Procedure for Assigning Non-Interest Accrual Status

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Date of creation: 2024-03-25

Registered with the Ministry of Justice of the Kyrgyz Republic

June 10, 2004. Registration number 70-04

Approved

by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic

dated April 28, 2004 No. 11/2

PROCEDURE

for assigning non-interest accrual status

(As amended by resolutions of the Board of Directors of the National Bank of the Kyrgyz Republic dated May 17, 2006 No. 14/4, November 16, 2012 No. 43/1, August 24, 2016 No. 35/4, June 15, 2017 No. 2017-P-12/25-12, December 29, 2021 No. 2021-P-12/75-3, January 17, 2024 No. 2024-P-12/1-3)

1. General Provisions

1.1. This Procedure defines the process for assigning non-interest accrual status for loans and assets carrying credit risk (hereinafter referred to as "loans") in commercial banks and other financial and credit organizations regulated by the National Bank of the Kyrgyz Republic, excluding exchange offices (hereinafter referred to as "credit organizations").

The provisions of this Procedure regarding the accrual of markup/income from murabaha and ijara munthaiya bit tamlik operations apply to credit organizations conducting operations based on Islamic financing principles, including through an "Islamic window," taking into account the special terminology used by them in carrying out banking operations.

(As amended by resolutions of the Board of Directors of the National Bank of the Kyrgyz Republic dated November 16, 2012 No. 43/1, August 24, 2016 No. 35/4, June 15, 2017 No. 2017-P-12/25-12, December 29, 2021 No. 2021-P-12/75-3, January 17, 2024 No. 2024-P-12/1-3)

1.2. This Procedure addresses issues related to the accrual and recognition of interest income by a credit organization. Assigning non-interest accrual status does not affect the terms of the contract between the client and the credit organization (for example, the terms or amounts of payments for the repayment of the principal and payment of interest, or the order of their payment).

For credit organizations conducting operations based on Islamic financing principles, including through an "Islamic window," the term "interest" refers to the markup/income from murabaha and ijara munthaiya bit tamlik operations.

(As amended by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated December 29, 2021 No. 2021-P-12/75-3)

1.3. The credit organization is responsible for developing and implementing the Policy on assigning non-interest accrual status, procedures, and internal control systems ensuring compliance with this Procedure.

1.4. The Policy on assigning non-interest accrual status of the credit organization must be approved by the Board of Directors or the relevant body of the credit organization.

2. Assigning Non-Interest Accrual Status

2.1. The application of the accrual method for accounting and financial reporting purposes does not mean that the credit organization must continue to accrue, capitalize, and/or recognize as income interest, the probability of receiving which is very low or absent altogether.

Recognition of interest income on loans whose payment schedule is not being followed leads to the presentation of unreliable information about the financial condition of the credit organization (incorrect information about the size of assets and income) to depositors, creditors, and shareholders.

2.2. The credit organization must assign non-interest accrual status to:

a) loans and assets on which payments of principal or interest are overdue by 90 days or more;

b) loans on which full repayment of principal and payment of interest is not expected, regardless of the duration of payment delays (but not exceeding the terms established in sub-paragraph a) of this paragraph for payments of principal or interest thereon).

3. Procedure for Non-Interest Accrual

3.1. The credit organization must create a Provision for Potential Losses and Damages (PPLD) in the amount of 100 percent of the sum of overdue accrued interest payments on loans to which non-interest accrual status is subsequently assigned.

3.2. All incoming payments on loans in non-interest accrual status must be accepted as repayment of overdue principal payments until they are fully repaid.

Only after the full repayment of the overdue part of the principal of the loan in non-interest accrual status can funds received be directed by the credit organization to repay the remaining debt in accordance with the loan agreement.

(As amended by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated May 17, 2006 No. 14/4)

3.3. The credit organization may recognize as interest income part or all of the interest payment amount on loans in non-interest accrual status based on the "cash" method, only if the following conditions are met simultaneously:

a) all overdue periodic payments for the repayment of the principal of the loan in non-interest accrual status and interest thereon have been fully paid by the borrower;

b) there is a high probability of full repayment of the remaining part of the principal of the loan in non-interest accrual status, which is assessed based on market conditions, the borrower's business plan, analysis of their financial condition, and other factors.

(As amended by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated May 17, 2006 No. 14/4)

3.4. (Deleted in accordance with the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated May 17, 2006 No. 14/4)

4. Return of Interest Accrual Status

4.1. A loan in non-interest accrual status may be returned to interest accrual status only if the following conditions are met simultaneously:

a) all overdue payments for the principal of the loan, interest payments, and penalties have been repaid according to the debt repayment schedule as of the reporting date;

b) the probability of the borrower making payments, both for the principal of the loan in non-interest accrual status and for interest, is high, which is assessed based on market conditions, the borrower's business plan, analysis of their financial condition, and other factors;

c) the borrower made payments on the loan in non-interest accrual status in accordance with the approved repayment schedule for this loan: for three months.

(As amended by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated August 24, 2016 No. 35/4)

4.2. The decision to return interest accrual status must be made by the credit organization only after a thorough assessment of the borrower's financial condition, as well as the borrower's ability and willingness to fully repay the debt in the future according to the loan repayment schedule.

Appendix

to the Procedure for Assigning Non-Interest Accrual Status

EXAMPLE

for organizing accounting for loans in non-interest accrual status

(DELETED

in accordance with the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic dated May 17, 2006 No. 14/4)

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