Approval of the Regulation on Non-accrual of Interest

Decision of the Board of the Central Bank of the Republic of Uzbekistan, registered on January 24, 2004, registration number 1304

Date of Entry into Force

03.02.2004

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11.01.2022

15.02.2019

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Document lost its force 11.01.2022

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1.07.00.00.00 Legislation on Finance and Credit. Bank Activity / 07.21.00.00 Bank Activity / 07.21.05.00 Bank Deposits and Other Deposit Operations]

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1. Finance / Banks and Other Credit Institutions. Credits]

DECISION OF THE BOARD OF THE CENTRAL BANK OF THE REPUBLIC OF UZBEKISTON

ON APPROVING THE REGULATION ON NON-ACCRUAL OF INTEREST

[Registered by the Ministry of Justice of the Republic of Uzbekistan on January 24, 2004, registration number 1304]

This decision loses its force from January 11, 2022, based on the Decision of the Board of the Central Bank of the Republic of Uzbekistan No. 27/8 of November 19, 2021 "On Approving the Regulation on Non-accrual of Interest" and the [decision](/docs/5768671?ONDATE=11.01.2022 00#5769971) (registration number 1304-5, dated 10.12.2021) declaring it invalid.

Based on Articles 3, 7, [17](/docs/72266?ONDATE=13.01.1996 00#129760) and 51 of the Law of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan", the Board of the Central Bank of the Republic of Uzbekistan decides:

1. The Regulation on Non-accrual of Interest is approved in accordance with the appendix.

2. This decision enters into force 10 days after the day of its state registration by the Ministry of Justice of the Republic of Uzbekistan.

3. From the date of entry into force of this decision, the Decision of the Board of the Central Bank of the Republic of Uzbekistan No. 16/2 of November 2, 1998 and the Regulation on the Policy of Non-accrual of Interest on Commercial Bank Loans Approved Thereby (registration number 561 of December 5, 1998) are considered to have lost their force.

Chairman of the Board of the Central Bank F. MULLAJONOV

Tashkent city,

October 11, 2003,

No. 25/7

Approved by the Board of the Central Bank of the Republic of Uzbekistan October 11, 2003, No. 25/7

REGULATION

On Non-accrual of Interest

1. General Provisions

This Regulation is developed in accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan", "On Banks and Banking Activity", "On Accounting".

This Regulation establishes the procedure for non-accrual of interest (hereinafter referred to as IFRS) on loans, debt securities, and other financial instruments (hereinafter referred to as assets) of commercial banks of the Republic of Uzbekistan (hereinafter referred to as banks) in accordance with International Financial Reporting Standards.

Banks must adopt procedures for applying requirements regarding the transfer of assets to "non-accrual" status and the revocation of "non-accrual" status in accordance with this Regulation.

2. Definitions

3. The following definitions are used in this Regulation:

accounting method — a method according to which transactions and events are recognized and reflected in accounting records when they occur, not when funds or their equivalents are received or paid, and are reflected in the financial reports of the period to which they relate;

real interest rate — the interest rate required to discount the expected future cash flows of an asset over its useful life to equal the initial balance sheet value of the asset;

real interest rate method — a method that results in recognizing a constant interest rate through amortizing the discount or premium as interest income (or expense) over the useful life of the asset (liability) or by allocating deferred interest payments (for example, received or paid annually rather than monthly);

impairment — a decrease in the recoverable amount of an asset below its balance sheet value;

non-accrual — the cessation of the accounting method for calculating interest income on an asset when there is absolutely no probability of collecting the calculated interest income or when the principal amount of the debt cannot be fully collected;

recoverable amount — the higher of the net realization value of the asset or its value in use.

3. Procedure for Transferring Assets to Non-accrual Status

4. Banks transfer assets to "non-accrual" status in the following cases:

1. when assets are classified as substandard, doubtful, and loss categories in accordance with the normative acts of the Central Bank;

2. when the asset is impaired in accordance with IFRS (Appendix 1);

3. when the repayment of the principal amount or payment of interest is delayed for 60 days or more (for interest-bearing assets with a repayment period of up to one year);

4. when the repayment of the principal amount or payment of interest is delayed for 90 days or more (for interest-bearing assets with a repayment period of more than one year);

3. From the moment assets are granted "non-accrual" status, banks must perform the following:

1. the calculation of interest income on balance sheet accounts is stopped;

2. all calculated but uncollected interest income must be transferred to off-balance sheet accounts, except for cases specified in the accounts, and interest calculated after the asset is granted "non-accrual" status is performed on off-balance sheet accounts;

3. all subsequent payments for these assets are first directed to cover calculated but uncollected interest income, and then to cover the principal amount of the loan.

4. The transfer of calculated interest income to off-balance sheet accounts is performed through the following accounting entries:

Dr Relevant interest income accounts

Cr 16300 "Accrued Interest to be Collected"

Dr 91500 "Interest and Fees on Assets"

Cr 96333 "Counter-account for Accrued Interest on Securities" or,

96335 "Counter-account for Interest and Fees on Assets".

5. Banks calculate interest on assets in non-accrual status only on off-balance sheet accounts. Banks must include the amount of interest to be collected in off-balance sheet accounts and subsequently continue calculating interest in accordance with the contract.

Granting "non-accrual" status to assets does not relieve debtors of the obligation to pay interest calculated on these debts, as well as interest calculated on off-balance sheet accounts after the asset is granted "non-accrual" status.

51. In accordance with Article 125 of the Law of the Republic of Uzbekistan "On Bankruptcy", the calculation of penalties (fines, penalties) and interest on all types of debts of the debtor ceases from the moment the economic court adopts a decision to declare the debtor bankrupt and initiate liquidation proceedings.

(Para 51 added based on the Decision of the Board of the Central Bank of the Republic of Uzbekistan No. 1/7 of January 19, 2019 [decision](/docs/4201142?ONDATE=15.02.2019 00#4201273) (registration number 1304-4, dated 15.02.2019) — National Database of Legislation, 15.02.2019, 10/19/1304-4/2616)

6. It is not allowed to capitalize overdue interest by adding it to the principal debt amount of the asset.

(Para 6 in the edition of the Decision of the Board of the Central Bank of the Republic of Uzbekistan No. 1/7 of January 19, 2019 [decision](/docs/4201142?ONDATE=15.02.2019 00#4201277) (registration number 1304-4, dated 15.02.2019) — National Database of Legislation, 15.02.2019, 10/19/1304-4/2616)

4. Restoration of Accrual Status

5. The decision to revoke "non-accrual" status can only be adopted if the borrower's financial situation is assessed, and there is a desire and ability to fully repay the debt under normal operating conditions. One of the factors for adopting this decision is the satisfactory fulfillment of requirements by the borrower or issuer continuing to make timely payments to the bank's benefit in accordance with the repayment schedule for a certain period, i.e., the customer or issuer makes payments on time for at least 90 days.

6. If the borrower or issuer has assets classified in or at the level of being granted this status, this situation is considered sufficient evidence for the asset to remain in non-accrual status.

7. The "non-accrual" status of assets is revoked based on the decision of the bank's credit committee. This decision must be formalized in writing.

8. When overdue interest income transferred and recorded in off-balance sheet accounts is received, the following accounting entry is performed in the balance sheet report and the income and loss report:

Dr 10101 "Cash in Circulation" or the customer's deposit account;

Cr 40000 — 45094 "Interest Income";

Dr 96333 "Counter-account for Accrued Interest on Securities to be Collected" or 96335 "Counter-account for Interest and Fees on Assets";

Cr 91500 "Interest and Fees on Assets".

Regulation on Non-accrual of Interest

APPENDIX 1

Identification of Impairment

The bank must assess at each reporting date (monthly) whether there are any indicators of the probability of impairment of interest, loans, debt securities, or other interest-bearing financial instruments (hereinafter referred to as assets) to be collected. If any of these indicators exist, the bank must assess the recoverable amount of the asset. The assessment of whether there are any real indicators of impairment of a financial asset is performed based on evidence available at the time of preparing the financial report (at the end of each month). The assessment must be documented.

In identifying indicators of the probability of impairment of interest and assets to be collected, the bank must consider the following indicators:

1. the market value of the borrower or issuer has decreased more than expected as a result of normal circumstances over a certain period;

2. significant changes have occurred or are expected in the near future that adversely affect the condition of the borrower or the issuer of the financial instrument, such as technological, market, economic, and legal conditions in which the borrower or issuer operates;

3. market interest rates or other market indicators of investment profitability have risen over a certain period, and these increases likely affect the discount rate used to calculate the value of the asset's utility, significantly reducing the recoverable amount of the asset;

4. the balance sheet value of the net assets of the borrower or issuer is higher than its market capitalization;

5. there is evidence of a significant adverse effect on the cash flows of the borrower or issuer, which casts doubt on the implementation of future payments;

6. significant changes have occurred in the past or are expected in the near future in the manner and level of operation of the borrower or issuer that may adversely affect their situation. These changes include plans to suspend or reorganize operations, or the write-off of significant volumes of assets or the assumption of significant obligations;

7. there is evidence that the economic condition of the borrower or issuer is deteriorating or is expected to deteriorate more than anticipated. For example:

a) the borrower's or issuer's need for funds to conduct operations is significantly greater than previously planned in the budget;

b) actual net cash flow from operations is significantly worse than profits and losses or the budget planned by the borrower or issuer;

c) the borrower or issuer notices a significant decrease in net cash flow or operating income planned in the budget, or a significant increase in operating losses planned in the budget;

d) when combining current period indicators with future period budget indicators, a decrease in operating losses or net cash flow is expected.

Banks must also consider objective evidence, i.e., information indicating that financial assets or groups of assets are impaired or uncollectible, including information attracting the attention of asset holders:

1. the existence of significant financial difficulties of the issuer;

2. actual breach of the contract, such as default or delay in payments of interest or principal;

3. concessions granted by the creditor to the borrower for economic or legal reasons related to the borrower's financial difficulties, which would not otherwise be granted;

4. a high probability of the issuer's bankruptcy or other financial restructuring;

5. the recognition of a loss on impairment of this asset in previous financial reports;

6. the disappearance of an active market for these financial assets due to financial difficulties;

7. the formation of a collection schedule for accounts receivable indicating that the full nominal amount of the accounts receivable portfolio will not be collected.

The disappearance of an active market due to securities of the enterprise not being sold and not being bought by the company cannot be evidence of impairment. A decrease in the credit rating of the enterprise is not in itself evidence of impairment, but it may be considered evidence of impairment when considering other existing information.

The lists above are not considered exhaustive. The bank may identify other indicators of the probability of asset impairment, which requires the bank to determine the recoverable amount of the asset.

Banks must adopt written measures for applying and implementing such assessments for interest-bearing assets. Such measures must include instructions on the relevant methods for identifying and applying these requirements.

Assessment of Recoverable Amount

If there is any objective evidence of impairment, the bank is required to formally assess the recoverable amount of this financial asset.

If there are no potential loss indicators due to impairment, the bank is not required to formally assess the recoverable amount in accordance with this Regulation.

If the balance sheet value of this asset is higher than its recoverable amount, interest and assets to be collected are impaired.

The impairment of financial assets and the impossibility of collecting their amounts are assessed and recognized separately for each asset. Impairment and the impossibility of collecting amounts may be assessed and recognized based on a portfolio approach for groups of similar financial assets not individually considered as impaired.

The recoverable amount for financial assets accounted for at cost or amortized cost (loans and accounts receivable provided by the bank and held until maturity, not intended for sale and investment) is expressed as the present value of future expected cash flows for this financial asset discounted at the initial real interest rate, or (if the interest rate for this asset is variable) at the current real interest rate specified in the contract. If this asset is pledged as collateral and there is a possibility of transfer of ownership to the pledgee, its owner reasonably assesses the impairment of the collateral.

The recoverable amount for debt instruments accounted for at fair value (assets offered or intended for sale) is expressed as the present value of future expected cash flows discounted at the current market interest rate for similar financial assets.

The recoverable amount for financial assets not accounted for at fair value, because their fair value cannot be reliably assessed due to the lack of a market price for assets evaluated in an active market (not quoted), is expressed as the present value of future expected cash flows discounted at the current market interest rate for similar financial assets.

When interest and assets to be collected are impaired, it indicates that interest calculation must be stopped and the "non-accrual" status must be applied to assets.

(Law Collection of the Republic of Uzbekistan, 2004, No. 4, Article 46; 2006, Nos. 20-21, Article 186; National Database of Legislation, 15.02.2019, 10/19/1304-4/2616)