Regulation on Asset Classification and Corresponding Provisions for Potential Losses and Losses

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Creation date: 2025-08-20

Attention!

Changes introduced by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 30, 2025, No. 2025-P-12/38-3-(NPA), enter into force on January 1, 2026.

Registered in the Ministry of Justice of the Kyrgyz Republic August 23, 2004. Registration number 95-04

Approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 21, 2004 No. 18/3

REGULATION

on the classification of assets and corresponding provisions for potential losses and losses

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated February 24, 2010 No. 3/8, May 26, 2010 No. 36/4, June 30, 2010 No. 52/4, May 18, 2012 No. 19/7, October 12, 2012 No. 40/3, October 31, 2012 No. 41/10, November 16, 2012 No. 43/1, May 30, 2014 No. 24/7, April 15, 2015 No. 22/6, April 15, 2015 No. 22/7, June 10, 2015 No. 31/2, October 28, 2015 No. 64/5, December 23, 2015 No. 78/23, January 20, 2016 No. 4/6, April 27, 2016 No. 19/6, July 14, 2016 No. 29/5, February 22, 2017 No. 6/4, June 15, 2017 No. 2017-P-12/25-1, June 20, 2018 No. 2018-P-12/24-1, December 26, 2018 No. 2018-P-12/58-10, April 15, 2019 No. 2019-P-12/20-2, April 24, 2019 No. 2019-P-12/22-4, September 9, 2019 No. 2019-P-33/47-4, March 24, 2020 No. 2020-P-12/15-5, March 25, 2020 No. 2020-P-12/16-3, December 23, 2020 No. 2020-P-12/73-11, December 28, 2020 No. 2020-P-12/75-3, December 28, 2020 No. 2020-P-33/75-5, May 19, 2021 No. 2021-P-12/25-3, September 15, 2021 No. 2021-P-12/51-1, March 31, 2022 No. 2022-P-12/19-4, December 21, 2022 No. 2022-P-12/81-8, December 20, 2023 No. 2023-P-12/80-4, January 17, 2024 No. 2024-P-12/1-3, April 12, 2024 No. 2024-P-12/17-3, July 5, 2024 No. 2024-P-12/28-2, September 25, 2024 No. 2024-P-12/46-3, December 4, 2024 No. 2024-P-12/64-3-(NPA), March 19, 2025 No. 2025-P-12/11-7-(NF KU), June 18, 2025 No. 2025-P-12/28-1-(NPA), July 30, 2025 No. 2025-P-12/38-3-(NPA))

1. General Provisions

1.1. This Regulation establishes requirements for the classification of assets and off-balance sheet obligations (hereinafter referred to as "assets"), as well as for the creation of corresponding provisions for potential losses and losses (hereinafter referred to as "PPLP") for the purposes of regulation and supervision, and applies to all commercial banks and guarantee funds (hereinafter referred to as "banks").

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated January 17, 2024, No. 2024-P-12/1-3)

1.2. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 15, 2017, No. 2017-P-12/25-1)

1.3. To timely cover potential losses and losses, as well as to determine the real financial condition and efficiency of operations, banks are obliged to constantly assess the quality of their assets and create PPLP.

1.4. Banks must maintain PPLP at a level sufficient to cover possible asset losses. The basis for the correct assessment of the reserve size is the asset classification system, which must be developed by the bank in accordance with this Regulation.

Bank activity that does not ensure an adequate level of PPLP will be considered by the National Bank of the Kyrgyz Republic (hereinafter referred to as the "National Bank") as unreliable and unhealthy banking practice, which puts the interests of depositors at risk.

1.5. Asset classification is an expression of various degrees of credit risk. All assets carry a certain degree of loss risk, which varies depending on various factors.

1.6. Credit risk may be related to the financial condition of the bank's client (hereinafter referred to as the "client"), the quality of collateral, the type of client by ownership form, industry affiliation, the presence and types of guarantees on assets and the reliability of the guarantors themselves, the assessment of the fulfillment of previously given obligations on bank assets, the prospects for further development of the client's business, and other potential factors.

Note: For the purposes of this Regulation, the term "client" of the bank hereinafter refers to a legal or natural person undertaking to repay the bank's assets listed in paragraph 1.7 of this Regulation.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 15, 2017, No. 2017-P-12/25-1)

1.7. The bank is obliged to periodically classify its credit portfolio and other assets. Such assets include:

• loans;
• assets acquired as a result of leasing;
• debt obligations acquired through factoring;
• investments in securities and/or in the capital of a company (in the form of shares, financial participation in the capital of the invested company);
• interbank placements;
• overdrafts, regardless of the reason for their occurrence;
• off-balance sheet obligations (letters of credit, guarantees, any lawful obligation to issue a loan, and others);
• issuance of a loan subject to a buyback condition;
• other property accepted in repayment of an asset;
• any other assets not listed above that carry the risk of non-repayment.

Taking into account the specifics of certain types of assets, this Regulation defines special requirements for the classification of restructured loans, interbank placements, investments in securities and/or capital, off-balance sheet obligations, and other bank property accepted in repayment of an asset.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 30, 2010, No. 52/4)

1.8. To carry out asset classification, banks must track and analyze data on cash flows and assess the client's ability to obtain sufficient funds to repay the asset. Under the terms of the asset provision agreement, the bank has the right to periodically receive information about the client's solvency (information on cash flows), in addition to mandatory quarterly reports (balance sheet reports and income statements).

At the same time, the absence of reliable financial information (for example, balance sheet reports and income statements of clients not verified by an external auditor) and its proper analysis is a serious deficiency. In accordance with the legislation of the Kyrgyz Republic, the client bears responsibility for the completeness and accuracy of the reporting and information provided to the bank. Nevertheless, the bank, assuming the risks associated with providing the asset, must verify the accuracy of these reports, both before the provision of the asset and subsequently - until the full repayment of the bank's funds.

1.9. In the bank's internal documents for each type of asset subject to classification, responsible persons/organs/structural subdivisions and the procedure for making decisions on the size of the corresponding provisions for potential losses must be defined.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 28, 2020, No. 2020-P-12/75-3)

2. Basic Concepts Used in This Regulation

2.1. Credit risk is the risk of clients failing to fulfill their obligations in accordance with the terms and conditions of the contract.

2.2. Bank's overdue assets refer to those assets for which:

• the principal amount recorded on the balance sheet (including partial scheduled payments) is not paid for 30 days or more;
• interest payments are overdue by 30 days or more;
• loans are issued in the form of overdrafts or, if such financing is carried out without a established repayment schedule, and interest on them is not paid for 30 days or more.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated February 22, 2017, No. 6/4)

2.3. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated February 22, 2017, No. 6/4)

2.3-1. Factoring is understood as financing under the assignment of a monetary claim, when one party (financial agent) transfers or undertakes to transfer to another party (client) monetary funds in account of the client's (creditor's) monetary claim to a third party (debtor), arising from the provision of goods by the client, the performance of work or provision of services to a third party, and the client assigns or undertakes to assign this monetary claim to the financial agent.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 30, 2010, No. 52/4)

2.3-2. Contract financing is a credit product in the form of short-term financing (up to one year) of working capital for the fulfillment of the client's obligations under a contract with counterparties.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 10, 2015, No. 31/2)

2.4. Bank's investments in securities and/or in capital - the bank's investments in debt securities, as well as the acquisition of shares or financial investment in capital for the purpose of obtaining profit in the form of distribution of the results of the invested company's activities.

Investments of bank funds into the working capital of other companies and participation in joint projects are considered loans.

2.5. Non-market investments in securities are investments in such securities that are not quoted on the securities market, or the market of these securities is not developed, efficient, transparent, and does not allow determining the fair value of these securities. At the same time, transactions with securities may be episodic in nature, and there is also no extensive, reliable, and easily accessible information about the security for all persons.

All other investments in securities are market investments.

2.6. For the unified classification of asset quality and the creation of PPLP, the following categories are established:

A. Non-classified assets:

1. normal,
2. satisfactory,
3. assets under observation

B. Classified assets:
4) substandard assets,
5) doubtful assets,
6) assets classified as losses.

3. General Instructions for Asset Classification

3.1. When carrying out asset classification, it is necessary to conduct an analysis of both the legal capacity and financial ability of the client to repay the asset, as well as changes in the financial condition of clients, their guarantors, and to analyze the quality of collateral and other factors.

3.2. Correct classification of an asset into one of the categories depends on the completeness of the assessment of the client's financial condition, the purpose and conditions of the asset, and the possibility of its repayment. The longer the client holds the bank's funds or has the right under the contract to receive funds (credit lines, obligations, letters of credit, etc.), the greater the degree of risk of negative trends. When analyzing assets, it should be taken into account that each asset has a primary and secondary source of repayment. The primary source is called those funds necessary for the repayment of the asset, which are generated in the process of production, provision of services, work, etc., under normal development. For example, a working capital loan is repaid in the process of turnover of material values, a loan for a harvest or an export loan - from funds received from the sale of goods, a consumer loan - from personal income. In the event that over time the primary source of repayment turns out to be insufficient, or in other words, will not generate the necessary cash flow sufficient to ensure the fulfillment of its obligations, the bank must provide for secondary sources, such as collateral, suretyship, and bank guarantees.

3.3. When using secondary sources, it should be taken into account that this usually entails a delay in payments associated with the difficulty of determining the value of the realization of collateral, with court costs, and postponements. These factors usually lead to the fact that the final amount of the debt payment obtained with the involvement of a secondary source does not correspond to expectations.

3.4. If the bank relies entirely on a person acting as a surety or guarantor as a secondary source of repayment, the bank must have complete information about the financial position of this person to assess its ability to repay the debt if necessary. If the specified person has become the only source of repayment of the debt, classification must take into account not only its solvency, but also the desire to repay the guaranteed asset, which must be documented in the appropriate document. If information about the guarantor is unreliable or completely absent, such a guarantee should not be taken into account when classifying the asset.

3.5. A significant deviation from the original source of repayment is sufficient grounds for classification, as well as vague repayment conditions or asset overdue. However, not all overdue assets can be subject to classification. An asset may be overdue, but if at the same time it is secured by funds pledged in the bank or state treasury bills that have not yet been repaid, such an asset may be recognized as non-classifiable.

3.6. The written intention and ability of the client to fulfill its obligations according to the contract is the primary criterion for assessing asset risk. This implies that the client must have income or liquid assets sufficient to pay interest on the asset and reduce or repay the debt to the bank in accordance with the agreement within reasonable and predictable timeframes.

3.6-1. When classifying assets provided by the bank to the same borrower or a group of related borrowers, it is necessary to take into account the classification carried out for each loan of the borrower or group of related borrowers, and classify these assets into the classification category assigned to the asset with the largest debt, if this classification is the worst.

A similar approach to classification must be applied by banks that are participants in a banking group, that is, assets of a borrower or a group of related borrowers who are residents of the Kyrgyz Republic must be classified into the classification category assigned to the asset with the largest debt, if this classification is the worst.

In the event that a borrower (natural or legal person) has several assets in one bank or within a banking group, the bank has the right not to apply the worst classification category to all assets if the worst category is assigned to the borrower's asset due to a deterioration in financial flows and the current financial condition of the client due to introduced emergency regimes and/or other force majeure circumstances (circumstances of irresistible force) and restrictions associated with them, with documentary confirmation of their influence. In this case, the bank may apply the classification category for each asset separately in accordance with the characteristic features of the category.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated December 23, 2020, No. 2020-P-12/73-11, December 20, 2023, No. 2023-P-12/80-4)

3.6-2. When classifying loans by the bank, the current credit discipline of the borrower on any other loan must be taken into account, in the event that the borrower has an outstanding debt to other financial and credit organizations. In this regard, it is necessary to track the presence of the client's other loans in other financial and credit organizations at the time of consideration of the application, using information obtained from the client/borrower, through the credit information bureau, or in any other available way within the legislation of the Kyrgyz Republic. Further, in the process of monitoring the loan for which the term of the credit contract has not expired, the client is obliged to provide information about the presence of loans in other financial and credit organizations and about compliance with the credit discipline on these loans at least once every six months. At the same time, all financial and credit organizations are obliged to provide, no later than the next working day upon request by the borrower, information about the receipt of the loan and about the borrower's compliance with the credit discipline for its provision to another financial and credit organization. The bank may obtain information about other loans of borrowers and about his credit discipline in any other available way within the legislation of the Kyrgyz Republic.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 15, 2017, No. 2017-P-12/25-1)

3.7. When carrying out classification, it is necessary to be guided by the definitions of classification categories (highlighted in bold in the text) and rely on common sense and judgment to attribute an asset to a particular classification category, not limiting oneself only to the signs given in this Regulation.

3.8. In connection with possible different interpretations of the definitions of classification categories, quantitative and qualitative characteristics are introduced. The combination of two or more signs determines the classification category, unless otherwise provided by this Regulation.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012, No. 41/10, April 15, 2015, No. 22/6)

3.9. Accounting for PPLP must be carried out in accordance with accounting standards.

3.10. Contractual relations between the bank and its clients, reflected in the corresponding contracts, must be carried out on the basis of the legislation of the Kyrgyz Republic.

3.11. The requirements of this Regulation cover only the necessary minimum of asset classification criteria, as it is impossible to foresee every specific situation. The National Bank and banks have the right, taking as a basis the requirements and criteria of this Regulation, to introduce additional criteria for asset assessment.

4. Non-classified Assets

4.1. Normal Assets

4.1.1. Normal assets are those assets for which the collateral fully covers the principal amount of the asset and the interest rate amount, calculated as the product of the principal amount of the asset and the nominal interest rate in annual terms according to the contract (for example, the principal amount of the asset is 100 thousand som, and the interest rate is 10%, respectively, the coverage must be 110 thousand som). At the same time, this collateral consists of:

• state securities of the Kyrgyz Republic and notes of the National Bank (hereinafter referred to as "GCB") (if the maturity of GCB occurs before the maturity of the asset, the bank must accept as collateral the funds received from the redemption of GCB, or accept additional similar (similar) GCB as collateral);
• funds held in a separate deposit account in this bank. A separate deposit account is understood as a segregated deposit account of a natural or legal person. Clients' settlement accounts and the bank's correspondent account cannot be used as collateral;
• other securities included in the listings of stock exchanges of the Kyrgyz Republic in the highest and next highest listing category in accordance with the legislation of the Kyrgyz Republic (hereinafter referred to as "other securities") provided that the minimum requirements established by Appendix 1 to this Regulation are met.

Normal assets are also those assets that are secured by at least 100% of the amount of the asset by collateral (in the form of a pledge) consisting of gold in the form of refined standard bars issued by the National Bank.

Note: Refined standard bars - manufactured and marked bars of precious metals issued (released) by the National Bank or an refining enterprise certified by the London Bullion Market Association, weighing 1000 grams or less, with a content of chemically pure base metal of not less than 99.95-99.99 percent of the alloy mass of the bar for gold and not less than 99.90 percent of the alloy mass of the bar for silver/platinum.

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

1. the agreement on the provision of the asset and the pledge agreement must indicate that the funds in the separate deposit account, GCB, and other securities are collateral for the funds issued by the bank, and the bank has the right to levy execution on them without acceptance in case of non-fulfillment of the client's obligations;

2. the deposit certificate or deposit book must be stored in the bank;

3. the pledge agreement must provide for the prohibition of further re-pledging of funds in the separate deposit account, GCB, and other securities;

4. in any case, the bank must develop appropriate procedures and carry out internal control ensuring all procedures related to the оформление of the pledge, and the safety of funds, GCB, and other securities until the end of the term provided for in the contract;

5. funds in the deposit securing the assets must be in the national currency of the Kyrgyz Republic, or in a currency freely convertible into Kyrgyz som, based on publicly available and reliable currency quotes;

6. mandatory weekly revaluation of the deposit, in the event that funds in a currency other than the currency of the asset are provided as collateral for the asset;

7. if as a result of revaluation the value of the collateral has decreased, the bank is obliged to immediately demand an increase in its value in accordance with the requirements of this Regulation and ensure the fulfillment of this requirement within 10 working days;

8. in the event that the requirements specified in sub-items 1-7 are not met, such an asset will be considered not fully secured, and it must be transferred to another classification category.

Banks may classify loans in the national currency as "normal assets" if they meet the requirements specified in paragraph 4.2 of this Regulation, as well as if they are issued within the framework of the implementation of state programs (housing, social, ensuring national and economic security), approved by the Decree of the President/Cabinet of Ministers of the Kyrgyz Republic.

Banks may classify loans as "normal assets" if they meet the requirements specified in sub-items 4.2.1 and 4.2.2 of this Regulation, as well as if they are secured by guarantees of international financial organizations, banks, and other financial and credit organizations having a long-term sovereign credit rating no lower than level "A", which is assigned by the international 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), Moody's Investors Service, and other rating agencies corresponding to the criteria established by paragraph 3 of the Regulation "On Economic Norms and Requirements Mandatory for Compliance by Commercial Banks of the Kyrgyz Republic", approved by the Resolution of the Board of the National Bank dated December 14, 2022, No. 2022-P-12/78-7-(NPA).

Banks may classify newly issued loans in US dollars as "normal assets" if they meet the requirements specified in paragraph 4.2 of this Regulation, with the formation of PPLP in the amount of 0 to 2 percent regardless of the income structure in accordance with the bank's internal policy. At the same time, these requirements apply to preferential loans issued by development funds created within the framework of interstate (intergovernmental) agreements (hereinafter referred to as the "Development Fund"), including loans from funds attracted and guaranteed by the Development Fund from other foreign financial institutions, including previously issued loans, the repayment of which will be carried out from the financing of the Development Fund and provides for a change in the initial conditions of the credit agreement.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated December 26, 2018, No. 2018-P-12/58-10, March 24, 2020, No. 2020-P-12/15-5, September 15, 2021, No. 2021-P-12/51-1, March 31, 2022, No. 2022-P-12/19-4, December 21, 2022, No. 2022-P-12/81-8, September 25, 2024, No. 2024-P-12/46-3, June 18, 2025, No. 2025-P-12/28-1-(NPA))

4.1.2. The bank may classify part of the asset secured by the guarantee of a guarantee fund, licensed and regulated in accordance with the legislation of the Kyrgyz Republic, as a "normal asset", provided that the following conditions are met simultaneously: