Clarification on the Regulation Concerning Asset Classification and Reserve Formation for Possible Losses in Commercial Banks

CLARIFICATION ON THE REGULATION CONCERNING ASSET CLASSIFICATION AND RESERVE FORMATION FOR POSSIBLE LOSSES IN COMMERCIAL BANKS

In the Decree No. PQ-1438 dated November 26, 2010 "On Priority Directions for Further Reforming and Increasing the Stability of the Republic's Financial-Banking System and Achieving High International Rating Indicators" and the Decree No. PQ-2344 dated May 6, 2015 "On Measures to Further Increase the Financial Stability of Commercial Banks and Develop Their Resource Base" of the President of the Republic of Uzbekistan, further improvement of the normative-legal framework of financial banking activities was identified as one of the main directions, specifically ensuring an even higher level of organization of banking activities in accordance with generally accepted international norms and standards.

In particular, in accordance with the new recommendations of the Basel Committee on Banking Supervision (Basel III standards), the process of classifying the quality of assets in commercial banks and creating reserves against possible losses on them has been further improved.

Together with international experts from the World Bank and the International Monetary Fund, the Central Bank implemented a project to improve regulatory documents related to bank supervision in the republic based on international standards, including the new recommendations of the Basel Committee on Banking Supervision.

Within the framework of this project, the Regulation "On the Procedure for Classifying the Quality of Assets in Commercial Banks, Forming Reserves to Cover Possible Losses on Assets and Using Them" was approved by Resolution No. 14/3 of the Board of Directors of the Central Bank of the Republic of Uzbekistan dated June 13, 2015, and registered with the State Registration Number 2696 at the Ministry of Justice of the Republic of Uzbekistan on June 14, 2015.

This regulation changed the names of asset classification categories, namely: "good" loans to "standard" loans, "standard" loans to "substandard" loans, and "substandard" loans to "unsatisfactory" loans.

It is introduced that reserves are formed in the amount of 1 percent of the balance of credits (assets) classified as "standard" as of the reporting date, allocated from the profit remaining after banks pay taxes and other mandatory payments, starting from the date this regulation enters into force.

This reserve is created within the structure of bank capital for loans classified as "Standard," which serves to ensure the financial stability of the bank.

This regulation specifies clear factors for classifying investments made by commercial banks in corporate securities. In particular,

an investment that has not generated income for the commercial bank over the past year is classified as "unsatisfactory";

an investment that has not generated income for the commercial bank over the past two years is classified as "doubtful";

an investment from which no income has been received over the past three years is classified as "hopeless."

Accounting entries provided for in the regulation have been aligned with current legislation and filled out.

The introduction of the above rules further strengthens measures by commercial banks to collect overdue loans, loans in court proceedings, and sell property acquired on the bank's balance sheet, creating opportunities to increase the financial stability of banks, ultimately ensuring further protection of the interests of depositors and creditors of commercial banks.

In connection with the entry into force of this Regulation, the Decision of the Central Bank "On Recognizing as Invalid the Resolution on Classifying Asset Quality, Forming Reserves to Cover Possible Losses on Them by Commercial Banks and Using Them (Registration No. 632, 11.02.1999) and Amendments and Additions to It" was registered with the Ministry of Justice under Registration No. 632-3 on July 14, 2015, in the established procedure.

The above regulations enter into force three months after the day of their official publication.