Approval of the Regulation on Non-accrual of Interest

Resolution 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

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Document lost its force 11.01.2022

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07.00.00.00 Legislation on Finance and Credit. Banking Activity / 07.21.00.00 Banking Activity / 07.21.05.00 Bank Deposits and Other Deposit Operations]
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Finance / Banks and Other Credit Institutions. Credits]

RESOLUTION 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 resolution loses its force on January 11, 2022, based on the Resolution of the Board of the Central Bank of the Republic of Uzbekistan No. 27/8 dated November 19, 2021 "On Approving the Regulation on Non-accrual of Interest" and the Resolution on Declaring Amendments and Additions Thereto Invalid (registration number 1304-5, dated December 10, 2021).

Based on Articles 3, 7, 17, 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 resolves:

1. Approve the Regulation on Non-accrual of Interest as per the Appendix.

2. This resolution shall enter into force ten days after the date of its state registration by the Ministry of Justice of the Republic of Uzbekistan.

3. From the date of entry into force of this resolution, the Resolution of the Board of the Central Bank of the Republic of Uzbekistan No. 16/2 dated November 2, 1998 and the Regulation on the Policy of Non-accrual of Interest on Commercial Bank Loans Approved Thereby (registration number 561 dated December 2, 1998) shall be considered invalid.

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", and "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 shall adopt the procedure 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 under which transactions and events are recognized and reflected in accounting records and reported in the financial statements of the period in which they occurred, rather than when cash funds or their equivalents are received or paid;

real interest rate — the interest rate necessary to discount the expected future cash inflows during the life of the asset to equal the initial carrying amount of the asset;

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

impairment — a decrease in the carrying amount of an asset below its recoverable amount;

non-accrual of interest — cessation of the application of the accounting method for an asset when there is absolutely no probability of collecting the accrued interest income or when it is impossible to collect the principal amount of the debt in full;

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

3. Procedure for Transferring an Asset to Non-accrual Status

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

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

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

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

4. when the deadline for repayment of the principal amount or payment of interest thereof is delayed by 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 shall perform the following:

1. the calculation of interest income on balance sheet accounts shall cease;

2. all accrued but unpaid interest income shall be transferred from balance sheet accounts to off-balance sheet accounts, and interest accrued after the granting of "non-accrual" status to the asset shall be processed on off-balance sheet accounts;

3. all subsequent payments for these assets shall be directed first to cover accrued but unpaid interest income, and then to cover the principal amount of the loan.

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

Dr Relevant interest income accounts

Cr 16300 "Accrued Interest to be Collected"

Dr 91500 "Interest and Intermediation Fees on Assets"

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

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

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

The granting of "non-accrual" status to assets does not release debtors from the obligation to pay the interest calculated on these loans, as well as the interest calculated on off-balance sheet accounts after the granting of "non-accrual" status.

5.1. From the moment the economic court adopts a decision on declaring the debtor bankrupt and initiating proceedings on termination 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 shall cease.
(Paragraph 5.1 was introduced based on the Resolution of the Board of the Central Bank of the Republic of Uzbekistan No. 1/7 dated January 19, 2019 (registration number 1304-4, dated February 15, 2019) — National Database of Legislative Acts, February 15, 2019, No. 10/19/1304-4/2616-)

6. It is not permitted to add overdue interest to the principal debt amount of the asset through capitalization.
   (Paragraph 6 was edited in the version of the Resolution of the Board of the Central Bank of the Republic of Uzbekistan No. 1/7 dated January 19, 2019 (registration number 1304-4, dated February 15, 2019) — National Database of Legislative Acts, February 15, 2019, No. 10/19/1304-4/2616-)

7. Restoration of Accrual Status

8. A decision on the revocation of "non-accrual" status may be adopted only upon assessment of the borrower's financial condition, the presence of 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 continuing to make timely payments to the bank in accordance with the repayment schedule for a certain period after the payment of overdue debts on interest and principal, i.e., the customer or issuer continues to make payments to the bank's profit for at least 90 days.

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

10. 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.

11. When funds from accrued and written-off overdue interest income are received, the following accounting entry is made in the balance sheet report and the income and loss statement:

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 Intermediation Fees on Assets";

Cr 91500 "Interest and Intermediation Fees on Assets".

Appendix 1 to the Regulation on Non-accrual of Interest

Identification of Impairment

The bank must assess the presence of any signs of the probability of impairment of interest calculated for collection, loans, debt securities, or other interest-bearing financial instruments (hereinafter referred to as assets) at each reporting date (monthly). If any of these signs are present, the bank must assess the recoverable amount of the asset. The assessment of the presence of any real signs of impairment of a financial asset is carried out based on evidence available at the time of preparing the financial statements (at the end of each month). The assessment must be documented.

In identifying signs of the probability of impairment of interest calculated for collection and assets, the bank shall consider the following signs:

1. the market value of the borrower or issuer has decreased significantly 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 negatively affect the condition of the borrower or the issuer of the financial instrument, or the 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 may affect the discount rate used to calculate the value of the asset's use and significantly reduce the recoverable amount of the asset;

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

5. there is evidence of a significant negative impact on the cash flows of the borrower or issuer, which raises doubt about the implementation of future payments;

6. significant changes have occurred in the past or are expected to occur in the near future in the manner and level of activity of the borrower or issuer, which may negatively affect the situation of the borrower and issuer. These changes include plans to suspend or reorganize activities, or the write-off of assets of significant volume or the assumption of significant liabilities;

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 need for funds to carry out the activities of the borrower or issuer is much greater than the need previously planned in the budget;

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

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

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

Banks shall also take into account objective evidence, i.e., information related to the following, indicating that the financial asset or group of assets has been impaired or is uncollectible, including attracting the attention of asset holders:

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

2. actual breach of the contract, such as default or delay in payment 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 the creditor would not otherwise grant under other circumstances;

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

5. the recognition of a loss on the 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 schedule for the collection of 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 the fact that the securities of the enterprise are not being sold and are not being purchased by the company cannot be proof of impairment. A decrease in the credit rating of the enterprise itself is not considered evidence of impairment, but it may be considered evidence of impairment when considering other existing information.

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

Banks shall adopt in writing the measures for applying and implementing such assessments for interest-bearing assets. Such measures shall 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 officially assess the recoverable amount of this financial asset.

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

If the book value of this asset is higher than its recoverable amount, interest calculated for collection and assets are impaired.

The impairment of financial assets and the impossibility of collecting amounts therefrom are assessed and recognized separately for each asset. Impairment and the impossibility of collecting amounts may be assessed and recognized on a portfolio basis for a group 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 repayment, not intended for sale and investment) is expressed as the present value of the 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 that it will pass to the property of the pledgee, then its owner assesses the impairment of the collateral on a fair basis.

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 (quoted) in an active market is expressed as the present value of future expected cash flows discounted at the current market interest rate for similar financial assets.

When interest calculated for collection and assets are impaired, it indicates that interest calculation must cease and the "non-accrual" status must be applied to assets.
(Compilation of Legislation of the Republic of Uzbekistan, 2004, No. 4, Article 46; 2006, Nos. 20-21, Article 186; National Database of Legislative Acts, February 15, 2019, No. 10/19/1304-4/2616-)