Instruction on Requirements for Operations of Commercial Banks and Other Financial and Credit Institutions Licensed by the National Bank of the Kyrgyz Republic with Insiders and Affiliated Persons

Registered with the Ministry of Justice of the Kyrgyz Republic on 5 January 2004. Registration number 2-04

	Approved by resolution of the Board of the National Bank of the Kyrgyz Republic of 10 December 2003 No. 34/10

INSTRUCTION

on requirements for operations of banks with insiders and affiliated persons

(As amended by resolutions of the Board of the National Bank of the Kyrgyz Republic of 15 September 2004 No. 24/4, 23 October 2004 No. 26/3, 25 August 2005 No. 26/5, 25 September 2007 No. 43/4, 10 June 2009 No. 26/2, 25 November 2009 No. 47/4, 16 November 2012 No. 43/1)

1. Basic concepts

2. General rules

3. Protocols and reports

4. Final provisions

This Instruction has been developed in accordance with the Laws of the Kyrgyz Republic "On Banks and Banking Activity in the Kyrgyz Republic", "On the National Bank of the Kyrgyz Republic" for the purpose of establishing requirements for the activities of banks, including those operating in accordance with Islamic principles of banking and financing, banks having an Islamic window, the specialized financial and credit institution OJSC "Financial Company of Credit Unions", licensed by the National Bank of the Kyrgyz Republic (hereinafter NBKR), and the State Development Bank of the Kyrgyz Republic (hereinafter banks), when they carry out operations with insiders and affiliated persons.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic of 16 November 2012 No. 43/1)

1. Basic concepts

For the purposes of this Instruction the following definitions are used:

Insiders (internal persons) of a bank - members of the Board, members of the Board of Directors, members of the Shariah Council, other officials, significant participants and any other natural persons connected with the said persons by common interests.

In cases where the internal auditor, risk manager and the person appointed for the purpose of organizing internal control on countering the financing of terrorism and legalization (laundering) of proceeds obtained by criminal means do not fall under the definition of "officials of the bank" in accordance with this Instruction, the requirements of this Instruction do not apply to them.

Officials of the bank - the chairman and other members of the Board of Directors of the bank, the chairman of the Board, members of the Board of the bank, the chief officers of the bank for finance and for credits. "Officials of the bank" also means persons who determine the policy of the bank or have the authority to participate or actually participate in the main operations of the bank that form the policy of the bank, regardless of whether these persons work on a gratuitous basis or receive remuneration.

Member of the Board of Directors (or member of a similar body) - a person who is a member of the Board of Directors of the bank and/or of a company controlling the bank, a person who is a member of the Board of Directors of any company controlled by the bank, as well as members of the Boards of Directors of companies that are controlled by the same natural or legal person.

Holders of large blocks of shares - persons who directly or indirectly control (are the beneficial owners of) more than 5 percent of voting shares.

Beneficial owner of shares - a person who owns shares of a company in his own name, as well as a person who is able to receive benefits from the ownership of shares of a company, through any contract, agreement, treaty or arrangement with another person, in any written or oral form, even if the legal ownership of such shares belongs to another person.

Control - solely, or jointly with other persons:

• direct or indirect ownership or management of fifty or more percent of the voting shares of a joint-stock company or of the charter capital of a legal entity that is not a joint-stock company, or;

• the ability to elect at least half of the members of the Board of Directors (supervisory body) of a legal entity, or;

• regardless of participation in the capital of a legal entity, the ability to exercise a determining influence on the management or policy of the given legal entity on the basis of an agreement or otherwise.

For the purposes of determining Control, Holders of large blocks of shares and the Beneficial owner of shares:

1.1. Any shares that are in the beneficial ownership or under the control of a relative from the circle of relatives determined by this Instruction are considered to be in the beneficial ownership of that natural person.

1.2. A person (natural or legal) that fully controls a company is considered to exercise control over all companies that are fully controlled by that company.

1.3. Shares that are in the beneficial ownership or under the control of companies that are fully controlled by a certain person are considered to be in the beneficial ownership of that person and are summed with the shares that are in the direct ownership of that person when determining the shares that are in the beneficial ownership of that person.

1.4. Shares that are in the beneficial ownership or fully controlled by companies that are controlled by the same natural or legal person are summed.

Persons connected by common interests with insiders - this is the circle of relatives of insiders, other natural persons who can really influence the decision-making by insiders of the bank, as well as legal entities controlled by insiders of the bank.

Circle of relatives - these are persons in a relationship of kinship and affinity, and includes: parents, spouse, parents of the spouse, children (including adopted), sisters and brothers, grandfather and grandmother, grandchildren, brothers/sisters of parents, children of brothers/sisters of parents.

Credit has the same definition as "Aggregate indebtedness, or claim", which is contained in the Instruction "On restrictions on lending", approved by resolution of the Board of the NBKR of 15 September 2004 No. 24/4 (registration number of the Ministry of Justice of the Kyrgyz Republic No. 109-04 of 7 October 2004).

Company means any form of entrepreneurial structure organized in accordance with the laws of the Kyrgyz Republic or a foreign state.

Affiliated persons are:

• significant participants of a legal entity, including banks;

• legal entities in which other legal entities, including banks, are significant participants;

• legal entities, including banks, in which other legal entities are significant participants.

The relationship of an affiliated person with the bank can be traced along the connections ("chain") of companies and persons, the relations between which are based on full control, regardless of the number of links in the "chain".

A company is not considered an affiliated person if control over it arose as a result of the exercise of rights to prevent losses of the bank from debts that arose earlier, but on condition that the bank must sell its ownership of such a company within two years, starting from the moment the bank acquired the right of legal ownership of it.

Transactions (operations) with affiliated persons include:

• granting a credit (credit substitute)(1) to an affiliated person;

• purchase of securities issued by an affiliated person;

• purchase of assets;

• acceptance of securities issued by an affiliated person as security for a loan or credit to any person or company;

• issuance of guarantees, acceptance of bills of exchange, opening of a letter of credit in favor of an affiliated person;

• other operations falling under the concept of transactions in accordance with legislation.

Low-quality assets mean:

• assets classified as substandard, doubtful and losses, in accordance with the requirements of the NBKR on classification of assets and creation of a reserve to cover potential losses and damages;

• assets (receivables) for which payment of interest(2) or principal is delayed by more than 30 days;

• assets whose terms were restructured due to the deterioration of the financial condition of the borrower.

Significant participation - solely or jointly with other persons:

• direct or indirect ownership or management of ten or more percent of the voting shares (of any type) of a joint-stock company, ten or more percent of the charter capital of a legal entity that is not a joint-stock company;

• or, regardless of participation in the charter capital of a legal entity, the ability to exercise significant influence on the management and/or policy of the given legal entity on the basis of an agreement or otherwise.

Significant participant - a person exercising significant participation in a legal entity in accordance with the Law "On Banks and Banking Activity in the Kyrgyz Republic".

Controlling person - a person exercising control over a legal entity.

The principle of impartiality means that the bank does not have the right to grant credits to insiders and affiliated persons, as well as to significant participants, if the terms of granting such credits are more favorable than for credits granted under similar conditions to borrowers who do not have common interests with the bank, and to significant participants of the bank.

Operations with affiliated persons and insiders - the transfer of resources or obligations carried out between "related" parties, regardless of whether a fee is charged for this.

The definitions of "Islamic bank", "Bank having an 'Islamic window'", "Islamic principles of banking and financing", "Shariah Standards", "Shariah Council" - correspond to the norms of the conceptual apparatus of the Law of the Kyrgyz Republic "On Banks and Banking Activity in the Kyrgyz Republic".

(As amended by resolutions of the Board of the National Bank of the Kyrgyz Republic of 15 September 2004 No. 24/4, 25 August 2005 No. 26/5, 25 September 2007 No. 43/4, 25 November 2009 No. 47/4)

2. General rules

2.1. The bank does not have the right to grant credits to its insiders or affiliated persons if this violates the requirements of the principle of impartiality and any of the following requirements is present:

A) The size of the maximum risk per borrower connected with the bank (norm K1.2) exceeds 15% of the net total capital (NTC) of the bank;

B) The bank does not comply with the requirements for adequacy of capital and own funds established by the NBKR;

C) In the presence of current losses as of the last reporting date.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic of 25 September 2007 No. 43/4)

2.2. The maximum risk size for interbank placements in another bank that is an affiliated person of the bank (norm K1.4) must not exceed 15% of NTC.

2.3. The maximum risk size for operations with insiders and/or affiliated persons, expressed as the size of the aggregate indebtedness of insiders and/or affiliated persons to the bank, must not exceed 60% of the NTC of the bank.

2.4. Banks are recommended to establish internal limits on lending to insiders or affiliated persons, which must be lower than those established by the NBKR.

2.5. Any operation of the bank or its subsidiary company with an insider or affiliated person must be concluded on terms confirming safe and sound banking practice.

2.6. Any transaction of the bank with any person must be considered a transaction with an insider or affiliated person if the income (even partially) from the transaction is used for the benefit of an insider or affiliated person of the bank or transferred to their disposal.

2.7. The bank has the right to carry out operations with an insider or affiliated person only if all of the following conditions are met:

A. The operation may be carried out only on such terms and requirements that are not more favorable compared to the terms and requirements applied at the same time for similar transactions between the given bank and other persons who do not fall under these norms and are not insiders or affiliated persons of the bank. Such terms and requirements include, in particular, the prevention of:

(1) charging lower interest or fees compared to those charged to other persons;

(2) payment of higher interest on deposits(3) compared to other persons;

(3) acceptance of collateral that has a lower value than that required from other persons. When accepting collateral, a methodology that allows it to be valued higher than another similar collateral must not be applied;

(4) granting credits that would not have been granted to other persons, due to the risk level of the given operation or the low creditworthiness of the borrower;

(5) purchase of a low-quality asset from an insider or affiliated person, or acceptance of a low-quality asset as collateral from an insider or affiliated person;

(6) purchase of an asset at a price higher than that which could have been paid to another person;

(7) sale of an asset at a lower price than that which could have been accepted from another person;

(8) investment in securities in which the bank would not otherwise invest due to the risk level of the securities or the type of activity engaged in by the investor or the affiliated person in question;

(9) payment for goods, services or for the lease of property at a higher price than that which would have been paid to another person, or under conditions under which payment would not have been made to another person;

(10) extension of the repayment terms of credits of insiders and affiliated persons, when such extension would not have been made for another person.

B. In the case of granting credits, its risk at the time of approval by the Board of Directors must not exceed the risk inherent in credits classified as satisfactory, according to the Regulation on classification of assets and corresponding deductions to the reserve to cover potential losses and damages.

C. The decision must be taken by the Board of Directors, by roll-call vote, by a majority of votes (more than 2/3 of the full composition of the members of the Board of Directors of the bank) in the absence of influence (direct or indirect) from a person interested in carrying out the operation. Any member of the Board of Directors with a direct or indirect interest in the proposed operation must leave the meeting of the Board of Directors during the discussion of the matter, and he does not have the right to vote on this matter.

D. The bank must keep a written protocol of approval of such an operation, which must include a written analysis of all the merits of the operation, including justification that the operation is carried out not to the detriment of the bank and in its interests. The analysis must include:

(1) for credit operations - the amount of the credit, the term of the credit, the interest rate, financial information about the borrower proving the borrower's ability to repay the credit in accordance with the arrangement, and information confirming the value of the collateral for the credit;

(2) for operations related to the purchase or sale of assets - the purchase price and information confirming the value of the asset;

(3) for investments - an assessment of the risk of such investments and the potential benefits for the bank and the person in question;

(4) a detailed explanation of the reasons for the necessity of the given operation;

(5) for operations involving the sale/acquisition of assets or services, the Board of Directors must consider at least three proposals for the purchase/sale of the asset or the provision of the service. These proposals must be made by persons not connected with the bank and correspond to average market prices.

E. Insiders who are a party to the proposed operation with the bank or connected with this party by common interests must disclose in writing information about the degree of their interest in the operation and the degree of their relationship with the other party to the operation. Such written disclosure must be provided to the Board of Directors before the vote on the proposed operation and must be part of the protocol of approval of the operation by the Board of Directors.

(As amended by resolutions of the Board of the National Bank of the Kyrgyz Republic of 25 September 2007 No. 43/4, 25 November 2009 No. 47/4)

2.8. The Chairman of the Board of Directors must notify in writing the members of the Board of Directors that all applicable conditions of paragraph 2.7 have been met before the members of the Board of Directors vote on the matter under consideration. Any member of the Board of Directors has the right to review the supporting documentation before voting. Each voting member of the Board of Directors must personally sign the resolution approving the operation. The resolution must clearly state that the member of the Board of Directors has reviewed and understands the terms of the proposed operation and has personally read the analysis required by subparagraph D of paragraph 2.7.

2.9. The provisions of subparagraphs C, D, and E of paragraph 2.7 do not apply to the acceptance of deposits by banks from their insiders or affiliated persons, when providing settlement and deposit services or when issuing credit cards to insiders on the same terms and requirements as for other clients of the bank.

2.10. Exceptions from the limits on lending to related persons of the bank are possible in the cases established in the Instruction on restrictions on lending, approved by resolution of the Board of the NBKR of 15 September 2004 No. 24/4 (registration number of the Ministry of Justice of the Kyrgyz Republic No. 109-04 of 7 October 2004).

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic of 25 September 2007 No. 43/4)

2.11. Each credit granted to an insider or affiliated person (with the exception of an interbank credit in the course of ordinary correspondent activity) must be secured by collateral whose net realizable value is at least:

A. 120 percent of the credit amount, if the credit is secured by securities of the Government of the Kyrgyz Republic or of member countries of the Organization for Economic Cooperation and Development and/or their Central Banks, or by a linked deposit in the bank granting the credit.

Linked deposit means a separate savings/time deposit (contribution) that is not a correspondent account:

• with a term not less than the term of the credit granted;

• duly executed as collateral;

• for which the movement of funds is prohibited; and

• inaccessible to the client until the obligations under the credit are fulfilled.

The market value of the collateral in the form of securities must be revalued by the bank monthly, in the form of a deposit in foreign currency - weekly.

B. 140 percent of the credit amount, in the case of any other type of collateral.

If the value of the collateral becomes less over time than the amount established in this Instruction, then such collateral must be additionally brought up to the required amount by concluding a new collateral agreement or making amendments to the existing collateral agreement and guaranteed by additional collateral property or replaced by a new type of collateral with a value sufficient to fulfill the established requirement, within a period not later than 15 working days from the day of revaluation.

2.12. After approval and granting of a credit to an insider or affiliated person, such credit must be managed (tracked and evaluated) in the same way as similar credits to other, unrelated persons are managed. Investments to affiliated persons must be tracked and evaluated periodically in the same way as other investments to unrelated persons.

2.13. In the case of a conflict of interests, when the Board of Directors refuses to vote or is unable to take a decision on an operation with an insider and/or affiliated person, the Board of Directors may decide by 2/3 of votes to refer the matter for consideration to the general meeting of shareholders. The Board of Directors must prepare a detailed report for the meeting of shareholders, which must contain a full description of the proposed operation, including the analysis specified in paragraph 2.7. A shareholder who could receive a preferential regime under the given operation (directly or indirectly, or through a person with whom the shareholder has common interests) cannot participate in the discussion, influence or attempt to influence the voting of the general meeting of shareholders, or vote on the matter of approving the operation. Shareholders may approve an operation that provides a preferential regime to an insider only in the case of 2/3 of votes "for" of the total number of shareholders. If each shareholder of the bank is an insider who could receive a preferential regime under the given operation (directly or indirectly, or through a person with whom the shareholder has common interests) or, if such persons constitute more than one third of the number of shareholders, the operation cannot be considered by the meeting of shareholders and cannot be carried out by the bank.

The practice of referring matters concerning a conflict of interests to the meeting of shareholders is not preferable and must be applied only under exceptional circumstances (refusal to vote or inability to take a decision on the matter that has arisen), which represent convincing grounds for such action. Ultimately, the Board of Directors bears responsibility for the sound and prudent activity of the bank, including maintaining high standards of ethics and integrity. The Board of Directors must make any attempt to resolve the matter in the best interests of the bank before taking a decision to refer the matter to the shareholders.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic of 25 September 2007 No. 43/4)

2.14. The bank cannot enter into a transaction with any person for the purpose of giving him the opportunity:

• to pay his obligations to an insider or affiliated person of the bank;

• to purchase any property from an insider or affiliated person of the bank;

• to acquire securities issued by an affiliated person of the bank.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic of 25 September 2007 No. 43/4)

2.15. In the case where the bank participates with its own funds in commercial or other non-banking organizations, the maximum size of such investments, including any financial investments and credits in each non-banking organization, must be less than 20 percent of the size of the net total capital of the bank. The total size of such investments cannot exceed 60 percent of the size of the net total capital of the bank.

(As amended by resolutions of the Board of the National Bank of the Kyrgyz Republic of 15 September 2004 No. 24/4, 10 June 2009 No. 26/2)

3. Protocols and reports

3.1. The bank must keep documentary records (reports) in accordance with the requirements of the legislation of the Kyrgyz Republic and this Instruction. These records must contain information about all insiders and affiliated persons, indicating the amounts and terms of all operations with these persons and persons connected with insiders by common interests.

3.2. The bank must keep records of all credits received by its insiders from banks or of other transactions. Each insider who has received a credit from a correspondent bank or has applied for a credit must, at least once every six months, submit to the bank written reports on all existing and newly received credits during the reporting period, no later than the 10th day of the month following the reporting period. For accounting of these reports, the bank must maintain a separate file, and when updating them, the bank must draw up a protocol indicating all changes that occurred during the reporting period.

3.3. Each member of the Board of Directors and an official of the bank must, at least once a year, submit to the Board of Directors and the bank's management a written statement of information regarding his commercial, business and other material interests. The report must include a list of persons connected with the member of the Board of Directors and the executive official by common interests, and the extent of such interests in each case. The member of the Board of Directors and the official must notify the bank in writing within 2 working days of any changes in the information in the report.

3.4. The bank must maintain an adequate internal control system to ensure compliance of its activities with the requirements of this Instruction.

3.5. The bank must submit to the NBKR as part of the PRBO monthly reports in Forms 1, 4 and semi-annually in Forms 2, 3, 5, 6, 7, 8 of the appendices to this Instruction.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of 25 August 2005 No. 26/5)

3.6. All reports with corresponding appendices (analysis) required in accordance with this Instruction must be kept in the bank for at least 5 years after the return of all debt on the credit and upon completion of the transaction with insiders and affiliated persons.

4. Final Provisions

4.1. Transactions conducted by the bank with insiders and affiliated persons must not be carried out to the detriment of the bank, the interests of depositors or other creditors of the bank.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of 25 August 2005 No. 26/5)

4.2. All members of the Board of Directors and the Management Board of the bank who approved the granting of a credit or the conduct of a transaction with insiders or affiliated persons in violation of the requirements of this Instruction bear full responsibility for the return of the debt to the bank on that credit or transaction.

If a credit was granted or a transaction was conducted in violation of the requirements of this Instruction, as a result of which the bank incurred losses or did not receive income, then each member of the Board of Directors, the Chairman and members of the Management Board who approved the transaction bear full responsibility for compensating the bank for lost profit.

4.3. All internal documents of the bank (policies and procedures) must be brought into compliance with the requirements of this Instruction.

4.4. Failure to comply with the requirements of this Instruction is grounds for the application of measures and sanctions by the NBKR provided for by legislation.

(1) For Islamic banks - transactions under the terms of which the Islamic bank provides funds.

(2) For Islamic banks - markup, principal amount and/or other payments stipulated by the agreement between the bank and the client.

(3) Deposit for Islamic banks - these are clients' funds placed in an Islamic bank on the basis of mudaraba, qard hasan and wadia yad daman agreements.

	Appendix

Form 1 Brief information on active transactions with affiliated persons

(thousand soms)

N	Information about the affiliated person
	Name of the affiliated person	Group	Total balance sheet debt of the affiliated person
			Credits and financial lease	Interest rate (%)	Other assets	Interest rate (%)	Off-balance sheet liabilities	Total	Classification category	Overdue assets	Share of financial participation (shares) of the affiliated person held by the bank (%)	Share of bank shares held by the affiliated person (%)
1	2	3	4	5	6	7	8	9	10	11	12	13
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21	Total transactions with affiliated persons
22	Largest debt per one affiliated person

Form 2 General information on transactions with affiliated persons

N	Name of the affiliated person	Amount of transaction (thousand soms)	Type of transaction [1]	Date of commencement of transaction	Term and date of completion of transaction [2]	Interest rate (%)	Collateral for the credit [3]	Owner of the collateral	Conditions of the transaction [4]	Note
	Below are examples of information disclosure:
1	Example 1: Subsidiary of the bank
2	Example 2: Company owning a large block of shares of the bank

Form 3 Information on affiliated persons of the bank

N	Name of the affiliated person	Nature of relations of the affiliated person with the bank (holding company, subsidiary, sister company, etc.)	Percentage of ownership of shares/interest depending on the relation to the bank [5] %	Name of the affiliated person/main activity	Note
1
2
...
n

[1] Indicate the type of transaction (credit, guarantee, sale/purchase of an asset, services, etc.).

[2] For credits, off-balance sheet liabilities, contracts, etc.

[3] Indicate the type of collateral (securities, deposit, immovable property, etc.).

[4] Describe the main conditions of the transaction.

[5] For example: a) The bank owns 50% of shares of company B; b) holding company A owns 55% of shares of the bank; c) the bank's holding company owns 100% of shares of sister company D.

Form 4 Brief information on active transactions with insiders (thousand soms)

N	Information about the insider
	Name of the insider	Group	Total balance sheet debt of the insider
			Credits and financial lease	Interest rate (%)	Other assets	Interest rate (%)	Off-balance sheet liabilities	Total	Classification category	Overdue assets (in days)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21	Total transactions with insiders
22	Largest debt per one insider

Form 5 General information on transactions with insiders

N	Full name of the insider	Amount of transaction (thousand soms)	Type of transaction [6]	Date of commencement of transaction	Term and date of completion of transaction [7]	Interest rate	Collateral for the credit [8]	Owner of the collateral	Conditions of the transaction [9]	Note
	Below are examples of information disclosure:
1	Example 1: Full name, Chairman of the Management Board of the bank
2	Full name, brother of the Chairman of the Management Board of the bank
3	Company X, father of the Chairman of the Management Board of the bank, owns 50% of shares of company X
4	Example

	2:
	Owners of large blocks of bank shares
---	---	---	---	---	---	---	---	---	---	---
...
---	---	---	---	---	---	---	---	---	---	---
n

[6] Indicate the type of transaction (loan, guarantee, sale/purchase of an asset, services, etc.).

[7] For loans, off-balance-sheet liabilities, contracts, etc.

[8] Indicate the type of collateral (securities, deposit, immovable property, etc.).

[9] Describe the main terms of the transaction.

Form 6 Information on persons within the circle of an insider's relatives

N	Full name of insider	Position held at the bank	Full name of close relative	Degree of kinship (parents, spouse, etc.)
1
---	---	---	---	---
2
---	---	---	---	---
...
---	---	---	---	---
n

Form 7 Information on other related persons

N	Full name of insider	Position held at the bank	Full name of related person	Disclosure of the degree of relatedness
1
---	---	---	---	---
2
---	---	---	---	---
...
---	---	---	---	---
n

Form 8 Information on legal entities in which insiders of the bank, persons within the circle of an insider's relatives or other related persons have control

N	Full name of insider	Position held at the bank	Name of legal entity/main activity	Relation to the insider and share (in %%) of ownership of the legal entity's shares
1
---	---	---	---	---
2
---	---	---	---	---
...
---	---	---	---	---
n