Procedure for Applying Special Classification of Loans Meeting Certain Criteria

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Date of creation: 2025-03-25

Approved

by the Resolution of the Board of the National Bank of the Kyrgyz Republic

dated March 2, 2006 No. 5/6

PROCEDURE

for applying special classification of loans meeting certain criteria

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated April 25, 2012 No. 18/8, May 18, 2012 No. 19/7, October 31, 2012 No. 41/10, November 27, 2013 No. 45/16, October 17, 2014 No. 45/2, April 15, 2015 No. 22/7, August 15, 2018 No. 2018-P-33/33-8, June 17, 2020 No. 2020-P-33/35-1, December 21, 2022 No. 2022-P-12/81-8, April 5, 2023 No. 2023-P-12/22-3, December 20, 2023 No. 2023-P-12/80-4, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

1. General Provisions

1.1. This Procedure for applying special classification of loans meeting certain criteria (hereinafter - the Procedure) is developed on the basis of the legislation of the Kyrgyz Republic with the aim of optimizing approaches to assessing credit risks and costs arising from lending by commercial banks and other financial and credit organizations licensed and regulated by the National Bank of the Kyrgyz Republic, including those operating in accordance with Islamic principles of banking and financing, taking into account the special terminology applied by them in carrying out banking operations (hereinafter - banks/F&COs).

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 17, 2014 No. 45/2)

1.2. The Procedure establishes the minimum conditions and requirements under which banks/F&COs apply special classification of loans and make corresponding allocations to the Provision for Potential Losses and Damages (hereinafter - PPLD).

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 27, 2013 No. 45/16)

2. Criteria Determining Loans Subject to Special Classification

(Chapter title as amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 21, 2022 No. 2022-P-12/81-8)

2.1. Special classification shall be applied to loans meeting the following criteria simultaneously:

• the loan amount (in national or foreign currency at the official exchange rate of the National Bank on the date of issuance) must not exceed 500,000 som;
• the loan term must not exceed 24 months;
• the intended purpose of the loan is for consumer needs and/or the development of an existing small business owned by the borrower and generating regular income;
• repayment of the loan debt is made through regular (at least once a month) payments of principal and interest;
• the bank/F&CO has no evidence of the borrower's failure to fulfill obligations to this bank/F&CO or to any other creditor;
• the borrower typically provides collateral for the loan in the amount of 100% of the principal and interest.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated April 5, 2023 No. 2023-P-12/22-3)

2.2. (Excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

2.3. Special classification shall also be applied to loans meeting the following criteria:

• a loan issued based on a credit rating;
• a loan issued through a remote/distance service channel;
• a loan whose interest rate at the time of issuance exceeds the maximum permissible interest rate established by the Law of the Kyrgyz Republic "On Restricting Usurious Activity in the Kyrgyz Republic". However, if the interest rate on an existing loan is reduced (without deterioration of the borrower's financial position) to a level not exceeding the maximum permissible interest rate established by the Law of the Kyrgyz Republic "On Restricting Usurious Activity in the Kyrgyz Republic" on the day of reduction, special classification may cease to be applied from the date of the interest rate reduction.

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated April 5, 2023 No. 2023-P-12/22-3, December 20, 2023 No. 2023-P-12/80-4, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

2-1. Classification of Loans Issued to a Joint Liability Group under the Guarantee of Group Members

(Section as amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

2-1.1. Special classification must be applied to loans issued to a joint liability group under the guarantee of members of the joint liability group.

2-1.2. In cases where a natural person borrower, including an individual entrepreneur without legal entity status, has any other individual loan or a loan issued as part of this or any other joint liability group in any other bank/F&CO, in addition to the loan obtained in the current bank/F&CO as part of a joint liability group, all loans of the natural person borrower, including an individual entrepreneur without legal entity status, obtained in the current bank/F&CO and subject to special classification under this Procedure, must be classified at minimum as "assets under observation".

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

2-1.3. Loans issued to a joint liability group must be recognized as doubtful if there are serious internal problems within the joint liability group that may lead to the dissolution of the group and failure to fulfill obligations to repay the loan. In cases where the joint liability group is on the verge of dissolution or for any other reason its members are unable to bear joint liability for obligations to the bank/F&CO, the loan of such joint liability group must be recognized as a loss.

2-1.4. For all loans of a natural person borrower, including an individual entrepreneur without legal entity status, obtained in the current bank/F&CO and subject to special classification under this Procedure, the classification assigned to the loan with the largest outstanding balance shall apply, if it is the worst. A F&CO may refrain from applying the worst classification category to all loans if the worst category was assigned to a borrower's loan due to deterioration or worsening of the borrower's financial condition caused by imposed states of emergency and/or emergencies due to epidemics/pandemics and other force majeure circumstances (circumstances of irresistible force) and related restrictions.

In such cases, a F&CO may apply a classification category to each loan separately in accordance with the characteristic features of the category.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1)

2-1.5. In the event of overdue principal and/or interest on loans obtained in the current bank/F&CO by members of a Joint Liability Group (JLG) who have a joint business, classification shall be applied based on the number of days overdue in accordance with this Procedure. In the event of overdue principal and/or interest on a loan of one of the JLG members for more than 60 days, the classification category assigned to that JLG member's loan in accordance with this Procedure shall be applied to all loans issued to the members of that JLG.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1)

3. Special Classification of Loans

3.1. When applying special classification, banks/F&COs must assess loan quality based on the number of days of overdue scheduled payments of principal and/or interest, as well as taking into account circumstances that may lead to deterioration of the borrower's financial position and ability to repay loan obligations.

3.2. For loans, including loans issued based on a credit rating and loans issued through remote service channels, to which special classification is applied, the following sizes of allocations to the PPLD are established depending on the number of days of overdue scheduled payments of principal and/or interest:

Special Classification of Loans and Corresponding Allocations to PPLD

Classification Category	Number of Days of Overdue Scheduled Payments	PPLD
Satisfactory	0-3	2%
Under observation	4-29	5%
Substandard	30-59	25%
Doubtful	60-89	50%
Loss	90 and more	100%

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1, April 5, 2023 No. 2023-P-12/22-3, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

4. Requirements for Banks and Other Financial and Credit Organizations When Applying Special Classification

4.1. The Board of Directors of banks/F&COs shall make a fundamental decision on the application of special classification of loans in accordance with the requirements of this document.

4.2. Loans subject to special classification shall be classified in accordance with established requirements until their full repayment.

4.3. Banks/F&COs applying special classification must have corresponding procedures approved by the Board of Directors of the bank/F&CO, which define an internal control system ensuring:

• quality and reliability of preliminary (pre-loan) assessment of the borrower's creditworthiness, based on evaluation of their financial condition, including analysis of the business owned by the borrower (state of assets and business conditions; business cash flows; borrower's ability to correctly utilize borrowed funds and generate expected (planned) income; sufficiency of the borrower's income from business and other sources to service the loan debt; existence of debt to other creditors);
• timeliness and effectiveness of subsequent (post-loan) monitoring of the borrower's financial condition and business;
• timeliness and adequacy of classification of loans subject to special classification and making corresponding allocations to the PPLD;
• preparation of regular (at least monthly) reporting on classification of loans subject to special classification;
• compliance with the requirements established by this Procedure for banks/F&COs when applying special classification.

Note of the IC "Toktom": The number of paragraphs in point 4.3 of this Procedure does not correspond to the number of paragraphs in point 4.3 of the text in the state language.

4.4. Classification of loans subject to special classification and corresponding allocations to the PPLD shall be conducted by banks/F&COs on a monthly basis.

4.5. In cases where multiple loans meeting the criteria established in point 2.1 of this Procedure are issued to one person in the current bank/F&CO, special classification shall be applied provided that the aggregate amount of all loans does not exceed the quantitative limit specified in point 2.1. Such loans must be classified according to the worst classification category applied to them.

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 18, 2012 No. 19/7, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

4.5-1. (Excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

4.5-2. In cases where a borrower (natural or legal person) has multiple loans in one bank or within a banking group, the bank may refrain from applying the worst classification category to all loans if the worst category was assigned to the borrower's loan due to deterioration of the borrower's financial flows for the loan caused by imposed states of emergency and/or other force majeure circumstances (circumstances of irresistible force) and related restrictions, provided their impact is documented.

In such cases, the bank may apply a classification category to each loan separately in accordance with the characteristic features of the category.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 20, 2023 No. 2023-P-12/80-4)

4.6. In cases where loans meeting established criteria are issued to persons related to each other, special classification shall be applied to those whose aggregate amount does not exceed the quantitative limit specified in point 2.1.

4.7. Loans subject to special classification for which restructuring has been conducted twice, including extension of the loan term and/or change in the frequency of scheduled payments, shall be classified as "under observation", and a PPLD shall be created in the amount of 5% of the loan principal. Upon subsequent restructuring of loans, the classification category must be downgraded by at least one category.

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1, March 19, 2025 No. 2025-P-12/11-7-(NF KU))

4.8. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 17, 2020 No. 2020-P-33/35-1)

4.9. A bank/F&CO may refrain from downgrading the asset classification category upon its restructuring due to deterioration of the borrower's financial flows caused by imposed states of emergency and/or other force majeure circumstances (circumstances of irresistible force) and related restrictions, provided the impact of the situation on the borrower's activities is documented.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 20, 2023 No. 2023-P-12/80-4)

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