Resolution of the Board of the National Bank of the Kyrgyz Republic of 12 April 2023 No. 2023-П-12/23-5-(НПА)

On approval of the Instruction "On credit restrictions"

In accordance with Articles 5, 9 and 64 of the Constitutional Law of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic", the Board of the National Bank of the Kyrgyz Republic resolves:

1. To approve the Instruction "On credit restrictions" (attached).
2. To recognize as no longer in force:
- 1) Resolution of the Board of the National Bank of the Kyrgyz Republic "On approval of the Instruction "On credit restrictions"" of 15 September 2004 No. 24/4;
- 2) Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain regulatory acts of the National Bank of the Kyrgyz Republic" of 23 October 2004 No. 26/3;
- 3) paragraph 24 of the Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain regulatory legal acts of the National Bank of the Kyrgyz Republic" of 16 November 2012 No. 43/1;
- 4) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain resolutions of the Board of the National Bank of the Kyrgyz Republic" of 27 November 2014 No. 53/9:
  - paragraph three of paragraph 1 of the Resolution;
  - paragraph 2 of the Appendix to the above-mentioned Resolution;
- 5) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain regulatory legal acts of the National Bank of the Kyrgyz Republic" of 15 June 2017 No. 2017-П-12/25-5-(НПА):
  - paragraph five of paragraph 1 of the Resolution;
  - paragraph 4 of the Appendix to the above-mentioned Resolution;
- 6) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain regulatory legal acts of the National Bank of the Kyrgyz Republic on issues of lending and measures of influence" of 24 April 2019 No. 2019-П-12/22-4-(НПА):
  - paragraph ten of paragraph 1 of the Resolution;
  - paragraph 9 of the Appendix to the above-mentioned Resolution;
- 7) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments and additions to certain regulatory legal acts of the National Bank of the Kyrgyz Republic" of 28 June 2019 No. 2019-П-12/34-3-(НПА):
  - paragraph five of paragraph 1 of the Resolution;
  - paragraph 4 of the Appendix to the above-mentioned Resolution;
- 8) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments to certain regulatory legal acts of the National Bank of the Kyrgyz Republic" of 23 December 2020 No. 2020-П-12/73-10-(НПА):
  - paragraph four of paragraph 1 of the Resolution;
  - paragraph 3 of the Appendix to the above-mentioned Resolution;
- 9) in the Resolution of the Board of the National Bank of the Kyrgyz Republic "On introducing amendments to certain regulatory legal acts of the National Bank of the Kyrgyz Republic" of 15 December 2021 No. 2021-П-12/70-2-(НПА):
  - paragraph three of paragraph 1 of the Resolution;
  - paragraph 2 of the Appendix to the above-mentioned Resolution.
3. To the Legal Department:
- from the day of receipt of the relevant documents, within 3 (three) working days, to publish this Resolution on the official website of the National Bank of the Kyrgyz Republic;
- after official publication, to send this Resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Regulatory Legal Acts of the Kyrgyz Republic.
4. This Resolution enters into force upon the expiration of 15 (fifteen) days from the day of official publication.
5. To the Supervision Methodology Department, after official publication, within 3 (three) working days, to bring this Resolution to the attention of the Legal Entity Association "Union of Banks of Kyrgyzstan", commercial banks and OJSC "State Development Bank of the Kyrgyz Republic".
6. To the "Secretariat of the Board" Division, within 3 (three) working days, to bring this Resolution to the attention of structural subdivisions, regional departments and the Representative Office of the National Bank of the Kyrgyz Republic in Batken Oblast.
7. To entrust control over the execution of this Resolution to the member of the Board of the National Bank of the Kyrgyz Republic supervising the Supervision Methodology Department.

Acting Chairman Z. Chokoev

Appendix to
the Resolution of the Board of the National Bank of the Kyrgyz Republic of "12" April 2023 No. 2023-П-12/23-5-(НПА)

INSTRUCTION

on credit restrictions

Chapter 1. General provisions

1. This Instruction applies to all commercial banks and the State Development Bank of the Kyrgyz Republic (hereinafter – banks).
2. The purpose of this Instruction is to establish credit limits, as well as requirements and procedures mandatory for execution by banks.
3. Credit limits are restrictions of risk on one borrower or a group of related borrowers (hereinafter – one borrower), established by the National Bank of the Kyrgyz Republic (hereinafter – the National Bank) through the economic ratio "Maximum size of risk on one borrower or a group of related borrowers".

Chapter 2. Procedure for calculating the ratio

of the maximum size of risk on one borrower

4. The ratio of the maximum size of risk on one borrower (К1) is calculated according to the following formula:

К1 = СЗ / ЧСК x 100%,

where aggregate debt or claims (СЗ) means the total debt of one borrower on:

loans (regardless of the maturity date);
factoring;
financial lease;
interbank placements;
investments in the form of debt obligations;
accrued interest receivable;
any other type of direct or indirect provision of funds to borrowers that are essentially credit substitutes;
the amount of off-balance-sheet liabilities (guarantees, letters of credit, commitments to grant loans) issued to the given borrower;
any risk of the bank with respect to a third party that is unconditionally guaranteed by this borrower;
previously written-off loans, including interest. The credit file of each borrower must include information on previously written-off loans and interest of this borrower and related persons, which must contain the following information: the name of the borrower and related persons, the amount of the written-off loan and interest, the date of write-off and the reason for which this debt was written off. If there are none, the credit file must contain a conclusion of an authorized person of the bank that there is no previously written-off debt of this borrower and related persons.

NSC – net total capital of the bank.

5. The maximum risk per one borrower not related to the bank must not exceed the following values:
- for borrowers other than banks (K1.1) – not more than 20%;
- for banks (K1.3) – not more than 30%.
6. The limits and procedure for lending to persons related to the bank are determined in accordance with the Instruction “On Requirements for Operations of a Bank with Affiliated and Related Persons of the Bank”, approved by resolution of the Board of the National Bank of 31 May 2017 No. 21/5.
7. In order to comply with the economic ratios and requirements specified in this Instruction and to further reduce risks, banks are recommended to establish internal lending limits, which must be lower than the limits established by the National Bank in paragraph 5 of this Instruction.

Chapter 3. Exceptions from the calculation of the ratio

of the maximum risk per one borrower

8. Exceptions not related to collateral:
- 1) Funds in a correspondent account with the National Bank.
- 2) Funds placed with commercial banks having a long-term credit rating not lower than “BBB” assigned by the rating agency Standard and Poor’s, or an equivalent rating assigned by one of the rating agencies Fitch Ratings, Moody’s Investors Service, Japan Credit Rating Agency (JCR), Dominion Bond Rating Service (DBRS), as well as loans guaranteed by such banks. In order to fall under this exception, the bank must have the relevant documentation confirming the assigned rating, in particular the name of the rating agency, the dates of the initial assignment of the rating and the last confirmation of the assigned rating, an acceptable source of information on the rating, as well as the latest annual report of the correspondent bank.
- 3) Funds placed in securities of the Cabinet of Ministers of the Kyrgyz Republic, the National Bank, or securities for which there are unconditional guarantees of the Cabinet of Ministers of the Kyrgyz Republic or the National Bank.
- 4) Claims on governments or central banks having a long-term sovereign credit rating not lower than “A” assigned by the rating agency Standard & Poor's, or an equivalent rating assigned by one of the rating agencies Japan Credit Rating Agency (JCR), Fitch Ratings, Dominion Bond Rating Service (DBRS) and Moody’s Investors Service.
9. Exceptions related to collateral:
- 1) When calculating the ratio of the maximum risk per one borrower, only those claims that are secured by:
  - securities of the Cabinet of Ministers of the Kyrgyz Republic and the National Bank;
  - funds held in a separate deposit account with this bank.
- 2) Claims on state bodies of the Kyrgyz Republic or off-balance-sheet liabilities assumed by the bank for which there is a state guarantee.
- 3) Claims secured by securities of the Cabinet of Ministers of the Kyrgyz Republic and the National Bank or securities for which there are unconditional guarantees of the Cabinet of Ministers of the Kyrgyz Republic or the National Bank. At the same time, the market value of such securities must exceed the principal amount of the loan by not less than 20%.

The loans specified in paragraphs 8 and 9 of this Instruction issued to state bodies of the Kyrgyz Republic, and guarantees issued by the Cabinet of Ministers of the Kyrgyz Republic, must be duly executed, including confirmation of their reflection in the budget of the Kyrgyz Republic in accordance with the legislation of the Kyrgyz Republic. At the same time, guarantees issued by the Cabinet of Ministers of the Kyrgyz Republic must not exceed 60% of the net total capital of the bank.

4) Claims secured by funds held in a separate deposit account with this bank. A separate deposit account means a segregated deposit account of an individual or legal entity. A client's settlement account and the bank's correspondent account cannot be used as collateral.

At the same time, the following conditions must be met:

- the deposit certificate or deposit book must be kept in the bank;

- the loan agreement and the pledge agreement must provide that the bank has the right to foreclose in an uncontested manner on the funds held in the borrower's separate deposit account in the event of the latter's failure to fulfill its obligations;

- in any case, the bank must develop appropriate procedures and carry out internal control ensuring the safekeeping of the deposit until the expiry of the term provided for by the agreement;

- the funds in the deposit securing the claims must be in the national currency of the Kyrgyz Republic or in a currency freely convertible into Kyrgyz soms on the basis of publicly available and reliable currency quotations. At the same time, if the deposit is in the same currency as the claim, it must cover the amount of the claim by not less than 100%, and a deposit in a currency different from the currency of the claim – by not less than 120% in som equivalent;

- mandatory weekly revaluation of the deposit, if cash in a currency other than the currency of the asset is provided as collateral for the asset.

5) Claims guaranteed by governments or central banks having a long-term sovereign credit rating not lower than "A" assigned by the rating agency Standard & Poor's, or an equivalent rating assigned by one of the rating agencies Japan Credit Rating Agency (JCR), Fitch Ratings, Dominion Bond Rating Service (DBRS) and Moody's Investors Service, or guaranteed by international financial institutions (EBRD, ADB, etc.).
6) Off-balance-sheet obligations assumed by the bank, under which the beneficiary is central banks or governments having a long-term sovereign credit rating not lower than "A" assigned by the rating agency Standard & Poor's, or an equivalent rating assigned by one of the rating agencies Japan Credit Rating Agency (JCR), Fitch Ratings, Dominion Bond Rating Service (DBRS) and Moody's Investors Service.
7) The amount of the participation share in a loan sold by the bank to another bank without the right of repurchase. This means that the acquiring bank fully assumes the risk of non-repayment of the loan on the same terms on which the acquiring bank usually grants loans. The loan participation agreement must provide that in the event of default, the risk of loss of each bank depends on the percentage ratio of their participation in the loan. When acquiring a loan, the National Bank's standards on limiting the maximum amount of risk per borrower must be observed.

Chapter 4. Requirements for collateral ensuring exclusion from the calculation of the maximum amount of risk per borrower standard

10. If the subject of collateral is securities and/or cash, the collateral is provided in the form of a pledge in accordance with the legislation of the Kyrgyz Republic.
11. If the subject of collateral is uncertificated securities, the bank must have documentation confirming the registration of this pledge in accordance with the legislation of the Kyrgyz Republic. At the same time, the bank must ensure that the bank's claims for enforcement of the collateral are of first priority.
12. The pledge is formalized in accordance with the Civil Code of the Kyrgyz Republic, the Law of the Kyrgyz Republic "On Pledge" and other regulatory legal acts of the Kyrgyz Republic.
13. The pledge agreement must provide for the prevention of further re-pledging in accordance with the legislation of the Kyrgyz Republic.
14. In the event of a decrease in the market value of the subject of collateral, the bank is obliged to immediately demand an increase in its value in accordance with the requirements of this Instruction and ensure compliance with this requirement within 10 (ten) business days.
15. The bank is obliged to develop appropriate procedures and carry out internal control to monitor the compliance of collateral with the requirements of Chapters 3 and 4 of this Instruction.
16. If the requirements of the legislation of the Kyrgyz Republic and this Instruction concerning collateral (including the procedure for registering collateral, the availability of relevant documentation, duly certified disposal powers in relation to the collateral, etc.) are not met, the claim will not fall under the exclusion from the calculation of the maximum amount of risk per borrower standard.
17. The share of the loan that does not fall under the requirements of Sections 3 and 4 must be considered in accordance with the general rules of this Instruction when calculating the maximum amount of risk per borrower standard.

Chapter 5. Requirements for limiting concentration risk

18. The aggregate debt of one borrower exceeding 10% of the bank's net total capital is considered a large risk.
19. The total amount of all large risks of the bank must not exceed five times the net total capital.
20. Each claim constituting a large risk must be approved by the bank's Board of Directors. The minutes of the Board of Directors meeting must clearly state the approval for its issuance, as well as the voting results of each member of the Board of Directors.
21. The condition of paragraph 20 of this Instruction applies to any additional claim to an existing borrower if it falls or continues to fall under the definition of a large risk.
22. The aggregate amount of unsecured loans must not exceed 50% of the bank's net total capital.

Chapter 6. Group of related borrowers

23. When calculating the maximum amount of risk per borrower standard, the debt of various borrowers must be summed up and considered as a related single aggregate debt if the financial difficulties of one borrower may lead to payment problems for other persons as well.
24. For the purposes of this Instruction, the concept of "borrower" means a person/group of persons to whom the bank has issued loans/credit substitutes and/or provided assets bearing credit risk (in the form of investments, prepayment for goods/services, etc.).
25. The bank may make investments (including issuing loans/credit substitutes, placing assets bearing credit risk) provided that persons related to each other are considered as one person.
26. The management of concentration risk in lending must be linked to identifying potential connections between individual borrowers, since there may be cases where two (or more) borrowers, separately interacting with the bank when obtaining a loan, represent a single risk due to legal and economic interconnectedness.

When determining related borrowers, it is not sufficient to simply consider groups of companies for which consolidated financial statements are provided and/or are envisaged to be provided. The relatedness/interdependence of borrowers may include, for example, joint ownership, control or management. Cross-guarantees may also serve as an indicator of the interconnectedness of borrowers.

In practice, the bank must exercise due diligence and make the necessary and all possible efforts to identify misrepresentation of any information and/or failure to provide information (for the purpose of concealing relationships between borrowers) by borrowers in order to identify risks associated with them.

27. In particular, the debt of various borrowers must be aggregated if:
- one borrower controls another;
- the loan is issued to both a legal entity and a participant/founder of that legal entity;
- they have at least one controlling person or significant participant, except in cases where the controlling person or significant participant is a state body of the Kyrgyz Republic;
- there is significant financial interdependence between several borrowers. Significant financial interdependence, including an agreement on mutual cooperation, generally exists if 50 or more percent of the annual gross income/expense or other receipts or payments of one borrower arose from transactions with another borrower;
- the same source is used to repay the loan, including a situation where borrowers use credit funds to participate in a joint venture or joint activity, or where both use the same secondary source of repayment (collateral);
- one of the borrowers has guaranteed the obligations of the other (cross-guarantees), or where the same third party is a guarantor for both borrowers;
the funds received by one or more borrowers are used for the direct benefit of a third party, except for state bodies of the Kyrgyz Republic (regardless of whether the bank had a claim against this third party or not), or where the funds or assets purchased with these received funds are transferred to a third party, except in cases of purchasing goods or services from it in the ordinary course of business;
they have the same pledgor, except in cases where the pledgor is a state body of the Kyrgyz Republic.

Chapter 7. Procedure for applying this Instruction in cases of non-compliance with established restrictions

28. If the maximum risk per borrower at the time the risk arose at the bank allowed compliance with the restrictions established by this Instruction, but subsequently exceeded them (for example, due to changes in the exchange rate), the bank is obliged to immediately inform the National Bank of this fact. The National Bank may, without applying enforcement measures, establish a certain period of time during which this non-compliance must be eliminated.

Chapter 8. Reporting

29. The bank is obliged to constantly maintain a database and keep a record log for the group of related borrowers, which must contain information on all claims against each borrower and related persons.

30. The bank, within the framework of banking reporting, must submit to the National Bank information on all large risks and correspondent banks that have a rating in accordance with the requirements of paragraph 8 of this Instruction.

31. In the event of cases of non-compliance with the requirements of this Instruction, the bank must submit information about them to the National Bank as of the last day of each month, inclusive (Appendix 1).

Chapter 9. Other requirements

32. Members of the Board of Directors and the Management Board of the bank who are part of the collegial body for issuing loans and who approved the issuance of a loan in violation of the requirements of this Instruction are responsible for the repayment of the debt to the bank on this claim or operation.

33. If the issuance of a loan or the conduct of an operation was carried out in violation of the requirements of this Instruction, and as a result the bank incurred losses, then each member of the Board of Directors and the Management Board of the bank who is part of the collegial body for issuing loans and who approved the operation is liable in accordance with the legislation of the Kyrgyz Republic.

Appendix 1

INFORMATION

on cases of non-compliance with the requirements of this Instruction

Name of the borrower and related persons

Outstanding total debt (TD) as of the reporting date (thousand soms)

Amount exceeding the limit (thousand soms)

Repayment date under the contract

Number of restructurings

Classification

Total aggregate debt

Instruction on Credit Restrictions