Temporary Rules on Asset Classification and Reserve Provisions for Potential Losses by Commercial Banks and Non-Bank Financial Credit Organizations

Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic dated April 29, 2020 No. 2020-P-12/25-7-(NPA)

(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, May 19, 2021 No. 2021-P-12/25-2-(NPA), May 19, 2021 No. 2021-P-12/25-3-(NPA), October 27, 2021 No. 2021-P-12/59-4-(NPA), March 31, 2022 No. 2022-P-12/19-4-(NPA))

Chapter 1. General Provisions

1. These Temporary Rules on Asset Classification and Reserve Provisions for Potential Losses by Commercial Banks and Certain Non-Bank Financial Credit Organizations (hereinafter referred to as the "Temporary Rules") define the temporary procedure for classifying assets by commercial banks and microfinance companies authorized to attract deposits, guarantee funds, and JSC "Financial Company of Credit Unions" (hereinafter referred to as "banks"), the quality of which has deteriorated or is deteriorating due to the spread of the coronavirus infection and related restrictive measures adopted by state authorities, as well as in connection with the current geopolitical situation and the impact of negative consequences of an external economic shock.

These Temporary Rules do not apply to newly issued bank loans, except for loans issued under targeted state programs of the Cabinet of Ministers of the Kyrgyz Republic or programs aimed at restarting/activating the activities of individuals and legal entities, as well as loans specified in Chapter 7 of these Temporary Rules.

(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, March 31, 2022 No. 2022-P-12/19-4-(NPA)).

Chapter 2. General Guidelines on Asset Classification

2. In the event that a borrower (individual or legal entity) has multiple loans in one bank or within a banking group, the bank has the right not to apply the worst classification category to all loans if the worst category is assigned to a loan of a borrower whose financial condition has deteriorated or is deteriorating due to the spread of the coronavirus infection and related restrictive measures adopted by state authorities, as well as in connection with the current geopolitical situation and the impact of negative consequences of an external economic shock.

In this case, the bank may apply the classification category for 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 March 31, 2022 No. 2022-P-12/19-4-(NPA)).

3. Newly issued loans under targeted state programs of the Cabinet of Ministers of the Kyrgyz Republic or programs aimed at restarting/activating the activities of individuals and legal entities are initially recognized as "normal" or "satisfactory" assets, according to characteristic features established by the Regulation "On Asset Classification and Corresponding Reserve Provisions for Potential Losses" (hereinafter - the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses"), approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 21, 2004 No. 18/3.

Subsequent classification of these assets is carried out in accordance with the requirements of these Temporary Rules.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 31, 2022 No. 2022-P-12/19-4-(NPA))

Chapter 3. Unclassified Assets

4. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 19, 2021 No. 2021-P-12/25-3-(NPA))

5. Characteristic features, upon the manifestation of which an asset can be considered an "asset under observation," are:

1. incomplete collateral for an asset that otherwise has all characteristics inherent in "satisfactory" assets, or collateral within the framework of contract financing (e.g., claims under financed contracts, accounts receivable, etc.);

2. overdue repayment/installments of the principal amount and/or interest for a period of no more than 60 days;

3. inability of the bank to monitor the collateral due to insufficient documentation, or due to the absence of valuation experts, except for cases related to restrictions introduced due to the spread of the coronavirus infection (with a justified conclusion of the bank);

4. impending decrease in collateral liquidity (price reduction, currency exchange rate changes) or, if the asset is secured by a guarantee/suretyship - receipt by the bank of information about the deterioration of the financial condition of the guarantor/surety;

5. changes in market conditions that may affect the recovery of the asset;

6. restructuring of classified assets that fall under the conditions of paragraph 7.6 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses";

7. repeated change of loan contract terms by converting the currency of the loan from one currency to another in cases where the loan previously did not belong to the category of classified loans and provided that this change is not related to the deterioration of the client's financial condition.

(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, March 31, 2022 No. 2022-P-12/19-4-(NPA))

6. Loans must be classified as "assets under observation" with the formation of a Provision for Potential Losses and Losses (PPLL) of 5%, if the repayment schedule of a newly issued loan provides for repayment of the principal amount not on a monthly basis, provided that repayment of more than 80% of the principal amount is scheduled after:

• 3/4 of the total loan term, provided that the total loan period is less than 3 years;
• 1/2 of the total loan term, provided that the total loan period is more than 3 years, except for:
  • loans issued under targeted state programs of the Cabinet of Ministers of the Kyrgyz Republic and providing for a grace period for loan repayment;
  • loans issued under programs providing for a grace period for loan repayment aimed at restarting/activating the activities of individuals and legal entities;
  • interbank loans, including loans issued to microfinance organizations;
  • amounts less than 1% of Net Consolidated Capital (NCC) in aggregate issued to one borrower.

These loans must be classified in accordance with paragraph 3 of these Temporary Rules.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 31, 2022 No. 2022-P-12/19-4-(NPA))

Chapter 4. Classified Assets

7. Characteristic features, upon the manifestation of which an asset can be considered "substandard," are:

1. overdue debt on scheduled payments from 60 to 180 days;

2. insufficient cash flows to pay off the debt;

3. presence of overdue debt of more than 30 days on the principal amount and/or interest on any other loan for a borrower-individual, including an individual entrepreneur without legal entity status, except for:

   • loans issued under targeted state programs of the Cabinet of Ministers of the Kyrgyz Republic, in this bank and/or another financial-credit organization;
   • loans issued under programs providing for a grace period for loan repayment aimed at restarting/activating the activities of individuals and legal entities;
   • loans where overdue debt arose due to the spread of the coronavirus infection and related restrictions;
   • loans where overdue debt arose due to the influence of the current geopolitical situation and negative consequences of an external economic shock;

4. presence of overdue debt on the principal amount and/or interest of more than 60 days on a loan of a spouse, parents, and children of a borrower-individual, including an individual entrepreneur without legal entity status, to this bank and/or other financial-credit organizations, except for loans issued to them under targeted state programs of the Cabinet of Ministers of the Kyrgyz Republic, provided that the source of repayment for all the above loans is the same. In this case, the same source of repayment for loans is understood as the aggregate income of the above persons, accounted for by the financial-credit organization when making a decision on issuing the loan, including income from entrepreneurial activity;

5. decrease in the value of collateral, deterioration of its quality, collateral becomes difficult to realize, or if the asset is secured by a guarantee/suretyship - receipt by the bank of information about the deterioration of the financial condition of the guarantor/surety.

Note: The features specified in sub-paragraphs 3 and 4 of this paragraph do not apply to overdrafts within salary projects.

(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, March 31, 2022 No. 2022-P-12/19-4-(NPA))

8. An asset must be classified as "substandard" with overdue debt from 180 to 270 days. In this case, the quality characteristics of such an asset cannot improve the classification category of the asset, except for assets with collateral, according to paragraph 4.1 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses".

An asset fully secured by suretyship/guarantee must be classified as "substandard" upon the occurrence of the 90th day from the moment of the emergence of overdue debt on payments, that is, before the occurrence of the term specified in the first paragraph of this paragraph.

9. Characteristic features, upon the manifestation of which an asset can be considered "doubtful," are:

1. overdue debt on the principal amount and/or interest is from 180 to 270 days;

2. the client's financial condition has seriously deteriorated (or the client is on the verge of bankruptcy);

3. the condition of the collateral is poor or it is absent;

4. deterioration of the financial condition of the surety/guarantor and/or the client's counterparty who received a loan within the framework of contract financing;

5. dependence of debt repayment on the realization of collateral. In this case, the collateral must be realizable, in the form of movable and immovable property, in an amount sufficient to pay the bank the principal debt, all interest in accordance with the contract, and possible costs associated with the realization of collateral rights. It is assumed that the collateral can be realized within the following timeframes:

   • immovable property - no later than 2 (two) years;
   • movable property - no later than 1 (one) year.

10. An asset must be classified as "doubtful" with overdue debt from 270 to 360 days. In this case, the quality characteristics of such an asset cannot improve the classification category of the asset, except for assets with collateral according to paragraph 4.1 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses".

11. Features by which an asset is classified as "losses" may be:

1. overdue debt for 270 days or more;

2. absence of collateral or inability to sell it due to the absence of a market;

3. inability or refusal of the client to pay off the debt, or expression of intent to pay, but without actual repayment, and absence of a secondary source for asset repayment, inability/refusal of the surety/guarantor and/or the client's counterparty who received a loan within the framework of contract financing to fulfill their obligations;

4. unwillingness of the client to cooperate with the bank or absence of the client;

5. cessation of the client's business operations or declaration of bankruptcy;

6. provision of assets to subjects of offshore zones.

11-1. In the presence of overdue debt exceeding 360 days, an asset must be classified as "losses," in which case the quality characteristics of such an asset are not applied during its classification, except for assets with collateral, according to paragraph 4.1 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses".

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 27, 2021 No. 2021-P-12/59-4-(NPA))

Chapter 5. Classification of Restructured Loans

12. Banks have the right not to worsen the classification category of an asset upon its restructuring due to changes in cash flows and the borrower's financial condition due to the influence of restrictions to contain the spread of the coronavirus infection, provided that this asset was restructured no more than 4 (four) times, starting from March 1, 2020, upon fulfillment of the following conditions:

• overdue debt on the principal amount and/or interest on the restructured asset at the time of its restructuring was no more than 180 days;
• the bank conducted a thorough analysis of the borrower's financial condition (with corresponding calculations, financial indicators), which confirms the borrower's ability to make payments under the proposed restructuring plan.

Upon the fifth and subsequent restructurings of assets, the classification category must be worsened by the bank by at least 1 category.

At the same time, these requirements do not apply to loans with total debt exceeding 2% of the bank's Net Consolidated Capital (NCC). These loans upon repeated restructuring must be classified in accordance with the requirements of paragraph 7.3 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses".

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 19, 2021 No. 2021-P-12/25-2-(NPA), October 27, 2021 No. 2021-P-12/59-4-(NPA), March 31, 2022 No. 2022-P-12/19-4-(NPA))

12-1. Banks have the right not to worsen the classification category of an asset upon its restructuring due to changes in cash flows and the borrower's financial condition due to the influence of the current geopolitical situation and negative consequences of an external economic shock (despite previously conducted restructurings), provided that this asset was restructured once, starting from March 1, 2022.

Subsequent restructuring of the above assets may be carried out in accordance with the conditions of paragraph 7.3 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses".

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 31, 2022 No. 2022-P-12/19-4-(NPA))

13. In the event of overdue debt on restructured assets (regardless of the number of restructurings), such assets are classified in accordance with the classification category features established by these Temporary Rules.

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 19, 2021 No. 2021-P-12/25-2-(NPA), March 31, 2022 No. 2022-P-12/19-4-(NPA))

14. The classification category of an asset restructured in accordance with the requirements of these Temporary Rules may be improved in accordance with the conditions of paragraph 7.6 of the "Regulation on Asset Classification and Corresponding Reserve Provisions for Potential Losses" or paragraph 14 of the "Regulation on Asset Classification and Formation of Reserves for Potential Losses and Losses by Non-Bank Financial Credit Organizations", approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 28, 2020 No. 2020-P-33/75-4-(NFPU).

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 19, 2021 No. 2021-P-12/25-2-(NPA), October 27, 2021 No. 2021-P-12/59-4-(NPA), March 31, 2022 No. 2022-P-12/19-4-(NPA))

Chapter 6. Classification of Other Bank Property Accepted in Settlement of an Asset

15. Other bank property accepted in settlement of an asset is classified as "losses" if it is not sold after the following periods:

a) two years - for movable property;

b) four years from the moment of acquisition of ownership rights - for immovable property, except for agricultural land, the terms for which are established by the legislation of the Kyrgyz Republic.

16. A bank has the right to lease other immovable property with income exceeding the costs of maintaining other property, in order to increase the operational income of banks, except in cases where the bank provides the borrower with the opportunity to purchase residential real estate in installments.

In this case, if the bank has not sold such immovable property within 3 (three) years from the moment of acquiring ownership rights, the bank classifies them as "doubtful" assets with the creation of a reserve for potential losses and losses in the amount of 50%.

17. In the event of payment delays and violation of the repayment schedule under a financial lease agreement/installment sale agreement of immovable property or another similar agreement regarding other property, classification must be carried out in accordance with these Temporary Rules.

Chapter 7. Additional Requirements for Newly Issued Loans

18. Newly issued loans with an interest rate exceeding the maximum permissible interest rate established by the Law of the Kyrgyz Republic "On Restriction of Usurious Activities in the Kyrgyz Republic" must be classified in accordance with the Procedure for Applying Special Classification of Loans Meeting Certain Criteria, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 2, 2006 No. 5/6.

19. A bank must classify a newly issued loan in foreign currency (except for currencies of EAEU member states) as at least "asset under observation" with the formation of a Provision for Potential Losses and Losses (PPLL) of 5% in the event that the borrower who received this loan has a share of income in foreign currency (except for currencies of EAEU member states) in the total volume of their aggregate income of more than 75 percent.

In this case, if the borrower who received a newly issued loan in foreign currency (except for currencies of EAEU member states) has a share of income in foreign currency (except for currencies of EAEU member states) in the total volume of their aggregate income from 50 to 75 percent, then the bank must classify the loan as at least "asset under observation" with the formation of a PPLL of 15 percent.

20. A bank must classify a newly issued loan in foreign currency (except for currencies of EAEU member states) as at least "substandard" with the formation of a PPLL of 25 percent in the event that the borrower who received this loan has a share of income in foreign currency (except for currencies of EAEU member states) in the total volume of their aggregate income of less than 50 percent.

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated March 31, 2022 No. 2022-P-12/19-4-(NPA))

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