Requirements for the Preparation of a Business Recovery Plan for Credit Financial Organizations

1 Registered in the Ministry of Justice of the Republic of Tajikistan on July 17, 2023, No. 1245 Approved by the Board of Directors of the National Bank of Tajikistan on June 13, 2023, No. 62

Requirements for the Preparation of a Business Recovery Plan for Credit Financial Organizations

Requirements for the Preparation of a Business Recovery Plan for Credit Financial Organizations (hereinafter referred to as the Requirements) are developed in accordance with Article 482 of the Law of the Republic of Tajikistan "On the National Bank of Tajikistan" with the aim of restoring their stable operations, including a sufficient level of capital and liquidity, as well as contributing to maintaining the reliability, stability, and normal functioning of the financial system. They establish minimum requirements for the development of a business recovery plan for credit financial organizations.

1. GENERAL PROVISIONS

2. The following main concepts are used in these Requirements:

• Critical functions and basic services - activities, operations, or services, the failure or interruption of which may threaten financial stability or the functioning of the real sector of the economy, as well as threaten the viability of the credit financial organization and all legal entities under its direct or indirect control, and which must be restored in the shortest possible time;
• Monitoring program – processes and procedures of the credit financial organization, the purpose of which is to identify and/or measure the effects of ongoing actions. Monitoring serves as an internal procedure based on indicators and results, as well as a tool for information collection and reporting;
• Stress scenarios – comprehensive hypothetical situations that may threaten the continuity of economic activity, liquidity, and viability of the credit financial organization. Stress scenarios include, at a minimum, possible devaluation of the exchange rate, deterioration of asset quality (loan classification), reduction of borrowing capacity, deterioration of profitability, and deterioration of liquidity inflows and outflows, which arise due to systemic and non-systemic instability of domestic or foreign origin. For testing the sufficiency of critical levels defined in the monitoring program, the validity and effectiveness of recovery strategies, stress scenarios must include the assumption that the organization's business model may become unviable;
• Business recovery strategy – a strategy providing for necessary and appropriate corrective measures that must be implemented in a timely manner by the credit financial organization in case of deterioration of its financial and operational situation. Recovery measures are aimed at restoring and maintaining the viability of the credit financial organization. The business recovery strategy must be implemented before the credit financial organization reaches the stage of loss of viability;
• Systemically important credit organization – a credit organization whose stable functioning is essential for the stability of the entire financial system, in particular the country's banking system.

2. The business recovery plan of credit financial organizations (hereinafter referred to as the recovery plan), approved by the supervisory board or board of trustees of the credit financial organization, must be developed in a simple and clear form and be accessible for use by responsible persons.

3. Systemically important credit organizations are obliged to develop their plans in accordance with the procedure established by these Requirements and submit them for consideration to the National Bank of Tajikistan by the end of each calendar year, after approval by their supervisory board.

4. The National Bank of Tajikistan will require the development of a business recovery plan from credit financial organizations that are not systemically important but perform critical functions and provide basic services. The National Bank of Tajikistan will set the deadline for the development and submission of the business recovery plan.

5. The business recovery plan covers all legal entities under the direct or indirect control of the credit financial organization.

6. CONTENT OF THE BUSINESS RECOVERY PLAN

7. The business recovery plan must include an executive summary and introduction that summarizes the structure and main content of the business recovery plan.

8. The business recovery plan must, at a minimum, contain the following:

• general information about the credit financial organization;
• monitoring program;
• stress scenarios;
• business recovery strategies;
• communication plan;
• barriers and risks;
• management mechanisms.

8. Business recovery strategies described in the business recovery plan are implemented by the credit financial organization in the following cases:

• achievement of critical levels provided for in the monitoring program;
• occurrence of a stress situation.

9. If the credit financial organization has grounds to believe that despite the situation provided for in paragraph 8 of these Requirements, there is no need to implement recovery strategies, due to, for example, the temporary nature of the stress situation, the supervisory board of the credit financial organization may decide not to implement such strategies. Such a decision must be properly justified, documented, and brought to the attention of the National Bank of Tajikistan within one working day from the moment of its adoption.

10. REQUIREMENTS AND DESCRIPTION OF RECOVERY MEASURES IN THE BUSINESS RECOVERY PLAN

§1. General Information about the Credit Financial Organization

10. General information about the credit financial organization must include:

• description of its structure, business model, critical functions and basic services, information on corporate governance, capital and liquidity management structure, as well as risk management structure;
• description of the credit financial organization with definition of main areas of economic activity, main products and services offered to customers, market niche, main sources of financing, distribution of its structural subdivisions (branches, subsidiaries, and banks) throughout the country and abroad, and any aspects related to the description of the organization;
• description of the corporate structure, including definition of major shareholders, structure of its group companies (subsidiaries, dependent companies, and others), any relevant credit obligations within the group, services of other companies in the group provided based on an outsourcing mechanism, and so on;
• description of the business model, as well as a detailed analysis of the main areas of economic activity of the credit financial organization, their share in total activity (turnover) and profit of the credit financial organization, and so on;
• description of corporate governance, as well as the composition of the supervisory board, committees under the supervisory board, and the executive body, spheres of responsibility of the executive body;
• description of the capital and liquidity management structure, including definition of persons responsible for monitoring financial indicators, existing processes of the credit financial organization for bringing any current issues to the attention of the executive body and supervisory board, and so on;
• description of the risk management structure, roles and duties of the supervisory board, its committees, executive body, management committees, their reporting lines, including loan approval processes, main indicators by which monitoring is carried out as part of normal operations, existing processes for determining any current issues and for bringing these issues to the attention of the executive body and supervisory board, etc.;
• description of critical functions and basic services, which determines whether they are critical or mandatory for the stability or functioning of the real sector of the economy and/or for the viability of the credit financial organization and all legal entities under its direct or indirect control.

11. The credit financial organization must determine the resources necessary for the restoration of critical functions and basic services, including:

• personnel;
• technologies;
• information;
• suppliers, external services, and supplies;
• financial resources.

12. In case the National Bank of Tajikistan determines that the list of critical and mandatory services included in the business recovery plan is incomplete, it may require the credit financial organization to make changes and additions to such a list to include other types of activities, operations, or services carried out by the credit financial organization or any legal entity under its direct or indirect control, which in the opinion of the National Bank of Tajikistan are critical or mandatory.

§2. Monitoring Program

13. The monitoring program must include indicators and other quantitative and qualitative information that:

• allows for proper monitoring of risks to which the credit financial organization is exposed;
• reflects the scale and speed of changes in the economic and financial condition of the credit financial organization, as well as changes in the liquidity of the credit financial organization;
• takes into account the model, nature, complexity of economic activity, and risk profile of the credit financial organization.

14. When creating the monitoring program, the credit financial organization must take into account the time required to implement all recovery measures, that is, after what period of time after implementation these measures can lead to the desired result, and take such time into account when deciding on the correct timing for implementing the business recovery plan.

15. The monitoring program must define critical levels for a set of indicators for risk monitoring and implementation of the business recovery plan, taking into account the necessary time for recovery strategies to achieve their expected results.

16. The monitoring program must provide minimum requirements for tracking the following indicators:

• indicators reflecting actual or likely deterioration in the credit financial organization's ability to comply with capital adequacy norms;
• indicators reflecting actual or likely deterioration in the credit organization's ability to meet liquidity and funding needs;
• indicators reflecting actual or likely changes in income, or changes in the scheme of income or expense sources;
• indicators reflecting the quality of operations related to assets and risk concentration according to sector, location, or counterparties;
• indicators reflecting concentration of funding sources, their level of stability, and cost;
• indicators and other data outside the credit financial organization that may have a significant impact on the image and operational or financial stability of the credit financial organization, in particular real estate prices, unemployment rate, and so on;
• indicators and other information indicating legal risks, contagion risks, and the effectiveness of internal control mechanisms.

17. Each credit financial organization is obliged to develop its own list of monitoring indicators and define thresholds (risk appetite) in accordance with its risk profile, complexity, product mix, and group structure. The list of potential monitoring indicators for inclusion in the recovery plan is provided in the Appendix only as an illustration.

18. The monitoring program must include all indicators listed in paragraph 16 of these Requirements, and priority should be given to indicators and other information used in risk and capital management.

19. The indicators specified in the first paragraph of paragraph 16 of these Requirements must correspond to risk and capital management structures.

20. The indicators specified in the second paragraph of paragraph 16 of these Requirements must correspond to the liquidity risk management structure.

21. The National Bank of Tajikistan may require the inclusion of other indicators and additional information in the monitoring program if it considers that their lack may have a negative impact on the effectiveness of the business recovery plan.

22. The credit financial organization is obliged to create processes and systems corresponding to the monitoring of indicators, critical levels, and other information contained in the monitoring program related to the business recovery plan.

23. The National Bank of Tajikistan, in a format and with a frequency determined by it, may request data related to indicators and other information contained in the monitoring program.

§3. Stress Scenarios

24. Stress scenarios must be comprehensive and provide for events that may threaten the continuity of operations, liquidity, and sustainability of the credit financial organization. The goal is to assess the feasibility and adequacy of recovery tools included in the business recovery plan separately, when the credit financial organization is in a state of stress, in difficult market conditions, and when both stresses occur simultaneously.

25. Stress scenarios include, at a minimum, possible devaluation of the exchange rate, deterioration of asset quality (loan classification), profitability, liquidity inflows and outflows, as well as reduction of borrowing capacity, which arise due to systemic and non-systemic instability of domestic or foreign origin.

26. For the purpose of testing the sufficiency of critical levels provided for in the monitoring program, the validity and effectiveness of recovery strategies, stress scenarios must include assumptions that the business model of the credit financial organization is economically and technically unviable.

27. If the National Bank of Tajikistan understands that the stress scenarios included by the credit financial organization in the business recovery plan are not sufficient for its purposes, it may issue a directive for the credit financial organization to include other stress scenarios in its business recovery plan. The National Bank of Tajikistan may also require the credit financial organization to conduct stress testing taking into account these scenarios and set deadlines for conducting this stress testing.

28. After each revision or update of the business recovery plan of the credit financial organization in accordance with paragraph 27 of these Requirements, stress scenarios must be re-evaluated, and stress tests conducted again.

§4. Business Recovery Strategies

29. The business recovery plan must provide for a comprehensive and reliable set of business recovery strategies in response to different stress scenarios.

30. The credit financial organization conducts an assessment of the inclusion of, at a minimum, the following business recovery strategies, both with regard to the organization itself and with regard to legal entities under the control of the credit financial organization:

• strengthening the level of capitalization and liquidity;
• sale of assets;
• refinancing debt;
• change in the structure of liabilities (passives);
• access to shareholder financial support (if available);
• access to financial support lines for liquidity assurance (if available);
• changes in the corporate or organizational structure, activity strategy, or business model of the credit financial organization;
• maintenance of services provided by third parties that are necessary to ensure the continuity of operations of the credit financial organization.

31. The business recovery plan must contain an analysis of the feasibility and expected impact of applying each business recovery strategy separately, and, if possible, the joint application of more than one strategy.

32. The justification of feasibility and impact analysis specified in paragraph 31 of these Requirements must emphasize the time required to obtain results from applying the business recovery strategy, and the expected costs and benefits from their application.

§5. Communication Plan

33. The goals and objectives of the communication plan include supporting the effectiveness of strategies provided for in the business recovery plan. The communication plan takes into account the relevance, appropriateness, and timeliness of communications with shareholders and the market throughout the entire process of implementing the business recovery plan.

34. The communication plan must contain a description of basic communication principles during a crisis situation, include communication strategies and measures, depending on the difficulties arising, as well as the role and duties of subdivisions of the credit financial organization responsible for maintaining external relations with the market.

35. The communication plan must provide for separate plans for communication both within the credit financial organization itself and for maintaining external relations with the market.

36. Internal and external communication plans must contain main information and recommendations that should be disseminated depending on the situation, define communication channels that will be used in it, as well as potential recipients of information.

§6. Barriers and Risks

37. The business recovery plan defines:

• any barriers to the implementation of business recovery strategies;
• risks associated with the execution of business recovery strategies;
• any circumstances or situations, including those caused by external factors, that may make business recovery strategies unviable (infeasible);
• any obstacles that may arise when several credit financial organizations in the country are forced to activate business recovery strategies simultaneously.

38. Situations described in paragraph 37 of these Requirements may threaten the implementation of recovery strategies or reduce their impact on improving the financial condition of the credit financial organization. These situations will change in accordance with the chosen recovery strategy and the profile of the credit financial organization, and include a fall in real estate prices, which will hinder the sale of real estate by the credit financial organization, a systemic crisis that may make it difficult to sell part of the economic activity of the credit financial organization to competitors.

39. In the business recovery plan, the credit financial organization must eliminate or reduce identified barriers and risks along with defining deadlines for completing actions.

§7. Management Mechanisms

40. The business recovery plan must contain a description of the leadership/management mechanisms necessary for its implementation.

41. The preparation and revision of the business recovery plan must be carried out in accordance with information, risk, capital, and crisis management processes, and capitalization plans of the credit financial organization.

42. The business recovery plan, the process of its development and review, are subject to audit and evaluation by internal auditors of the credit financial organization and an independent auditor, through the preparation of specific reports.

43. The business recovery plan is submitted for consideration to all structural subdivisions of the credit financial organization.

44. The revision of the business recovery plan provided for in paragraph 41 of these Requirements must:

• affect the assessment of critical functions and basic services, the sufficiency and reliability of the monitoring program, and stress scenarios, the development of risk maps and barriers regarding the effectiveness of business recovery strategies, leadership/management, and other criteria, and procedures related to the implementation of the plan;
• be conducted no less than once a year, or upon each relevant change in the economic and financial scenario, operational strategies, business model, organizational structure, and processes related to critical functions and basic services specified in the first paragraph of paragraph 10 of these Requirements.

45. The business recovery plan is reviewed and approved by the supervisory board on an annual basis or upon each relevant change in the economic and financial scenario, operational strategies, business model, organizational structure, and processes linked to critical functions and basic services.

46. The supervisory board is obliged to:

• ensure the timely appointment of persons responsible for the implementation of the business recovery plan;
• possess a comprehensive and integrated understanding of critical functions and basic services, indicators and other information contained in the monitoring program, stress scenarios, business recovery strategies, barriers and risks associated with the plan, ensuring their compatibility with the strategic planning of the credit financial organization;
• ensure the development of feasible and effective business recovery strategies, including strategies affecting other legal entities under the control of the credit financial organization.

47. The supervisory board and the executive body are responsible for adopting the strategies provided for in the business recovery plan.

48. Specific duties of the executive body and the supervisory board are defined in the business recovery plan.

49. The head of the risk management structural subdivision is obliged to immediately inform the executive body, the supervisory board, and the risk management committee when the indicators specified in paragraph 13 of these Requirements reach previously defined critical levels.

50. FINAL PROVISIONS

51. Credit financial organizations specified in paragraphs 3 and 4 of these Requirements are obliged to submit the business recovery plan to the National Bank of Tajikistan annually, or upon approval of an updated version, within 30 (thirty) days from the day of its approval by the supervisory board or board of trustees.

52. In the following cases, the National Bank of Tajikistan must be notified immediately:

• achievement of critical levels established in the monitoring program;
• occurrence of a stress situation;
• when the credit financial organization decides to implement one or more measures from the business recovery strategy;
• when the supervisory board decides to refuse to apply any business recovery strategies upon the occurrence of events specified in the first and second paragraphs of this paragraph of these Requirements.

52. The National Bank of Tajikistan may establish a specific deadline for each type of notification specified in...