Explanatory Note on Amendments and Additions to the Procedure for Classifying Asset Quality, Forming Reserves for Potential Losses by Commercial Banks, and Their Use

EXPLANATORY NOTE ON AMENDMENTS AND ADDITIONS TO THE PROCEDURE FOR CLASSIFYING ASSET QUALITY, FORMING RESERVES FOR POTENTIAL LOSSES BY COMMERCIAL BANKS, AND THEIR USE

Resolution No. 26/1 of the Board of the Central Bank of the Republic of Uzbekistan dated September 10, 2011, "On Amendments and Additions to the Procedure for Classifying Asset Quality, Forming Reserves for Potential Losses by Commercial Banks, and Their Use," was registered with the Ministry of Justice of the Republic of Uzbekistan on September 22, 2011, under No. 632-2.

Based on Resolution No. PQ-1438 of the President of the Republic of Uzbekistan dated November 26, 2010, "On Priority Directions for Further Reforming and Increasing the Stability of the Republic's Financial and Banking System and Achieving High International Rating Indicators," further improving the regulatory and legal basis of financial and banking activities, introducing amendments and additions to existing laws in accordance with modern requirements and international norms and standards, adopting new laws and regulatory acts, and taking preventive measures to prevent the emergence of problematic loans on credits, ensuring the continuous growth and improvement of the quality of commercial banks' credit portfolios are considered key directions for reforming and increasing the stability of the country's financial and banking system.

In particular, Paragraph 32 of Annex 1 to Resolution No. PQ-1438 of the President of the Republic of Uzbekistan dated November 26, 2010, stipulates the introduction of a clear mechanism for conducting in-depth factor analysis in managing bank risks, improving the monitoring of bank assets while considering the formation of reserves and diversification of the credit portfolio, as well as adopting warning measures to prevent the emergence of problematic debt.

To ensure the implementation of this task, Resolution No. 26/1 of the Board of the Central Bank dated September 10, 2011, "On Amendments and Additions to the Procedure for Classifying Asset Quality, Forming Reserves for Potential Losses by Commercial Banks, and Their Use," was adopted.

This Resolution of the Board of the Central Bank was registered with the Ministry of Justice of the Republic of Uzbekistan under No. 632-2 on September 22, 2011, and enters into force on October 2, 2011.

The amendments and additions introduced into the Central Bank's "Procedure for Classifying Asset Quality, Forming Reserves for Potential Losses by Commercial Banks, and Their Use" include, among other things, the following.

A mandatory reserve deposit has been established at the Central Bank for reserves to cover potential losses on commercial bank assets, and a requirement has been imposed on commercial banks to transfer funds from their representative accounts in an amount equal to the sum of special reserves formed against potential losses on their assets to this mandatory reserve deposit.

The amount of funds to be transferred to the mandatory reserve deposit is recalculated monthly based on the reserve sum formed against potential losses on assets as of the 10th, 20th, and the end of the month.

Based on the calculation results, commercial banks are required to transfer funds to the mandatory reserve deposit within three working days if the amount is insufficient to meet the sum of special reserves, or, upon justified requests from commercial banks, the Central Bank returns excess funds to the banks.

Furthermore, according to the newly introduced amendments, the Central Bank may send mandatory instructions to commercial banks for the formation of additional reserves against potential losses on assets, having analyzed the commercial banks' credit portfolios.

In turn, if commercial banks fail to comply with the aforementioned requirements, the Central Bank will recover the funds that should have been transferred to the mandatory reserve deposit from the bank's representative account at the Central Bank and apply relevant measures and sanctions to the bank in accordance with Article 53 of the Law of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan."

In addition, according to the newly introduced amendments and additions, it is established that payments on all credits issued by the bank must be paid in installments, distributed across the entire term of the credit contract.

This rule serves as a warning sign to prevent the emergence of problematic credits in banks.

At the same time, the introduced amendments introduce a number of novelties for commercial banks regarding the classification of their asset quality.

In particular, under the old rules, credits with a payment delay of up to 30 days were classified as "standard," those with a delay of up to 90 days as "substandard," and those with a payment delay of more than 180 days as "doubtful." Under the new procedure, all credits with intermediate payments on principal and interest overdue by more than 180 days, where payments were not made within the contract term and according to the schedule, are classified as "doubtful."

Furthermore, assets in court proceedings, assets with extended payment terms due to the debtor's poor financial condition and inability to pay, and properties obtained to cover problematic credits that are not used in bank operations, as well as assets not sold within three months from the day they were included in the bank's balance sheet, are also classified as "doubtful."

The introduction of these rules creates opportunities for further improvement in the quality of commercial banks' assets, early detection of the emergence of problematic credits, and ultimately ensures the further protection of the interests of depositors and creditors of commercial banks.

Sh. Khalilov
Deputy Director
Department for Licensing and Regulation of Credit Institutions Central Bank of the Republic of Uzbekistan