repr-esent.
in our Vlew a substantlal tranfer of new technolocv to Costa
Rl ca. ,I
DJ EFFECTIVENESS OF LOAN ADMINISTRATION - ASSESSMENT
li Promot1on.
A calling program on prospect1ve borrowers was ta1rly recently
introduced. in which desirable prospect1ve cli~nts for
commerCIal loans are v1s1ted. However. we saw no specIf1c llst
of cl i ents to be targeted over the ne::t. say twelve m~nths.
nor a 11st presenting e::1stIrlg cl1ents to be el1mlnate!.,
The ~all is usually m3de bv ~ credit offIcer. whc 15 u~uallv
accompanIed by an operat1ons off1cer to market serVlces.
primarily letters of credit or other documentary products. But
the AID funded project loans eIther came 1n the door, or
prospect1ve borrowers were introduced by members 0+ the board.
.37
FINDINGS
2) Analvsls.
The qualIty of analysIs has conslderably lmprov~d over the
last twelve months. Sensltlvlty analyses were carrIed out on
all recent term loans we looked at. Here we have three
observatIons:
al the major point here refers to standardization ot credlt
accompllshed~
and cons of
management,
headlnqs.
a credit.
th:""
such as credlt references. pros
note5 on the cap~bllltv of
market for borrowers products. note on the
flnanclal standIng of a guar~ntor. are not In the same
sequenc~ In credlt presentatlon. Thls means that.
occaslonally, these elements are inadvertently omItted:
bJ sensltivity analyses usually allow for a varlatlon in
major ltems. such as sale~ revenue. of 5 or at the most
10%~ thIS hardly seems to be realistic in many InstanC?s;
and.
cJ assumptlons are not always spelled out. at tlmes haVlnq
to be extrapolated from the flgures. LlJe have 031 so seen
the introduction of ratlo analvsls and analvsls of a
borrower·s overall si tuat i on ~~l th and \~l thoLlt the
I=.ropeosed loan. We ?ound thlS to be a useful tool.
3) Appr-oval.
Apart from a very small limlt. C 1 mIllion granted to top
management by the board, all credIts are decided by the Board.
As saId. a credlt commIttee, composed of pro+esslona! bankers
38
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)
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)
)
)
)
)
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FINDINGS
mav veto these credIts before they are presented for board
delIberatIon.
As was mentloned 1n last vears evaluatIon, we too fInd thIS
system cumbersome and not qUlte effIcient. A loan comes In to
one officer who does a quick reVIew. The propo~al mav then be
analysed by another offIcer, and another ~fflcer presents it
to the credIt comm1ttee. It l~ then presented to the Board by
yet another offlcer. from where, if approved. 1 t then (loes
under the respo~slbll1tv of YP~ another off1cer 1n the Follow
:Jp Department. This system detracts substantially trom the
accountabilitv for credlts.
4, ClOSIng and SuperviSIon.
Legal counsel reVlews all pertinent documentatIon and confirms
In writing that it is In order. We saw no evidence ot credlts
havlng been booked without a legal seal of of
documentation, nor of
proper prior authorlty.
loans haVIng been disbursed Without
Cohsa rlohtly prides Itself of never
ha~ing suffered from mlshandlin9 of funds or fraud.
In tr.e "FallON Up" Department, whIch supervlses loans c::.nce
they are approved by the Board and reports to It. Coflsa
h2~ ~pproprlat~!Y r~coQnlzed that. E'st:'E"clallv In
project lending, a close follow up IS indispensable to
antICIpate pOSSIble proble~s a borrower may encounter~ as
opposed to SImply reacting to them once they have appeared and
it IS too late to brInq etfectIve anticipatory measures. They
are to be lauded for this. The new dep~rtment 15 dOIng a
39
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')
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)
• )
• )
• ')
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FINDINGS
cred1ble Job w1thin the conf1nes of its scope ot work.
5) Collect1on.
Pract1callv all USS loans are st111 1n the1r crace per10d w1th
only 1nterest payable. We have seen a slQniflcant number ot
loans wIth late Interest payments. A penalty 1nterest rate 1S
imposed an the pr1ncipal in case of late payments; it IS.
a llght penalty. only one percent p.a. above the
regular rate. Not much pressure appears to be put on late
payers.
Thls m1ght appear acceptable far a d~velopment lender,
especially when the lender does not have to bother ~bout
parallel match1ng at tundlng. and some borrowers apparently do
not ta~e theIr obllqation to Cofisa too serlously. We think.
that It lS very lmportant that borrowers Jearn that
payment terms are to be strlctly enforced. espeCially in the
early stages. wh~n they are mak1ng only lnterest payments
<during the qrace periodJ. Borrowers must take thelr
obligat1ons serIously and not regard Coflsa as a soft lender.
An effectlve way to pollce thIS lS bv stlpulatlng a real
punitive Interest rat~. 1f it is determined that payments are
late due to the client's fault. not to BeeR delays 1n
dellverlng +are~'IIlCIn e::chanqe. or by simply be1ng more
aggressive with collectlon efforts and management of these
6) Average Tlme to Process Loan Appl1cat1ons.
lhlS V3rl~d greatly dependlng on the complexlty of the loan.
40
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)
)
• )
• )
• )
• ')
• )
FINDINGS
In a case of great urqency a quorum of the Poard can be
convened very qUIckly. 1n one or two days. BeSldes. the Board
meets reliQIOusly every week. However. even complex project
loans do not. on a~eraqe take over a month to process. Cof1sa
compares favorably with other Costa Rican Banks in thIS
regard.
IJ fle::lbll1t.V In StrLlcturlnq Loans.
Coflsa wor~s closely with prospectIve borrowers. many at whom
00 nG~ have the ~lnanCIaJ or analytIcal S~lllS neeoea to put
tcc~thet- a proJect. in preparIng thell'- cas.h flol'"J: and
and In checking on marlet and assumptions. In
one case Cotisa found an additlonal partner that a project
prc~oter badly needed: In another. It IS a~slstinQ a borrower.
Flores Intercontinentaies. through diffIcultIes and 15
attE:rlpt~ng to find a bu','er for pa'rt of Its lclnd.
E) PPGBLEM LOANS
A~ hsa been sUQoested In the pre~lous evaluation. some major
problem loans are alrea~y b~qlnninQ to appear. Nine problem loans
e:~lst wltr: varYIng deqrees of severity. totalIng US:f· ~.4 million.
A wor~t case downs1de potentIal loss. as estImated by Coflsa
manaqe~ent at thIS time. 1S US$ 500.000 after applYIng collateral
oLttstandl ngs. Loss 0+ Inter set would be an
addltlcnal hIt. but this situation IS already operatIve since all
Cash teslS loans (With payment~ of 70 days past due' due to
Central Bank FX allocatIon delays amount to about US$ 3 millIon
41
)
)
• )
• )
• j
• )
FINDINGS
out of total US$ 4.2 mIllIon. The present level of bad loan
reserves. us. 614.000 on a portfolio of Just over US$ 10 millIon
and of e 4.3 mIllion on a colon portfolio of e 250 will be
reInforced durIng August wIth an addItional
required by AID. ThIs latter amount has up to now been segregated
in the net worth section of the Coflsa InternaClonal F1nanClal
wlth standard ban~lng procedures.
fl PkuFl1H~!Ll1,
The reporting ~ management informatIon system 1S extensIve but
not sophIsticated In terms of allocatinQ costs across
departmental lines. Surprlsinglv, 1nternal manaQement systems
stIll do not produce consolloated results on a monthly basis.
Coflsa rel1es Gn a new mainframe computer from whIch InformatIon
can be extracted In many versIons.
A budaet 1S drawn up every year ba~~d on overall assumptIons as
to costs. rates. a-nd comm1 :..:;i ons on a glgQ~l amount 0+ e::pected
bUSIness. We have seen no plans based on specifIC accounts and
bLISlness e:-:pected to be brouqht In. I.e. no "zero based" budqet.
The budgetIng system. while fairly detailed and overed!
reasonabl y ac:cLlrate as far as di rect e>::penses so tar thlS vear.
is considerably Wloe off the mark for earnIngs, ~ 89MM versus
prOjected. The Variance IS due to unantIcIpated
extr~ordlnarv gaIns of et6MM, a vet unreQlstered ~16MM bad debt
reserve and a elO.5MH in revenues to Coflsa InternatIonal dLI£'> to
a hIgher depOSIt/intermedIation actIvity. The extraordinary Qalns
42
)
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)
)
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• )
• ,
• )
FINDINGS
are the result of foreIgn exchanQe gaIns (between the 8.6 rate
earlIer received as payment to Coflsa and the rate of 20.00
ultimately allocated by the Central Bank> on some recuperatIon of
loans from Cofisa's difficult days.
The budget has fifteen "profit centers" that take Into account.
separately. actlvities related to AID funded operations and the
three trust. turlds. LookIng at the lndlvldual componerlt.s.
hOLoJever. the budgetIng system falls considerably short 0+
1) Difficulty of allocating lndlrect costs.
Coflsa havlng been unable to find. as yet. any satistactory
way to allocate "lndirect costs" amoLintino to 4()i. of total
costs. These costs include sentor management and board
legal fees. repaIrs and malntalnance.
i nSLlrance. and transportation. Naturally. with 40% of
unallocated costs on an overall budgeted total costs of ~lb0
MM up to June 1987. allocated earnlngs to indIvidual unIts dO
not mean mucr..
2) Budgeted hloher returns.
Cofisa has budgeted a much hIgher return on Its portfollo than
has in fact been the case. For instance. on the AI~ fundlno
US$ portfollO if had budgeted receIving Interest on US. 8.8
million. However it actually accrued interest as of 6/30/87
on only' 5.1 MM out of a total AID US. outstandlno of US! ~.3
MM as of that date; that is. US. 4.2 MM had to be put on a
cash baSIS SInce interest was more than 70 days past due. 0+
43
)
)
)
J
• )
FINDINGS
that US. 4.2 mIllIon. about US$ 3 million 15 due to Central
Bank delays 1n allocatIng foreIgn e~chanQe SO that any
payments received are booked at thIS time. The effect. then.
as to these Central Bank delayed funds. is to cause a delay 1n
revenue Qeneration. However. as to amounts of past due loans
resultIng from problem loans. these are dIrect "hI ts" or.
be sufficIently aggreSSIve in pursuing prompter F~ delIvery ty
th~ Central Bna~ compared with other Costa Rican instItutIons.
For the e AID portfolio now amountIng tc e 116 MM. as of now ~
22 MM are not accruing Interest. representing several loans
that are past due over 70 days wIth many much longer than
that. Coflsa had budgeted an AID ~ portfolIO of e 140 MM.
3) Reasonableness of assumptions for the profIt centers.
A fairly elaborate profIt center budget was drawn up. HS
seen. the overall us~ and e earninQ portfolIO has fallen
considerably short 0+ e~pectations. Other major assumotl0ns
that WIll probably turn out to have been unduly optImIstIC are
the reserves for bad debts. Although seemingly Qene~ously
budgeted at 4% for US. loans and 2% for e loans. these l'lllli
probably 1n time have to be augmented.
4) ProfItability of AID related actIvities.
It IS very difficult to come to any accurate estImate of
earnIngs on these actIvIties given the present unalJocated
costs amounting to 40% of the total. GIven COfISa. S present
organi~ational set up WIth various departments working for
44
)
• J
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• 0)
FINDINGS
dlfferent cost and proflt centers~ any allocatIon of IndIrect
c:osts will alwa"s be subject to a sIgnlfIc:ant dearee of
arbritrariness. However, alloc:ating lndIrec:t c:osts for AID
related activities In the same proportlon as dIrect c:osts for
these activities bear to total direc:t c:osts. appears to be a
faIrly ac:c:eptable way. Cofisa management also aaree= WIth thIS
mEthod.
On the total AID funding eqUIvalent to E 848 mIllIon. the
a return of 4.7% p.a. whIle the trust operatIons produce an
estImated annual return of e 23.3 mlillon (1.4%) on the total
e 1,670 million managed. for a total annuali=ed AID sourc:ed
net Income of e 62.9 mIllIOn). If we factor In bad debt
prOVISIons as had been orlQlnally budaeted by Coflsa. and
WhICh we feel should be the mInImum. of 4% and 2% on the US!
and e portfolIO respec:tively. thIS will reduce the above
total AID figure to e 37.2 million:
Annuall:ed Dollar and Colon Portfolio EarnInas Annuall:ed Trust EarnIngs
Total Annualized Earnings before Reserves
Less:
4~ on US! portfolIO 0+ $ 9.3MM \at l: .. ~...;.~/U::;.f'
2% on € portfolIO (assumed at e 120 MMJ
Total Loan Loss Reserve
TOTAL 1987 PROJECTED AID SOURCED EARNINGS
45
L.40
e C
C
.39. 6 ,,":I·~ .~
.. ,_I • . _'
62. 9
,- .C: ._, _...J ••
)
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)
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)
)
)
)
FINDINGS
ThIS fIgure represents 48% of 1986 consolIdated net ~roflts.
o2'l. 0+ annualIzed net profits for 1987 (8 month
consolldated profit fIgure of e 50.9 million annualIzed = e
85.4 mIllion. less ~ 25.7 loan loss reserve = e 59.7 mIllIon
annuallzed consolldated net earnlnQs). ThIS SItuation reflects
Coflsa s stronQ dependency on AID business. But thIS 15 not
less t.han a year. and prior to the AID fundinq anj the
arrsnaement WIth preVIOUS fOrelQn creditor banks.
essentlallv bankrupt. ThIS SItuation is also con~lstent WIth
one 04 the objectIves of the Coflsa loan. whIch was to restore
the market VIability of thIS fInanCIal instItution.
G) F'lFELINE
Coflsa has e::hausted the fLtnding avaIlable under the HIt- US!· 10
MM I oar.. PrIncipal r-eflows ar-e e::pected to star-t trIc.llnQ in
dur-ino t~lS year- and not untll ne:·: t '~1 11 the amou~ts be
appr-ecla~ie. In thIS r-egsrd we are alreadv begInnIng t.o see late
Inter-est payments. and this situatIon could qet worse If It is
not managed cor-rectly.
Coflsa. however. does have several pr-ospectlve loans to b~ booked
under the somewhat parallel "A.I.F-:.F-:." proqram funded bv A.I.D.
t..a Losta hI carl ban~.s
possibilItIes are loans to be booked under colones longer- ter-m
(includi~g AID) through the Central Bank. These latter
facilItIes WIll be avaIlable to Banco de Cafisa startInq In
40
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FINDINGS
November 1987 when the one year requIred waltinq perlod l~ o~er.
4. INSTITUTIONAL DEVELOPMENT
A) GENERAL
With the setting up of Banco de Cof1sa in November 1986 Cofisa
has now become, as I ts own management connotes it. a "mi ni
financIal conglomerate." ThIS group of companies 1S headed by
tt1e flnanc1era Coflsa Cost~.r- r 1 cense oe
Financ1amlento Industrlal). which also serves as the hold1ng
Cofasa (African Palm trust>. The Panama subsidlarv enoaqes in
foreign currency operations and lending. the bac~bone of Wh1Ch
lS, 1n fact, the U5:f. 1') m1llion AID loan L-Jrlich maLes LIC almost
e::actlv ='('~. of 1tS total ass~ts. Very recently. the Panama
company has obtained preferential status from the Costa R1can
Central Ban~ for foreIgn currency operations. thus slgn1flcantly
redUCIng the 1 egal risk that Cofisa InternatIonal lendlnp
activIties could be deemed to be domestic lendlng in dollars in
the eyes cf Costa Rican courts (as occurred In the past).
Besides its net worth of about US! 7 million and the AID US:f. 10
million, other slgn1flcant fundinq sources of the
subSIdiary are US! 2.8 million of depOSIts from the publlc on
Inese tun~~ ar~ trom
many depositors and are almost entirely balanced by cash and
L/C·s •
For these deposits Coflsa pays a premium of around 15% over what
47
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FINDINGS
a US Bank would have to pay. ThlS is the norm for prlme Costa
Rican financial institutlons. For the flrst elght months of the
currE·nt f i seal year. Cofisa lnternaclonal Panama. has shown
earning of 5.3% p.a. on average net worth.
Glven the substantlal net spread on the dollar portfollo of at
least L.. ., Y •• p. a •• the somewhat meager return to Cofisa f-'anama IS
somewhat surprlslng. lhere are tnree major elements to be
consldered that amount to an average monthly cost of us:!
1 h£2'y ar E:: 11 personnE:l cos~s
$28,000 per month; 2) Panama offlce costs (123.000 per month.
inflated by management bonuses and part of the general manager s
salary) and losses in translatIon into dollars of accounts
carrled 1n colenes (USS 18,000 per month) plus. as seen. the hlgh
amount of non performIng loan (45% of the USI portfolio}. The
loan loss reserve wlll also have an lmpact here.
Cofisa has made great strides in dIverSifYIng over the past year.
Compared to a fIgure of 44% 1n September lqSb. ~ID fundlnq to
total fundlng fer the three Cofisa companies at present amounts
to 40, .• It is e::pecte>"j that thls trend will cor.tlnLle declining.
especially as the bank takes on a greater role of financlal
lntermediation with thF public at large. and as greater amounts
of speCIal ~undlng froffi tne ~entral 8ank are utlll=ed.
B> ENHANCEMENl OF DEVELOPMENT BANKING FUNC1IONS
With their trio of companies, Cofisa can now t~~e full adv~ntage
of development banklng opportunltles that are channelled through
the Costa Rican Banklng System. while the Flnanclera 1n Costa
48
FINDINGS
FUca can enter 1nto activlt1es that ~re not so closely
restrIcted as those of ~ bank and the Panama subsIdIary can ~eep
attracting fore1gn currency depc,its and ma~lng fore1gn currency
loan:, similar to those funded by Alu.
C) INSTITUTIONAL CAPABILITIES
1) Management.
Coi1sa 1S aom1nlstered dav ~o day by a ~r10 composed of ~ne
General Manager and two Sub-General Managers who work closely
w1ln an occaslonaJ overlapp1ng ot tunc~lons. It.1S 1S possIDle
given the informal set up at Cofisa. While the General
Manager is faIrly new. under three years. the two General Subs
have been with Cofisa for many Years. These two Subs were
wIth Cofisa at Its apex, when It was bv far the bIggest
private financial institution in Costa RIca and commanded, at
one tl~e, abo~t eight years ago. unsecured lines of credit
with over sixty foreign banks totalIng over US$ 80 millIon.
These three top men SIt on the credIt comm1ttee and take an
actIve role In credit diSCUSSIons and approvals. WIthin the
small 11mits set by the Board, and 1n presentIng these credIts
to the Buard.
Like many other Costa Rican 1nstitutions. Coflsa has a workIng
board that ta~es an actIve rOle In the day to day management
of the Cofisa group of companies, meetIng at least once a
at times fer s~vcra! hour~.
the Board as part of the management. The Board conSIsts ot
nIne promInent businessmen. three of whom have formal credIt
49
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• )
• )
FINDINGS
If Coflsa wants to keep on QrowlnQ profItably. thereby
implying growth w1thln its permanent staff. we bel1eve the
Board must make a Qood faith effort In qrantlnq to the
permanent staff. gradually. more authority and re~p~nsIbil1ty.
2) TechnIcal.
After the retrenchment caused by tne tInancIal uncer-taIntIes
of the early eightIes. Coflsa has been rebuildlnQ Its lIne
teChnIcal capaOlll~le=. Hpart 1rom tn~ mentIoned two ~UD-
General Managers. who have been WIth Cofisa for many years and.
are ~'Jell ~nown and respected ban~ers In the communIty. the
General Manager has many vears of fInancial e::perlence In
sever al countrIes and has actec successfully as a consultant
to varIOUS internatIonal organIzatIons. including ~.I.D. He 1S
a mover who has brought several new good clients to Coflsa.
On the credit side. the ProJect DIvision He6d IS a seasoned
banker. hired just LtndE'r a .... ear agc,. ,.,J th
successful e::perience In InternatIonal. IncllldinQ US. banks.
Under him there are eIght people WIth varYlno deQrees of
e:: per 1 ence: a seasoned credIt offIcer, a jun10r officer
(Cof 1 s.:; just lost an e::perlenced credIt offIcer' • .an
agronomIst. an archItect WIth good experIence
proJects. and some Junior people.
The staff IS obviously dedIcated and overall hard "JOrklng.
EspeCIally gIven the expected Increase In volume caused by a
greater momentum to c:om~ercial lending. an Increased credIt
50
FINDINGS
staff, and a splItting of thIs staff Into commerclLI and
development actIVItIes may become n~cessary.
3) Financlal.
Wl th a consol i ·jated nE?t worth eOUl val ent to II·-~ . .t 9 frlllll on.
Coflsa lS probably the hiqhest capltall=ed consolIdated
prIvate Costa Rican fInancial entity_ Thls sItuation provldes
a stron9 base tor leveraged growth opportunItIes.
D. FINANCIAL ANALYSIS - SEE CONSOLIDATED STATEMENTS COMPARISON
While In dollar terms Cofisa appears to be fairly profitable. one
must bear in mInd that It 15 a colon denomInated organl:atlon.
As such. its 1986 net earnings at 16% of average equIty must be
conSIdered about half \lts US$ fundinq) in terms of dollars and
half In colones. Glven an opportunity YIeld on local funds of
easlly 25~ (the local CertIficate ot Deposit annual rate> It can
qUlckly be appreciated th~t Cofisa is not yet that profitable.
ProfitabIlIty for 1987 will probably be lower. due prImarIly to
passing of the loan loss reserves through the profIt and loss
statement. ~s of 5-31-87 (eight months fIgures) cCon5011 dated
profitability (net earnIngs / average net worth). at an
annuall=ed rate. was about 15% before ta~lnQ the above loan 1055
reserve.
The reasons for Cofisa's less than exclting profitablllty are
three: fIrst, Banco de Cofisa started operatlng only seven months
ago and while. admIttedly, it was basically a simple chanqE of
hats as far as switchIng assets among instItutIons In the ~ame
group. It did lnvolve addltionc:\l costs: second. a necessary
FINDINGS
concentration. at least Initially. on shorter, leEs profItable
assets was manitalned; and third, the hIgh percentage ot non
pe~formlng loans plus Cofisa's still low leverage <2.59 to 1).
DespIte some expected Increase In write ofts, as ~een.
profitabIlIty should lncrease as the full portfolio is loaned
out. I. e. spread ~ccruing on full AID Qutstandinqs; and as
greater etforts can be pJaced on loan admlnIstratlon and tolJow
up. 1 • e. as fewer new projects are analy=ed, permitting greater
statT tIme on tollow up and r~ductlon ot the non accruIng Joans.
BLlt o·;er2.11, the Cofisa portfollo level of profitability will
prababl~ never be as high as perhaps orlglnally estImated when
the Cof15a loan was orlglnated. and not as hIgh as the low cost
of AID funds. 2% p.a., might seem to permit. This IS dLle to
three factors: fIrst. to a general drop in rates from the very
high prevaIling level at the time the loan was conceIved in 1982
(COflS~ now earns approxImately 10% p.a. on loans versus about
16~ it could have earned four or five years ago); secondly, the
hIgh cost of serVIcIng these loans; and third the considerably
hIgher than normal credIt rIsk assoclated WIth the sort of
lending where Coflsa IS, rightly. expected to take on greater
rIsk.
We reckon that. given today's monev rates, Coflsa earns a gross 7
to 8% (including commissions) ggr~§~ on the actual cost of Al~
money. While thIS is a healthy spread. when one factors in the
C\dditicnal servIcing costs of ~ develo~ment portfolIO and the
addItIonal wrIte offs this portfolIO entaIls. the potential
52
FINDINGS
return drops consIderably.
5. COLON CREDIT LINE
As the scope of wor~ states. we made a cursory reVIew of the
col~n portfolio funded by A.I.D. The amount of this ~ID funding
is e 233.5 million. While Cofisa is currently malntalning
expected to decline to ~ 22.3 million within the next few months.
Of the remaining e 185 millIon. ~ 120 mIllIon IS placed In mostly
development lend!ng~ ~ 13 million in permanent investments. as
Cofisa claims AID requested~ with about ~ 53 million placed in
short term investments. ThIS latter amount IS too high tor
funds that should be Invested long term and in de~elopment
prOJects. Management is well aware of the mandate It has tor
these funds and this amount should diminish soon as It 15 placed
in development projects.
As regards the e 120 million portfolIo we revIewed several lo~ns.
WhICh comprise about ~5% of the total AID outstandings. We found
that a great number of them had very stale financial fIgures with
no eVIdence of any recent follow up. even on term loans. Of the
seven colon loans we reviewed, two large loans could not be
deemed to be development prD)ect~ whIle the others definItelv
were.
up a matrix to give numerical credit ratIng to the 52 subloans
of the AID-Cinde colon li~e. t~~ing into account elenlents such as
)
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FINDINGS
complIance wlth tprms. support. term'of the loans and fln~nclal
stre,",gth. then asslI;.Jnlng ~ factor to e~ch elements WI th the total
comIng to 100. While this may be a posItive step to exert greater
control over thIS portfolIo, any such system cannot escape some
sort of arbitrarIness. The matrix may be an InterestIng pOInter
of the quality of the Cofisa Colen portfolio. but we question the
valldltv of the weIghting qlven to some of the factors used.
One major ob5~rvatlon we have is that the total average should be
w~lqhed 2=cordlno to the size of the loan withIn the total.
Loans vary In sIze from a low of e 60,000 for the smallest to e
21 millIon for the largest. Another observatIon we have IS the
WEIght placed on a borrower's fl~ancial strength: at 10 out of
possible 100 WIth fIve other ~lements. we belIeve thIS factor to
be serlouslv underrated •
b. A. I. D. TF:USTS
A> GENEF:AL.
Slnce 1984 Cofisa has been the trustee or agent for the tollowing
AID trLlst funds.
1) e 950 MM Fedecoop Special Funds. plus
50 MM Fedecoop Grant:
259 MM African Palm Fund (as agent. WIth Banco
Interfln as Trustee>:
215 MM Housing Fund; and.
~78 r·• .. · .. I •• hOl..ISl r,g trust
During our revIew. the auditing flrm of Peat. Merwic~ MItchell'
Co. started theIr annual audIt of Cofisa for Its complIance with
54
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FINDINGS
U'I' provl5ions of the trust agreenlents perta1n1nq to trusts No.1
and No.3. For Trust No.2 Cofasa, a wholly owned subs1diary of
Cofisa. 1S the agent while Trust No.4 was recently set up and
very recently partly disbursed.
F'/"1/,,1 s audIt will be avaIlable WIthIn a few week~. loJe wIll.
th2refore. 11mit our reV1ew to the operat1on of the trusts and
they are admInIstered. fOCUSIng on effect1veness of
admln1stration and profitabil1tv.
These funds are held 1n autonomous accounts, completely separate
from Cof1sa's property. and Cof1sa. as trustee. is obllgated to
use the funds ~olelv as set forth 1n the trust agreements. We
have taken an overall view of the trust agreements and of the way
these funds are employed. While It appears that Cofisa 1S abidina
by the specific uses for the funds as mandated. we defer to Peat.
M?rWICk & Mitchell for a final determination.
B. THE INDlVIDUAL TRUS1S
AccordIng to the trust agreement, tunds should be used:
- to m?le long terms loans to Fedecoop for lmprovement,
technlfication and dlversificat10n on the part of 1ts
aftil1ated cotfee producers in strict accordance wlth the
terms of an AID/Fedecoop agreement.
- to invest undisbursed amounts in C.R. government or State
Bank paper always attemptIng to achieve the hIghest return
possible consistent with a predefined disbursement 5ch~dule.
55
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FINDINGS
- to dlsburse e 50 MM grant to Fedecoop for purposes approved
bv AI D.
- to dIsburse funds to CAllE (sourced from earnings of the
trust~ wIth approval of AID / Rocap In accordance wIth a
~a~h flow submltted by CATIE.
How BasIc Duties Are Carried Out:
According to the trust agreement, Coflsa must:
- flnall=e all loans to Fedecoop; 69 loans so tar. callIng
f Qr monthl V repavment s" No credi t dec i 51 on i s ta~'en bv
Cof I '=~.
- Invest Idle funds in the Balsa and follow throuah on
maturities and accounting.
- submlt quarterlv cash flows to AID. plus full
activitles.
repo!""ts on
- prOVide Peat. Marwlck & Mitchell Co •• the outSIde auditors.
~~1 th all
checl: s.
information needed for monthly lndependent spot
- reVlew all documentation and approve or reject It as a baSIS
for dlsbur~ement.
Main Constraints On Effectiveness:
CAllE s own projected cash needs have not beer re311stlc
causIng substantlal varIation In the actual amounts dIsbursed
versus projections. lhis has inhibited somewhat t.he ma::lmum
5b
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FINDINGS
YIeld obtaInable on temporarIly Invested fund5.
Profitability to Coflsa:
Compensation to Cofisa for this trust IS 2% p.a. on amounts
actually dIsbursed to Fedecoop. So far In 1987 Coflsa has
grossed about ~ 5.5 mIllion plus commlSS1~ns earned by ItS
Bolsa Aoent on investIng undlsbursed funds on account of the
undIsbursed). Cofisa estImates total expenses for manaOlng
thIS fund to total around ~2.4 mIllIon so far this vear. tor a
net profit of about e 3.2 mlilion tplus Bolsa commIssions). on
a ~ 1,000 mllll0n fund.
AccordIng to the terms of the trust agreement. Cofa5a, a
Cotisa wholly owned subsidIary. IS the agent WIth Banco
Interfln as Trustee. Cofisa has had t~ organizp. a separate
cooperative (Coopecallfornia) to take advantage of the Trust.
A dIrector of Cofi5a spends, on average. two days a week at
Coopec~lifornla to give technIcal assistance, verIfy progress
of AfrIcan Palm cultivation and asslst In draWIng up
Coopecallfcrnia Budgets to be approved bv AID. On the basis of
this Cofisa (Ccfasa) orders lnterfln to dlsburse loans to
Coopecalifornla (about 35 so far). Coflsa provides accountIng
records for Coopecalifornia's outside auditors.
Coflsa will have to collect. monthly, p~yments on loans to
Coopecallfornla, and must ~eep Interfin informed on progress
in loan collection. Coflsa must also send Quarterly reports to
57
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FINDINGS
AID on activItIes engaged in durIng the perIod.
Cofisa (Cofasa> earns 1/6 ot 1% per month on the balance
disbursed (nowe 211 mIllionj, presently amountIng to about e
351.000 per month, plus comm1ssjons earned by its Bolsa
Agent on the amount und1sbursed (now about ~ 48 m11Iion).
Coflsa estimates costs of admln1sterIng thIs lrust amount to
about e 200.000 per month. It should be noted, howe~er, that
since Coflsa has bEen earnlng fees only on disbursed amounts,
It IS only recently that total gross tram thIS fund has
rea=hed e351,OOO per month. Coflsa states that for a long tIme
earn:ngs wer~ much lower and were actu~Jlv Jess than cost.
Under the terms of the trust agreement. Cofisa must hold the
funds and disburse them accordinQ to AID def1ned parameters.
Of e215 million, e 140 million has been disbursed so far for
hOUSIng projects since the agreement was sIgned 1n Harch '86.
[O+lsa 1S dependent on OVI/OVA, under a separate co~tract.
approved by AID, to br1ng 1n projects to fjnance. Otherw1se
funds are employed in temporary investments in the Balsa.
plan get off to a slow start mainly due to: a) the polItIcal
rei orll no at the time the fund lC'l.Inc:hed
(uncertainlv caused by the forthcoming general electIOn); b)
the infrastructure not yet readv tor a project of this si:e;
and C) OVI/OVA <project offices for the promotion of the Jow
cost hOUSIng plan' not being ready vet. Hm.,,~ver. I n1 t I al
InertIa l~ now over and Cofisc3 expects to dIsburse everything
58 /\~ \ '
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•
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• ')
• .:)
FINDINGS
withIn three to four months.
Approximately 700 houses, according to CofiF~. will have been
co~structed and sold based on e 225 milllo~ colones from thiA
fund at an average price ot about ~ 375.~)O per house wIth an
av~rage 35 square meters floor space. We visited four
prOjects and came away with an overall favorable 1mpre~~10n of
them. glven the average price of the houses. lhese houses are
qU1c~ly sold and financed basIcally by Mutuales at average
rates of about 19.5% p.a. on 10% down pa;ment. f-Cl.lrteen
prOJects> have been financed so far wIth five more In the
pipe!lne.
CoflEa prepares cash flow proJect1ons for 1ndlvidual
contra.::tors and sends comprehens1ve monthly and qU2rterly
reports to AIDiOVI/OVA. Much of the work 1nvolved is tedious.
detailed, and time consllmlng for Cof1sa. involVing
verlflcation of registry data for each house in a proJect.
Main Constraints on EffectIveness:
Wh1le It appears to have bas1cally overcome th~ maln
constraints with the expected number of projects comIng on
str E"2.7l • there stIll remain latent problems. That 1S. Cofisa
. ?r.:j C,V!/OVA .':'.r'<.=' oaid commls'::lons Nheth~r 0'" n:14:: t!-.E''' fInanCE'
hOLl~es or the funds are Just slttlng In Investments in the
8olsa. lhis objection is even more relevant for OVI/OVA than
for Cofisa 1n that Cofisa ha~ to wait for OV!/OVA to bring
the projects in for Cofisa to review, approve. offl?r
suggest10ns or reject.
59
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FINDINGS
ProfitabIlity to Cofisa:
Cofisa earns 1/3 of 1% on the entlre amount of the Trust (now
rIsen to e 254 millionl or about e 800.0~) per month).
Against thls Coflsa estlm3tes total monthly costs to be around
e 5()O,000 per month. Ttns clalm appears defenSIble e'.'en though
~ more In depth reVlew of Coflsa's costs would be requIred for
~n entlrelv accurate determInatIon.
The Trust Agreement was signed In March 1987. and the first
AID dIsbursement to CofIsa took place at the beglnlng ot July
for e140 mIllion. The Trust has been establIshed to fund the
PrIvate 8anl.lng Sector in financlng low to medIum cost hOUSIng
(up to a maximum price of e 1.5 million and up to 20 years,
for houses with a maximum price of ~ 500.0001.
No dIsbursements have been made to the Private Ban~lng Sector
yet, though basl call y all the money 1 n the f LindE IS e:: pected
to have be~n allocated and dlsbw'''sed l..,ithin the ne;;t fel..,
months. ThIS project got otf to a slow start due to a varIety
of factors, among which were: the novelty of the program to
the prIvate banks, Coflsa having to canvass all of the banks
~nd exclain th~ pro~ram. the Central Ban~ no~ havl~a deflned
or not these funds were subject to reserve
reqUIrements (as on depOSits). and AID not havlng dIsbursed
the funds to Cofisa Iwhich claims that they wculd have bpen
dIsbursed wIthln a maXlmum of six wee~s after the SIgning'.
60
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FJNDINGS
Of the 17 banks that were contacted and ~ent the 4ull
Information package, three, in the end, were fully Interested
and had actual projects to finance. A meeting was held by
Cofisa in April W1 th en ght banks that had e::pressed some
interest. The amount of the trust has been "tully SLtbs=rlbed"
reflecting 0 SIgnIficant waItIng lIst of proJects.
solicit banks to part1cipate in the TrLlst. formall=e
IndiVIdual loans to them. and review th~t each appllcatlon
conforms to the parameters set by AID. AddItIonally. on the
strength of ItS e::perlenCE' g~lned In the ot.t-Ier HOLlslng Trust,
Cofisa has put together a full package IncILldlng
computerl=ed program to permIt the prl'·.tate banks to follow LIP
on each loan. Coflsa will disburse and recel~e repayments of
the loans to indiVIdual ban~s then recycle the funds.
Profitability to Coflsa:
This has been a major bone of contentIon for Cofisa In that It
claims to have easily spent over ~ 1 million 1n packagln; and
promoting this lrust while its income IS lib of 1% per month
on the amount actually dIsbursed by AID. C140 mIllion so far.
meaning about C 230,000 per month versu~ estImated cost 0+
about C 300.000 per month from now on. thl: Trust
WIll be transferred to the new NatIonal Mortgage Bank WIthIn
about a ycrar so that, Cofisa claIms, thIS h~s been a losing
proposItion for them.
bl
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FINDINGS
c. CONCLUSIONS AND RECOMMENDATION ON THE COFISA TRUS1S
GIven the tIme fr~me of our review and evaluation of Coflsa. our
observ~tlons on Cofisa's Trusts have necess~rlly h~d to be fairly
superficial. While the earnlng~ accruing to Coflsa from the
Trusts, e::cept, qU1te pOSSibly, the l~st one.
attractive even ~s st~ted to us by the Cofisa Tru5t Offic~r. It
1S dIfficult to ass~ss the over~ll proflt~billtv of the~E
actIvitIes because the cost ot the servIces IS spreaa throughout
varIous department5. These departments Include operat1ons lmost
ot tr.e costS), contralorla. ~ccountlng, da~2 prOCESSIng. bolsa.
general management, and the boar d. The estImates of Cofisa
personnel for administrative effort channelled Into the trusts is
on a level of 15% to 20% of total expenses on a COr,sol1dated
b~SIS.
Cofisc? 's Ol'ln appro::imate estImates for total profIts are: c?bout e
950.000 per month plus commISSIons on the 801s3 Investments and
le~s approxImately e 100,000 lost on the last Trust. Our o .. m
very rough f1gures are as follows:
recent aver~ge monthly Incomes:
Fedecoop
HOLlsi ng OVI lOW ..
HOUSIng Pr1va~e Banks
African Palm
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FINDINGS
less: average monthly administrative costs
* consolidated administrative costs
through 5-31-87 <8 months)
* cost for one month
* assume 15% cost of trust admin
trust profits per month ~ 1.090.000
Whlle these figures are very rough. they 00 approxlmaL~ tr,e
Cofisa numbers. The key figure 1S the assumption for total trust
aomlnlSLra~lon costs as a percentBge OT
adm1nistrative costs. It should be noted in the fl9ures abc~e
that the more recent numbers would probably present a he~~ler
cost load since the last housing trust was opErative c~ly 1n ~he
last month. If the assumption for total trust =osts were
Increased to 18%, profits would go down to about e 850.000 per
month. exclusive of Bolsa commiSSions earned (which Cofisa
estimates at about e 250,000 per month).
A satisfactory definition of earnln9~ would requlre
con~lderably deeper review of Cofisp trust activities only. with
a m~re sophisticate~ cost allocation. This 15. beyond the scope of
this report. If AID wishes to have greater precision In this area
to resolve the issue of reasonableness of profits. we recommeno a
separate study, focuslng on cost allocations, to determlne
overall profitability.
However. it appears that overall Coflsa has done a satlsfactorv
this new activity in Co~ta Rica. and h~s made a
Cohslder~ble effort to manage these funds in accordance with the
b3
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• . )
FINDINGS
trust agreements. We do not belIeve that other flnancial
Institutions in Costa Rica could do a m~asurably better Job. and
it is worth noting that the most recent trust, the prIvate
sector housing trust, had, in fact, also been offered to a State
Bank. whlch turned the business down on the terms that Coflsa
accepted.
We Oe!le~~ tnat, as opposed to attempts to preclSely C05~ LC~lsa
Trust Actlvitles, AID would probably achieve more pedce of mlnd.
better publici=ing pOSSIble future trust bUSlness and gettlng
competltive blds for the Trust. Li keL·n se, for the lndl~ldual
trusts aleady assigned to Cofisa, try to place an incentlve on
Co-tlsa. and other dependent entitles (see OVI/OVA> to utlll:e
these funds as opposed to keeping them lnvested In the local
money market, by stipulatlng a hlgher fee for funds disbursed to
the intended party and a lower ~ne for funds that Just Slt
around .
b4
Ill. CONCLUSIONS, SUSTAINABILITt AND LESSONS LEARNE~
A. CONCLUSIONS
The focus of AID assistance to Cofisa, forcIng it to concentrat~
on prOjects that promote employment and gener~te forei gn
e::change, has, even In retrospect~ been rIght on t~rget, and In
our v:.eL .. it should c;:-Jntinue.
non tradlt10rlal e::ports is the best and posslbly only .. Jay to pull
Costa R1ca. eventually. out of its predicament of heavy debt.
insuffICIent foreign exchange earn1ngs to servIce thIS debt and
gettIng much needed foreIgn resourses to Improve 1ts standard
of llving wlthout havlng to depend, essent1ally, on lnternatlonal
charity, WhiCh, by itself cannot guarantee thls growth anyway.
Non tradltional e::por-ts have, in fact, been the most dynamIC
component of the Costa Rlcan economy in the past few years,
r1sing fr-om:$ 330 million ln 198~ to a prOjected $ 4::(' million
this year. These figures are much more r-em~r-kable when one
considers the collapse of the Centr-al American Common Marlet that
absor-bed S 270 millIon of Costa RIcan exports 1n 1980 ver-sus • 90
mIllion 1n 1986. 'ha Its total (..IS. 9.2 million loans tc e::por-t
enterprises that WIll gener-ate an estimated US. 26 millIon 1n
AID funds through Cofisa can be ~21d to h~ve been
advantageously employed.
we dId not Identify any major ones other than, perhaps. the haste
in whIch Coflsa found itself to utilize all the fund~ bv ~ Qlven
b5
CONCLUSIONS, SUSTAINABILITV. AND LESSONS LEARNED
date t.hat caused some projects to be flnanc.ed wIthoLlt
sufficiently deep analysls. Some of these projects and that now
entail considerable follow up work and restructurlng, with some
probable eventual write offs down the road.
B. SUSTAINABILITY
A) Project Continuation Once AID Funds are Are Repaid.
Both US~ and Colones fur-dIng have several year~ to go. far tne
US$ fundlng lt wIll be seven more years betore any prInCIpal
to projec.t continuatIon would be somewhat premature.
B) Estimated Net Income from AID Funds.
It is dlfflcult to estimate earnings on these actlvlties
accurately because of present unallocated costs am~unting to 40%
of total costs. With various Coflsa departments worklng for
different cost and profit centers, allocation of lndlrect costs
i s d 1 f f i C Lt 1 t • However. a faIrly acceptable wa~ of doing thlS
(Cofisa management agrees with this method' 1S bv allocatlng
indlrect costs for AID related actIvlties in the same proportlon
as dIrect costs for these activities bear to total dIrect costs.
If we do thiS, the estimated annual 1987 gross profIt on AID
funding i~ € 39.6 million (about US. 600.000J. ThIS repre~ents a
return, or spread. of 4.7% on the total AID funding eqUIvalent to
£ 848 million. Since Cofisa is receiving a hypothet1cal 11% thIS
year on the US$ portfolIO (LIBOR of 7% + 3% spread>, and pays AID
2'l. p. a. for the funds, this means that Coflsa's cost of
analy:ing, structurlng, and administerlng the portfollO is about
66
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'CONCLUSIONS, SUSTAINABILITV, AND LESSONS LEARNED
3% (10% - 2'l. - 4.7%>.
Trust operations produce an estImated annual return of e 23.3
million (about US. 351),0')(" on the total e 1,67(1 m1ll1on managed,
a 1.47. return. Total annuali=ed AID sourced net lncom~ is
therefore of e 62.9 million (about US$ 950.000).
budgeted by Coflsa, and "J j t h ~'Jh 1 ch we agree, of 47. on the US$
portfolIo (e "?~ ~ mIllIOn) and 2i- on the colon portfolio Ie 2.4 - _'e _'
mIll ion) , thIS ~H 11 redllce the above total AID f i gL!re to e 37.2
million. ThIS ~·JOL.tl d r'es,..!l t 1n c.. net spt-ead on the portfoliO of
=nly 1.64% for thi£ fiscal year.
This e 37.2 mIllIon fIgure represents 48% of 1986 consolIdated
net profIts, but 62'l. of annuall:ed net operating profIts for 1987
(8 month consolidated profIt fIgure of 56.9 m1llion annuall:ed = 85.4 IT,i 11 1 on • less -,c -...:.:._t. / loan loss re5erve = 59.7 million
annuali:ed consolIdated net earnIngs). ThIS situation reflects
Cofisa s strong dependency on AID busine5s. But thIS IS not
surpriSIng given ~hat the Cof1sa bank has been operatIng for less
than a vE'ar, and prior to the AID fundIng and the arra~gement
with previous ~oreIgn credItor banks, Cofisa was essent1ally
bankrupt. This SItuation 15 also consIstent WIth one 04 the
objectlvea of the COflS3 loan, which was to restore the market
VIability of thIS fInancial Institutir~.
C> Control System EstablIshed Over These Earnlngs.
Cofisa ha5 set up separate profit centers WIth income derIved
b7 ,... t, '''I' '\
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CONCLUSIONS, SUSTAINABILITY, AND LESSONS LEARNED
from AID funding"separated from other income. However. c~st
allocations to the separate profit centers involve some degree of
arbitrariness. We believe the system is a good beg1nning and 1S
presently adequate, although improvements can be made. This
should occur empirically, as the system evolves.
D) Recommended Annu~l Amounts Coflsa Should Reasonably Contribute
GIven the tentatIve spread flgure noted above, and based on
antlc1patEd write offs. we find 1t difficult to answer this
questIon adequately at thIS tIme. WIth the antlclPatlon that
C~sta RIca and Cofisa must continue relying for the great
majority of their funding on bilateral and multilateral
assistanCE. much of these other funds must nEcessarl1v come from
such sources.
Cofisa is attempting to diversify 1ts funding sources. even If 1t
IS still consIderably dependent on direct AID funding (now 40%,.
With the Banco de Cofisa vehicle, Coflsa WIll have Increased
access to other sources of fairly InexpenSIve funding Vla
1nternat1o~al assIstance through the Banco Central. and from
commerCial sources of funds as well.
A suggestion mIght be that Cofisa reduce ItS total de~endence en
HiU dlre=~ funolng to, say, 35 or even 3v% by ~he end ot l~od
WIth a less than proport1onal drop in Cofisa project lend1ng that
WIll =on~D~wcn~ly h3\'e to b~ tunded by scurc~~ other than dirD~t
MID fund1ng •
be
)
)
)
)
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•
IV. RECOMMENDATIONS
Cofisa IS now run more professlOnally than it was before the
crlSlS. beIng better dIversifIed and thus less vulnerable to
sudden or prolonged economlC downturns; there are, however.
important aspects of its operations that requIre attentIon to
place It 1n a posIt1on from where It can contInue improvIng.
WhIle LO~lsa IS presently well placed. it IS ImperatIve that It
maIntaIn the momentum it has been bUIldlng up recently. or its
lose valua~le ground VlS a VIS the ever IncreasIng comp~titlon.
While, as stated in the previous evaluatlon,
that e~ervthIng cannot be done at once. there are several steps
that ShOLl1 d hav~ high prIority. Appro:: i mClte dates for
implementation are suggested, but some steps can be taken
simLl1 taneOLlsl y. These suggestIons, as IS the thrust of our
mandate, relate baslcally to the overall organization and the
credIt process in partIcular.
FOP COFISA
December I P S7; DelegatIon of Credit Authority.
In baSIcally all fast growing ban~s in Europe Clnd the US. and
increasIngly In LatIn Ameru:a. credlt deCISIons are tal en 0).'
bankers working full time for the institutIon and directly
several advantage: to thIS set up. Flrst of all. credit, we
b~ljeve IS a disciplIne lIke any other and. as such, It IS
( 69
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>
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•
practlced better by professlonals.
Secondly, and concomltantly w1th the first, there 1S the real,
though somewhat unquantifiable factor of accountabilIty. Who IS
really responsIble for a credit at Cofisa? We submlt that, at
present, no one re~lly is. Of course we have a follow up
department. But this department 1S assIgned credIts once they
recommended by other people.
LredIt~ ~rE presented to the ~oard b~ oan~ers but 1t 1S t~e ~oaro
that ~Dproves or dIsapproves. This detracts considerably, In our
VIew. trom the accountability factor. for, after all. SInce the
Board appr~~es the credIt, off1cers are relIeved of the burden of
responsIbIlity. There are at present some limits delegated to the
management but they are so small as to be insigniflcant 1
mi 11 ion j • Also, the credit commIttee serves to ~ ". ~te credits,
not to approve them.
CredIts should have specific names of offIcers recommending.
concurrlrg and partlcipating in theIr approval, with all of these
offIcers beIng then responsible for followlng up on their
development and admlnlstrdtion and suggesting, or introdUCIng as
the credIt level rna',' dIctate, changes as he/she may deem
approprIate.
Another advantage of much greater delegated authorltv 15 that It
frees up time both on the part of the Board ;md of the
prafeS;loncd ban~ers themselves to pursue theIr respect~ve are~5
of 1 nterest. The Board would not then need to meet as often as
70
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It does now (once a week), allowIng it to devote its tIme to
issues properly pertaining to it: deciding on polIcIes and
mappIng out strategies to implement them; identifying whIch
economIC sectors they want to go after and how; where they want
the instItutIon to be ne~t year, and three and fIve years from
approvIng and makIng suggestions for account oiiicers
budgetIng process; makIng quarterly budget reviews; revIewIng
progress on problem credits: gIving direction to public affaIrs
and government relatIons; etc. The dIfferent functions could be
done In smaller Board Committees. 'oJl th the ilill Board being
adVIsed of progre~s on the different fronts.
WIth such delegatIons. the credIt staff and management could
devote greater tIme to managing the credIts Instead of preparIng
tOI- the r.e::t Board meeting. They would manage the marketIng,
anal '1'=.1 S. and follow up processes on credits. as I'lell as
admlnlstratlve processes for annual credit reVISIons and
collectIon of past due and non accrual principal and Interest
outstandings. The Board would be advised of progress through
montt-II'y rejJcrt : ..
DecemberS7; ImplementIng an Account Officer System
Cotlsa SnOUJd serIously conSlder ImplementatIon of an aCCOllnt
officer svstem. WIth a nucleus of officers under the Project
rf:.·.·i=i~:-. , Cr-E:dlt H::ad.
could be separated from commerc1al banking responSIbIlItIes.
Account OffIcers should be assigned between 20 to 30 accounts
71 ... 1'\ '\~
)
)
)
)
)
each for which thev will be responsible at· all times. with close
superVlSlon bv the Credit Head. Account officers wllI: ~naly=e
the credlts and make credit recommendations and presentatIons to
the approprlate approving level withIn the Cofisa mana;ement;
supervlse the documentatIon and disbursement process ~within
establlshed pollcles and gUIdelines>; and be In charge of
adminIstration for t~at relatlonship, performlng annual re/lsions
and supervlslng collat~ral reQUlr~ments and lnspectlo~s and
gener~l c~~formance to approved credit facilities.
ConcLlrrentll. the Trust Department could report dIrectly to the
Head of Operations since the Trust Department operates under
VEry s~eclflc parameters w1th ~o direct credit respon~lb111tv
attached. The Follow Up Department should be elImInated as a
sep2.,-ate department, arId Its staff and functIons sholtld be
Integratej into the account officer nucleus, preferably unjer the
De~elo~ment Banking HeadIng.
An lmportant benefIt of the Account Officer mode of orgarl=atlon
15 the Increased professlcnallsm obtained. over time, from the
credlt sta+f as they are held accountable for the1r portfolio.
Also. and equally l~portant, such a system offers a career path
to JunIors. thLl=- permittlng lncreased responslbilltv as they
proaress cr~fesslonallv. ThlS IS important. especiallv 1n the
present seller's mar~et where one o~ the major constralnt~ 15 the
thin pool of banking tal~nt. If an institution such as Cofisa
does not offer a care~r path~ the employee may leave Just as
he/she IS becomln~ most productive to the organl=atlon. The
InstItutIon will then have to hIre someon@ @lse and begIn the
.72
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arduous, costly. and time con~umlng on the Job tralnlng proc~ss
allover again, losing valuable productivIty. )
ImplementatIon ot an account officer mode of organization will
require time and detailed planning that go beyond the scope of
) thl s repor t; It will requlre, for instance. also setting up an
IndependEnt credit review department that reports dlrectlv to
t~nk controller and the Board. The steps ta~en by Loflsa In the
) pa~t two years are. therefore, Just a beginning and do show the
wlilingnsss to trea~ wlth the old. l~ss than effiCient. ways ot
dOing the bank's bUSIness.
Cofisa n=w has a fully fledged Private Commerclal B~nk and the
wherewithal to capItalize it easily at e 200 million. enabling It
to grow to total assets of € 2.000 million. That sort of growth
IS. In our Vlew. feasible but only If management and the Board
step bac~. and ta~e a long har1 look at Coflsa as a ~ubstantlally
bigger. and necessarly. different, organization from what It 15 )
toda','; Its credlt apparatus must be substantially
altered as here outlinEd.
) Growth '"-'1 II lmpllcitly bring opportunity to Its offl=ers for
promctlc~ and higher reward which, In tLlrn. lmplle=: more
to thos~ who are
) and prepared r to accept it. Hence. the new credit
dlVISlon should be staffed by senior well sea~,onE'd credl t
officers. Delegated c Llthor 1 t '{ now will accelerate thiS
t, seasonl ng" process to permi t adequate prof eSSI onal staffing
le~els t~at will be needed for a larger Coflsa tomorrow.
73
We believe th~t the present Cofisa shareholder composIton and
capital position offers both a challenge and an opportunIty for a
quantum leap Into a s~und and much bigger organization than it IS
Lecember 1987; Structured Training Programs
a well defIned traIning program for a year ahead,
should alt'Javs be In '.::?!:Istence. The staff should all
havE' a dlrE'ct InpLlt In sugge=/ lng Its conterlt: .. , and all should
participate at their respecti~e levels. The basic idea is. of
=ourse that traIning ~,~uld be an ongoing process wIth basically
e~eryb~dy at the offIcer level ta~lng a course 0+ a mInImum one
week once a year, whatever theIr real or purported e;:perl ence·
level. While some courses could be structured in the bank,
ethers, attendees will have to go outside.
September 1987; Credit Policy Manual.
ThIS should be completed and Implemented as soon as p~sslble. We
recommend that two samples of complete credIt pres2ntatlon be
added. ore for a commercial loan. the other for a pPoJect loan.
The idea here IS for future credIt presentatIons to oe patterned
after tt:ese. with thE' S2me ele~ent~ in the s~me seQuen=e. Thi:
would h~lp achIeve a uniform order to list the credIt components
in credIt presentations.
September 1987; Total Exposure to a GIven Borrower.
be the determinIng f~gure for c r- e::h t
74
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JurIsdIctIons and shr~ld lnclude the amount requested as well as
all present commitments, whether or not they are all dlsbursed i
whatever they be (including letters of credit and guarantees
issu~d en a
they are or are not in use at present. lhlS fIgure should be
clear and unequIvocal and appear very visibly on the cover page
(In the same spot) of all credit presentations. It shculd ot
course, 1nclude all Cof1sa's exposure in whatever currency. thIS
concept ~!ll become even more important as Coflsa expands its
~anl~lng actlvltles grant1ng lncreaslng amoun~s ot
lInes of credIt.
* ContIngent L1abilities. We fInd 1t hard to believe that not
one of all the borrowers we looked at had any. In some instances
these liabilities have sunk some very strong borrowers. The
account offIcers should always find out from the audItors and if
it canGot be determIned at least indIcate that fact.
* IndependentlY AudIted Financial Statements. There is SImply no
jU5tlf~catlon for Cofisa mal~ing any loan of over, say t 100,000
to a borrower that does not produce them. See the case of
P.A.C.O. where the company had no idea of its cost structure
untIl the auditors came in and after Cofisa had already
dlsbursed the loan.
* Management CapacIty. A note on the capabIlity ot management or
sponsors of a projecl is always necessary In a credIt
presentatIon.
75
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* Numtered Sequence in PresentatIons. The same gener~l order
) should be mainta1ned in all presentatIons. It will greatly
facilitate review by anybody that has not actually written the
presentation.
) * Cred1t Control Clauses. These should be 1n practIcally all
debt to worth, par1 passu wIth other equivalent cred1tors. Wh1le )
some cf these clauses may be inserted in loan agreements by
Cofisa s counsel, they are really the re~ponsib111ty and the
purV1ew of the ~(~~i~ Q±fi£§[§ to determ1ne and to request 1n the )
presentatlon and on the basis of Wh1Ch counsel then prepares ~he
docLlmer:tet 1 on.
) * Couns:.el for Document Preparation. ThE? fact th2.t
documentat10n has been drawn up and reviewed by a lawyer does not
make a credlt good. Indeed, it may lull a ban~er 1nto a sense ot
) 1f a borrower cannot comply,
clause 1S llmited In Its usefulness:
capabllIty ot a borrower to comply 1S a credit, not a legal
) functl cr.. Credit documentat10n must always be driv~n bv credlt
people. ~=t by lawyers. Lawyers do law. credlt people do
cr~dit,=.
)
* EVlbence of Approval. Why draw up yet another form recltlng
) presentatIon apol1cation page Itself, wlth s:pace for reqUIred
sIgnatures, should be sufficient as opposed to yet another Board
76
resolutIon form that IS now drawn up tor every Board ~ppro~al.
~ Penalty Interest on Late Payment. lhis COLtld be substantIal}"
increased. We understand, too. that It is illegal to charge
Interest on late interest payments. However, the present penalty
on principal of only one perce~t extr~ per annum on prlnclpal on
late payments hardly seems to be a penalty to us.
This i5 the rule In many other developed countrIes.
~ Autr,or-sh 1 p of Lredi t F'res~1 .tat ions. All presentatIons ~ave an
aLlthor .and all have somebody who recommends the credl t 5. As
sLlch. the names should be spelled out Just lIke, in tr,9 same
vein, any other communIcation. We have seen memos Just emen~tlng
from a "department"; obviously they can but they Just must have
been wrItten by somebody.
* Intere5t Accruals. Interest StoP5 being accured once It 1S 70
days past due but it is not reversed; Why? we bellEve it should
and loans 5hould then be placed on cash baSIS.
* Board Resolutlon5. Full presentatIons are SQme~lmes prep3red
WIth no recommendatIons. or for turnIng a cred1t It seems
to us tc be a waste of effort. A one. or maXlmum two pegs: memo
* Credlt Availability. The latest ~vailability date should be
01, e 'E;'r y
automatically lapses. Also. if ~onditions to an approv~! are
not met then the facility should not be con5idered as apcroved.
)
)
)
)
)
)
)
That IS. we see no need for vet another Board re5clutlon
cancelIng a previous one (i.e •• P.A.C.O.}.
* Collateral DescrIptIons. We see no need to go into a long
descriptIon of collateral in the credIt pre=entatlon. Simply
stating that It consists of say real estate appraised at 50 much
by our own appraIser should suffice fQC ~ £~~~~t ~~£l§!~~.
* Source of FundIng. The source of funding for every t~~illty
shQ~ld be stated in every pre=entatlon. ThIS is eSP~=ially
relevant conSIderIng the restrictions Imposed on AID funce: leans
a~d other facilities Banco de Cofisa will soon start utll::ing;
i . e. : ?aID, own reSOLtrCes. Fodein, Fope::. r~.I.F:.R. and VIt"latever-
ather funds are or will become avaIlable.
FOf.: A. I. D.
December 1987; Increase Capital by US. 400,000 equivalent.
Over the past three years Cofisa h~s been able to place only the
equivalent of USZ 20,000. As said, gIven first at &11 the
opportunity yields :n colones (Cofisa's present dIvidends amounts
to 2.7% p.a. of net worth), and about 6% ot s~lling price of the
stocL, selling additional capital to O~~ shareholders is
especially difficult. and probably unrealistic. It is felt that
existIng shareholders may be more receptlve to subscrlbln~ new
shares.
Therefore, AID may consider liftIng the restrIction ban~lng
eXIsting shareholders from buying new stoc~ so long as the lImit
78 • ! i .. . : ••. &
, .. ~, \ \.. '
, on 1nd1vidual, or related shareholders, of 5% each 1S maIntaIned.
Additionally, AID may consIder, as already suggested In our
recommendat10ns in a report on the F'rivate Investment
Corporation. settin~ aside a given amount of its soft loans to
other Costa Rican Private Financial Institutions for them to
onl end for "stock purchase plans". Ccfisa IS one of the few
widely held Costa Rica entities and would seem to be as good a
pla=e to start as any. Parameters can be drawn up to encourage
small shareholders to becom~ ~uch more numerous.
Ongoing; F'olicing Employment of Colon Funds.
AID should police more closely the full employment by Cofisa of
the Cindeicolones funds. Even doubling the rate Cofisa presently
pays on these fLlnds from 5 to 1(.% verSLlS OL,tS1 de rates of easi 1 y
201. and w1thout secure funding, ''Jould not, in Ollr V1ew. e::onerate
Cofisa from having to adhere to strict developmental lend1ng.
Indeed, qLlite the opposite may l'Jell happen, 1n that haVIng to
pay double for these funds Cofisa might feel free. and HID less
impelled, to force developmental employment of these funds.
feel that, if anything, colones funds should be even more
development oriented than USI funds; these is no f/:: e::pc,sllre
here.
It might be appropriate In many cases to impose a stock optIon
target on Cofisa for development leans made. This does not
absolutely mean a stock purchase target, Just an opti~n. Beside
the real profit advantage that may accrue to Cofisa from stoc~
optIons, there 1S a real, though unquantlfiable, degree of
79
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further assurance to AID that funds are in f~ct utlllzej tor
development I oan~. We all know money IS fungIble and the doubt
many times persists whether a development project would not have
come to pass anyway even in the absence of AID fundIng. 50. 1 i
the promoters of a project maintaIn It cannot be fInanced without
AID indirect fundIng, and If there is a collateral shor t f aj 1 ,
..... ,-.. -, ~_ --;.t 1 :- - ::. .;
It were demanded of them as a conditIon to a loan. l'Je l:nol'l many
entrepreneurs are reI actant tc take on e::tra partner: and share
1 n the e:;pected ear-ni ngs if they I-:nOL~ the pr-oJect Ni 11 do &'JEdl
and if they could get the finanCIng anyway.
March 1988; RefloL'J'='.
As the reflows from AID funded subloans start trIckling in. AID
should consIder some sort of Incentive, or penalty. to Coflsa to
~eep on maintaInIng these funds fully employed for development
pL\rpOS~s • as oppos~d to just sitting 1n an intere5t bearIng
~n some banks in New Ycrk. A formuls could be devI~ed
I-lhereby the rIsk minlml=ation funds should be augmented b',' CO-hS2
according to some preestablished ratios of thE un~mploved funds
to total AID funds available, includIng an agreed upon
augmentation for Interest.
• )
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ANNEX 1. COFISA'S CON~OLIDATEO FINANCIAL5
IN e MILLION BALANCE SHEET
CASH ~, ~AN~,S
SHORT TERM ASSEiS
LONG T~F:M F'OPTFOLIO
BAD DEBT RE.SERVE
TOTAL BHN~ !NG ~)SSE r~.
PREM I SES ,~JE T )
OTHEF: AS~ETS
TuTAL ASSETS
AIr.' IN C " ~ONG)
Alu IN :f 'LONG)
C. [:. ." C: -' rSS~JED
:,HOJ=::T
OTHEF: LIH~
TOTAL LIA~ILITIES
CAPITAL
A[·T. FDF F x REVAL.
HuJ.f--.'X r\C:I_I~~i....
AUDlTED 9/3(1/86
(Z 166
189
734
C 224
476
169
99
1 --:.:.,'
TOTAL LIA~. & EQUITY
III • '.'4 ',:,
Cl.61'>
5:::6
1Z1.61'.1
ur,ulut'l H~[O ~/-:1I8/
618
9"--'
lSt:l
c7
C..:. ll.'c;,.
C 1 .5':: 1
.. . ,
II
)
)
JNTERESl
COMM 1 S5 I ON t, OTHER
TOTAL I NCOr-1E
GENERAL ~, ADM.
F 1 N*-iNL 1 AL c. X F-' •
INCOME TA;,ES
TOTAL E,-:PENSES
NET I NC[tl"lE
IlIS1
115
122
64
LOANS fTOTAL ASSETS
AID LT/TOTAL LIAB.
LIAB. IEI}Ul Tv
EARNING/TOTAL ASSETS %
EAF:N I NG: F; I SK ASSE TS ~-;.
EAF:NING/AVER.NET WORTH %
*ANNUALIZED
58
IZ 266 IZ 19:'::
65
15
e 189 e 13~
IZ 17 IZ 57
.58 .58
.65 0:0:: • ~_I
4.7 4. ' .. '~I ...
8 ? . - "7. (I;;, *
15.8 15.:: *
• )
ANNEX 3
LIST OF INTERVIEWS
)
Cartex Manufacturera Jerry WC1tklns )
Fi ncas I'JC1bor 1 Carlo: Torres
Flores Intercontinentales Dave H2\ll
Interplast Al e:: 1 s F'a:'"c,d 1
) Seripla:tlC: Amadp.o G.?-gg 1 :.n
EI Tirrea Fed~rlC:o C~ntlilo
Vista Grande Mar i 0 F:odr 1 gLle::
) Jot-ge Ces~,eces Board 1'1enlber
Ja=k HarriS
William F'help: General Manager
) GUillermo Serrano Manager-
Jorge Breneos Assistant Manager
Juan Eduardo ~rteaq2 Manaaer: lrLlst
Fernando C!ulros Head: Projec:t Dlvislon
Gon::alo Ec:heverria Manager: Follow Up ~epartment
Ana Dilla Alvarado Head: CredIt Department
Mario Iglcasi;A$ Head: LIC Department
" ,~\ I
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