On Amendments and Additions to the Regulation on Classifying Asset Quality in Commercial Banks and Forming Reserves to Cover Potential Losses on Assets and Their Use

Resolution of the Board of the Central Bank of the Republic of Uzbekistan, registered on December 10, 2021, Registration No. 2696-3

Date of Entry into Force

January 11, 2022

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07.00.00.00 Legislation on Finance and Credit. Banking Activity / 07.19.00.00 Banking System / 07.19.02.00 Commercial Banks. Private Banks. Foreign Banks;
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07.00.00.00 Legislation on Finance and Credit. Banking Activity / 07.19.00.00 Banking System / 07.19.03.00 Bank Reserves and Funds. Capitalization]
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Resolution of the Board of the Central Bank of the Republic of Uzbekistan

On Amendments and Additions to the Regulation on Classifying Asset Quality in Commercial Banks and Forming Reserves to Cover Potential Losses on Assets and Their Use

[Registered by the Ministry of Justice of the Republic of Uzbekistan on December 10, 2021, Registration No. 2696-3]

In accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan" and "On Banks and Banking Activity," the Board of the Central Bank of the Republic of Uzbekistan resolves:

1. Amendments and additions to the Regulation on Classifying Asset Quality in Commercial Banks and Forming Reserves to Cover Potential Losses on Assets and Their Use, approved by Resolution No. 14/5 of the Board of the Central Bank of the Republic of Uzbekistan dated June 13, 2015 (Registration No. 2696, July 14, 2015) (Collection of Legislation of the Republic of Uzbekistan, 2015, No. 28, Article 374), shall be made in accordance with the Appendix.

2. This Resolution shall enter into force one month after its official publication.

Chairman of the Central Bank M. NURMURATOV

Tashkent city,

November 19, 2021,

No. 27/7

APPENDIX

to Resolution No. 27/7 of the Board of the Central Bank of the Republic of Uzbekistan dated November 19, 2021

Amendments and Additions to the Regulation on Classifying Asset Quality in Commercial Banks and Forming Reserves to Cover Potential Losses on Assets and Their Use

The Preamble shall be stated in the following edition:

"This Regulation establishes the procedure for classifying asset quality in commercial banks and forming reserves (hereinafter referred to as reserves in the text) to cover potential losses on assets and their use, in accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan," "On Banks and Banking Activity," and "On Accounting."

In Paragraph 1:

the second bullet point shall be stated in the following edition:

"assets — loans, microloans, overdrafts, leasing, factoring, securities, investments, funds in other banks, accrued and (or) uncollected interest-bearing and non-interest income, other private property of the bank, property sold in installments, off-balance sheet items (uncollectible credit obligations, unused credit lines, letters of credit, guarantees) and other assets and off-balance sheet items with credit risk;"

it shall be supplemented with the following bullet points:

"credit risk — the risk of loss (damage) that may arise as a result of the failure (inadequate performance) by the debtor to fulfill its obligations to the bank within the timeframes and conditions specified in the contract or legislative acts, and/or the risk of not receiving planned income;

overdue debt — the debtor's obligations to the bank that have not been fulfilled (adequately fulfilled) within the timeframes and conditions specified in the contract or legislative acts;

total value of the asset — the remaining amount of the principal debt of the asset reflected in the bank's balance sheet and off-balance sheet items, plus accrued interest, penalties, commission, and other non-interest payments, minus the amount of the reserve created for them that has not been written off."

3. It shall be supplemented with paragraphs 12–14 of the following content:

"12. In accordance with the requirements of this Regulation, the following assets are classified by quality:

interbank deposits and loans, funds in representative accounts;

funds used in interbank settlements and other funds placed in banks;

the bank's claims under loans, including debt, credit, microloan, overdraft (debit balance in clients' deposit accounts), leasing, factoring;

investments made into the charter fund (charter capital) and securities of a legal entity, as well as securities sold under repurchase agreements;

accrued and (or) uncollected interest-bearing and non-interest income, fines, and penalties;

claims under assets sold with installment payment terms;

property recovered from collateral;

advance payments and accounts receivable;

assets arising from the fulfillment by the bank of obligations in off-balance sheet items, including bank guarantees and letters of credit;

off-balance sheet items with credit risk, including unused credit lines, guarantees, uncalled obligations, trade financing (letters of credit, etc.);

other assets and off-balance sheet items with credit risk.

When calculating the value of off-balance sheet items, the results obtained after applying the credit recalculation factor in capital adequacy calculations are taken.

13. The requirements of this Regulation do not apply to direct claims of banks against the Central Bank of the Republic of Uzbekistan (hereinafter referred to as the Central Bank in the text) and the Ministry of Finance of the Republic of Uzbekistan, including claims on purchased government securities.

14. If the amount of the debtor's overdue debts on assets or payment documents in the No. 2 card file is equal to or less than a small amount, a downgrade in the quality classification of such assets is not required.

A small amount means an amount not exceeding 100,000 soums for assets issued to individuals, and 1,000,000 soums for assets issued to legal entities and individual entrepreneurs, and not exceeding one percent of the total value of the asset."

4. In the fifth bullet point of Paragraph 9, the word "(or)" shall be added after the words "principal debt and".

Paragraphs 11, 13, 15, 18, 21, 23, 31, 44, 50, 54, and 55 shall be deemed to have lost their force.

In Paragraph 12:

the fifth bullet point shall be stated in the following edition:

"if the debtor has a No. 2 card file, and the term of the payment documents in it does not exceed 90 days (excluding debtors for whom there is a payment request in the No. 2 card file for writing off this asset, or debtors whose activities have a seasonal nature);";

the seventh and eighth bullet points shall be stated in the following edition:

"if there is overdue debt not exceeding 90 days on the principal debt and (or) interest of reliable (trusted) assets;

if there is overdue debt exceeding 31 days but not exceeding 90 days on the principal debt and (or) interest of secured assets."

In Paragraph 14:

the fifth bullet point shall be stated in the following edition:

"if the debtor has payment documents delayed by 91 days or more but not exceeding 180 days in the No. 2 card file (excluding debtors for whom there is a payment request in the No. 2 card file for writing off this asset, or debtors whose activities have a seasonal nature);";

the seventh bullet point shall be stated in the following edition:

"if the ratio of the bank asset's collateral value exceeds the limit specified in the bank's internal documents (excluding reliable (trusted) assets);";

the eighth bullet point shall be deleted;

the ninth bullet point shall be considered the eighth bullet point;

the eighth bullet point shall be stated in the following edition:

"if there is overdue debt exceeding 91 days but not exceeding 180 days on the principal debt and (or) interest."

In Paragraph 17:

the fourth bullet point shall be stated in the following edition:

"if the debtor has payment documents delayed by 181 days or more but not exceeding 365 days in the No. 2 card file (excluding debtors for whom there is a payment request in the No. 2 card file for writing off this asset, or debtors whose activities have a seasonal nature);";

the fifth bullet point shall be deleted;

the sixth bullet point shall be considered the fifth bullet point;

the fifth bullet point shall be stated in the following edition:

"if there is overdue debt exceeding 181 days but not exceeding 365 days on the principal debt and (or) interest."

Paragraph 20 shall be stated in the following edition:

"20. If at least one of the following factors is present, the quality of assets shall be classified as 'hopeless':

if property recovered from the debtor and lessee, or rights to pledged property, accepted onto the balance sheet by the commercial bank, has not been sold within three months from the date of acceptance; if a building purchased to expand bank activities has not been used for two years; if property has not been sold for one year from the date it was left unused for bank activities;

if the debtor has payment documents delayed by 366 days or more in the No. 2 card file;

if there is overdue debt exceeding 366 days on the principal debt and (or) interest."

Paragraph 22 shall be stated in the following edition:

"22. If there are multiple assets issued to one debtor, the bank must classify the asset it provided as the asset with the lowest category among all assets issued to the debtor."

Paragraph 26 shall be stated in the following edition:

"26. High-liquidity collateral of assets includes:

pledge of government securities;

pledge of securities issued or guaranteed by governments and central banks of foreign countries with a risk level of 0 percent in bank capital adequacy calculations;

guarantees of development banks of the World Bank Group (International Bank for Reconstruction and Development, International Finance Corporation, International Centre for Settlement of Investment Disputes, International Development Association), Asian Development Bank, Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development, European Investment Bank, European Investment Fund, Islamic Development Bank, and Council of Europe;

pledge of deposits or deposit certificates in the creditor bank."

12. It shall be supplemented with paragraph 261 of the following content:

"261. When assets are secured with high-liquidity collateral, the amount of the reserve intended to cover potential losses on them is determined in accordance with the following formula:

Z = (AJM — TQ * (1-Ch)) * m

where:

Z — the amount of the reserve to be formed;

AJM — the total value of the asset;

TQ — the value of high-liquidity collateral;

Ch — the factor for taking into account currency differences. This factor is equal to 0 if the currency in which the asset is denominated does not differ from the currency of the collateral accepted for it, and 0.1 if it differs;

m — the reserve creation rate required based on the asset classification.

In this case, if the amount of the reserve intended to cover potential losses on assets is 0 or less (negative), no reserve is formed for potential losses on the asset."

Paragraph 27 shall be stated in the following edition:

"27. The types of collateral accepted by the bank under Paragraph 26 of this Regulation must meet the following requirements:

if securities, deposits in the bank, or deposit certificates are accepted as collateral, their term must not be less than the term for writing off the relevant asset;

if a deposit in the creditor bank is the subject of collateral, the bank must have the right to unconditionally control and dispose of these funds in case the borrower fails to fulfill its obligations, according to the terms of the collateral agreement;

if a bank asset is secured by deposits in the bank, the deposit must be maintained in the relevant account for securing the asset, and the loan agreement or other contract must stipulate that the bank can dispose of the deposit without acceptance in case the borrower fails to return the asset or fulfill obligations, as well as that the borrower may voluntarily direct this deposit to write off the asset secured by it.

In this case, the bank must take necessary measures and establish control to prevent the withdrawal of funds from the deposit until the asset return date arrives."

14. It shall be supplemented with paragraph 271 of the following content:

"271. For a guarantee to be considered high-liquidity collateral, it must simultaneously meet the following requirements:

the guarantee term and the main obligation term must match;

in case the borrower fails to fulfill its obligations, there must be no restrictions in the contract and (or) agreement regarding the timeframes for fulfilling the guarantee conditions;

the guarantee document provided by the guarantor must be a documented obligation;

the bank must have the right to directly claim the obligation from the guarantor;

the amount of the guarantee provided for the borrower's obligation to the bank must be clearly defined;

the guarantee must be irrevocable and unconditional, i.e., there must be no conditions allowing the guarantor unilaterally to cancel the guarantee, increase its value, shorten its term, or make full or partial non-payment of funds under the guarantee;

in case the borrower fails to fulfill obligations secured by the guarantee, the bank must have the right to demand payment under the guarantee from the guarantor."

Paragraph 28 shall be stated in the following edition:

"28. If at least one of the following main conditions of assets is changed, their terms are considered modified, and the assets are considered restructured:

decrease in the interest rate, except for cases where the interest rate is decreased due to a decrease in the variable interest rate specified in the contract;

reduction of the principal debt or partial waiver of it, except for reduction of the unused part of the asset;

waiver of part or all of payments related to interest and (or) principal debt;

delay or extension of the payment term for the main part and (or) interest of the asset, except for changes in the payment schedule or payment date within the month due to changes in the financing start date for the client;

change in the type of collateral, except for cases where collateral is released due to partial repayment of the credit, and the ratio of the asset amount to the collateral amount does not exceed the limit specified in the bank's internal documents;

capitalization of interest;

change in the borrower by applying one or more of the conditions specified in the second through seventh bullet points of this paragraph."

16. It shall be supplemented with paragraph 281 of the following content:

"281. The credit classification is not changed, and the terms are not considered restructured, when the terms of the credit contract are changed as follows:

when the interest rate is decreased, provided that after the change, the interest rate on loans in national currency is not less than the Central Bank's base rate + 2 percent;

when the credit currency is changed, provided that when the credit is changed from foreign currency to national currency, the interest rate on loans is not less than the Central Bank's base rate + 2 percent;

when the grace period of the credit is extended up to 6 months, provided that interest was fully paid according to the initial schedule, interest payments are provided for in the new schedule, the grace period has not expired and is being extended for the first time, and the extension of the final term of the contract does not exceed the extended grace period.

In this case, when the terms of the credit contract are being modified, the borrower must not have any overdue debt on credits obtained from all banks, and their credit quality must be in the 'standard' or 'substandard' category, and the total number of days with delayed payments in the last 6 months for payments under the contract being modified must not exceed 60 days."

17. The second bullet point of Paragraph 30 shall be deleted.

Paragraph 36 shall be stated in the following edition:

"36. Assets relative to the total value of the commercial bank's assets:

when classified as 'standard' — form a reserve of one percent;

when classified as 'substandard' — form a reserve of ten percent;

when classified as 'unsatisfactory' — form a reserve of twenty-five percent;

when classified as 'doubtful' — form a reserve of fifty percent;

when classified as 'hopeless' — form a reserve of one hundred percent from bank expenses.

In this case, the commercial bank must form special reserves starting from the date the grounds for classifying assets under this Regulation arose, and perform accounting entries for them in a programmed manner."

19. Paragraph 361 shall be stated in the following edition:

"361. If an asset originated in a certain currency, a special reserve must be formed separately for each asset in that same currency.

Reserves formed for standard assets must be formed in national currency by the end of each month relative to the remaining amount of total assets classified as standard."

Paragraph 42 shall be stated in the following edition:

"Accounting entries related to the formation and use of reserves for potential losses on assets are carried out in commercial banks in accordance with the Chart of Accounts of Accounting in Commercial Banks (Registration No. 3336, November 26, 2021)."

(, December 10, 2021, No. 10/21/2696-3/1152-3)