Regulation on Certain Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic with Real Estate

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Creation Date: 2025-06-16

Approved

by the Resolution of the Board of the National Bank of the Kyrgyz Republic of August 29, 2012 No. 36/2

REGULATION

on certain transactions/operations of commercial banks and microfinance companies of the Kyrgyz Republic with real estate

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of November 16, 2012 No. 43/1, October 23, 2013 No. 39/7, July 31, 2014 No. 34/11, October 28, 2015 No. 64/5, February 22, 2017 No. 6/4, May 17, 2017 No. 19/11, June 15, 2017 No. 2017-P-12/25-12, December 26, 2018 No. 2018-P-12/58-10, April 24, 2019 No. 2019-P-12/22-4, September 25, 2019 No. 2019-P-12/49-4, November 1, 2019 No. 2019-P-33/55-3, December 28, 2020 No. 2020-P-12/75-3, December 21, 2022 No. 2022-P-12/81-8, December 28, 2022 No. 2022-P-12/83-7, August 30, 2023 No. 2023-P-12/55-1, January 17, 2024 No. 2024-P-12/1-3)

1. General Provisions

2. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of May 17, 2017 No. 19/11)

3. This Regulation applies to commercial banks and microfinance companies authorized to attract deposits, including those conducting operations in accordance with Islamic principles of banking and financing, including banks and microfinance companies with an "Islamic window," taking into account the specifics of their activities and terminology used by them in carrying out banking operations, JSC "Financial Company of Credit Unions," housing savings credit companies (hereinafter referred to as "banks").

The purpose of this Regulation is to establish requirements for banks when carrying out operations with real estate acquired by the bank to offset previously issued loans, as well as operations with bank premises intended for sale.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 25, 2019 No. 2019-P-12/49-4, November 1, 2019 No. 2019-P-33/55-3, January 17, 2024 No. 2024-P-12/1-3)

3. For the purposes of this Regulation, the following terms are used:

"Other real estate" means an asset in the form of:

a) real estate acquired by the bank as a result of purchase, or transferred by a client as repayment of its debt to the bank, in full or in part, for previously issued loans;

b) any real estate of the bank, including unused bank premises, which is not used and will not be used to ensure the bank's activities, and is intended for sale, provided that amortization of such assets must be discontinued.

The bank must accept or transfer these assets to the category "Other bank property" - "real estate transferred to the bank's ownership" from the moment the events specified in paragraph 6 of this Regulation occur.

Valuation is the process of determining (calculating) the value of real estate as of a specific date based on a valuation report prepared by an appraiser/valuation organization in accordance with the requirements of legislation on valuation activities.

Appraiser (independent specialist appraiser) - an individual having a qualification certificate for carrying out valuation activities, issued in the manner determined by the Cabinet of Ministers of the Kyrgyz Republic.

Valuation organization - a legal entity registered in the manner prescribed by legislation, the main type of activity of which is valuation activities, and having at least two appraisers with qualification certificates on its staff.

Fair value - the estimated monetary amount for which an asset could be exchanged between a willing buyer and a willing seller in an arm's length transaction after proper marketing, during which each party acted knowledgeably, prudently, and without coercion. In the event that the property is not realized at auction, the fair value is considered to be the value established in the manner provided for by the current legislation of the Kyrgyz Republic.

Loan debt is the unpaid balance of the principal loan amount plus all accrued but unpaid interest, penalties, and other expenses related to debt repayment (if applicable, the unpaid balance must be adjusted for discounts or premiums).

Major transaction - a transaction or several interrelated transactions with a value of 10 percent or more of the bank's net aggregate capital as of the date of making the decision to conclude such transactions.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, May 17, 2017 No. 19/11, June 15, 2017 No. 2017-P-12/25-12, December 28, 2022 No. 2022-P-12/83-7)

4. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of May 17, 2017 No. 19/11)

5. Requirements for the term of holding other real estate

6. Other real estate cannot be held by the bank for more than three years from the moment ownership rights arise, with the exception of agricultural land, recreation objects, and tourism infrastructure, the terms and features of which are established by the legislation of the Kyrgyz Republic. At the same time, the bank must initiate an active program to find a buyer.

In the event of a court seizure of the bank's other property, the above term is suspended until the seizure is lifted by the court.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of February 22, 2017 No. 6/4, June 15, 2017 No. 2017-P-12/25-12, August 30, 2023 No. 2023-P-12/55-1)

6. The countdown for holding other real estate begins from the date when:

1. the protocol on the results of the auction is registered with the authorized state body, and the pledgee acquires ownership rights to the pledged item received to offset previously issued loans/transactions carrying credit risk (including based on civil law transactions).

An agreement on satisfaction of the pledgee's claims out of court must not provide for conditions recognizing this agreement as a title document;

2. the property is accepted onto the bank's balance sheet by agreement without holding auctions, then the countdown begins from the date when ownership rights to the real estate received by the bank to offset previously issued loans/transactions carrying credit risk are registered with the authorized registration body;

3. the Board of Directors of the bank makes a decision not to use the acquired real estate for the future expansion of the bank and/or to cease using the premises for banking activities (for example, as a result of the closure of a separate structural subdivision, relocation, and for other reasons in accordance with an act) and the need to sell it. This decision must be approved by the Board of Directors.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 26, 2018 No. 2018-P-12/58-10)

3. Requirements for operations with other real estate

4. The bank must have a policy for managing other real estate approved by the Bank's Board of Directors (it may be a component of the credit policy). The policy must contain the following minimum information:

a) the procedure for accepting and transferring assets to the category "Other bank property," as well as their sale, including the determination of the body/person authorized to make decisions on accepting, transferring, and selling other real estate;

b) methods used by the bank to sell the property, including the procedure and methods of sale, sequence of actions, and measures for selling other real estate;

c) the frequency of determining the fair value of other real estate;

d) the requirement to conduct an appraisal by an appraiser/valuation organization in accordance with this Regulation and the legislation of the Kyrgyz Republic;

e) accounting and reporting, if these issues are not described in other internal documents of the bank;

f) other information reflecting the bank's activities related to other real estate.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-12, December 26, 2018 No. 2018-P-12/58-10, December 21, 2022 No. 2022-P-12/81-8, December 28, 2022 No. 2022-P-12/83-7)

8. The bank must constantly maintain information on each unit of other real estate, including:

a) the decision of the authorized body/person on accepting other real estate onto the balance sheet;

b) the date of acceptance onto the balance sheet;

c) actions taken to sell this unit of other real estate;

d) offers from potential buyers, if any;

e) the fair value of the real estate, confirmed by relevant documents;

f) the date of valuation and the cost of the valuation;

g) other necessary information.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, June 15, 2017 No. 2017-P-12/25-12)

9. Written reports of the bank on the sale of other real estate must be reviewed by the Board of the Bank at least once a quarter. The results of the Board of the Bank's consideration of issues regarding the sale of other real estate must be documented in the minutes of the Board meeting.

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

10. The Bank's Board of Directors must review the results of the Board of the Bank's consideration of issues regarding the sale of other real estate and the bank's written reports on a quarterly basis.

If the bank has not sold the other real estate within the term established by paragraph 5 of this Regulation, the issue of the reasons for the impossibility of realization must be considered by the Board of Directors.

Based on the quarterly reports of the Board on the state of the bank's other real estate, the Board of Directors must review and evaluate the effectiveness of the Board's work with other real estate, determining subsequent measures for the realization of other real estate held by the bank for a period exceeding the term established by paragraph 5 of this Regulation.

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

11. The bank has the right to conclude a lease agreement (a form of contract under which other real estate is transferred to temporary possession and/or temporary use) for other real estate to cover expenses related to its maintenance, for a period not exceeding the term specified in paragraph 5 of this Regulation. In the event of violation of the terms of leasing other real estate, measures of impact may be applied to the bank in accordance with the legislation of the Kyrgyz Republic, including normative legal acts of the National Bank of the Kyrgyz Republic (hereinafter referred to as the "National Bank").

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 21, 2022 No. 2022-P-12/81-8)

12. Additional expenses for improving the general condition of other real estate, which will lead to the emergence of future economic benefits and an increase in its value, may be approved only if the bank's actions are not aimed at making a profit from real estate transactions.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, June 15, 2017 No. 2017-P-12/25-12)

13. The decision to approve additional expenses for improving the general condition of other real estate in accordance with paragraph 12 of this Regulation must be made by the Bank's Board of Directors.

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

14. The decision to approve additional expenses must be supported by reasoned arguments as to how the proposed expenses will benefit the bank. In the event that the bank intends to improve the general condition of other real estate, a report from the authorized structural subdivision with a confirming and motivated justification must be attached to the decision of the Board of Directors.

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

15. The Board of the Bank may approve additional current expenses for repair and maintenance (daily maintenance of the object) of other real estate.

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

16. If the actions of the bank described in paragraphs 11-15 of this Regulation are related to affiliated/connected persons, they must be approved by the Board of Directors. In this case, in addition to other documents for consideration by the Bank's Board of Directors, the following documentation must be attached:

a) a description of the transaction with the affiliated/connected person;

b) the surname, first name, and patronymic of the affiliated/connected person (name of the legal entity that is an affiliated person) and its relationship to the bank;

c) evidence of the fairness of the terms of the transaction with the affiliated/connected person (market research, appraiser/valuation organization report, and other evidence);

d) an estimate of the bank's expected expenses.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2022 No. 2022-P-12/83-7)

17. In the minutes of the Board of Directors meeting approving the transaction with the affiliated/connected person, signed by all members of the Board of Directors, it must be indicated that the affiliated/connected person did not participate in and did not vote on the decision. A copy of the transcript of the Board of Directors meeting, signed by all members of the Board of Directors who participated in the vote, confirming that all terms and circumstances of the transaction with the affiliated/connected person have been studied and that this transaction was concluded at a fair value for the bank and in accordance with the legislation, must be attached to the minutes.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 21, 2022 No. 2022-P-12/81-8)

18. Actions of the bank regarding an affiliated/connected person must comply with the requirements of the normative legal acts of the National Bank of the Kyrgyz Republic regulating transactions with affiliated/connected persons.

19. The bank is obliged to comply with all requirements of this Regulation also when conducting the following transactions/operations with affiliated/connected persons:

a) sale/purchase of real estate;

b) lease/leasing of real estate;

c) transactions under which income is received by affiliated/connected persons;

d) any other transactions/operations with other real estate involving an affiliated/connected person.

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

4. Accounting for other real estate

5. Real estate specified in subparagraph a) of paragraph 3 of this Regulation, when accepted into the category "Other property" within the framework of out-of-court foreclosure on pledged property, must be recognized on the balance sheet at the fair value of the property (except for accepting real estate onto the balance sheet as a result of failed public auctions) minus the estimated expenses for selling the real estate on the date of acceptance into the category "Other property" in accordance with Section 5 of this Regulation.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, June 15, 2017 No. 2017-P-12/25-12)

21. In this case, any excess of loan debt over the fair value of the real estate must be charged to the reserve for covering potential losses and losses in accordance with the Regulation "On the classification of assets and corresponding allocations to the reserve for covering potential losses and losses," approved by the Resolution of the Board of the National Bank of July 21, 2004 No. 18/3 (hereinafter referred to as the Regulation on the classification of assets and corresponding allocations to the reserve for covering potential losses and losses).

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 21, 2022 No. 2022-P-12/81-8)

22. Within the framework of the recovery of pledged property, the excess of the amount at which the real estate is accepted onto the bank's balance sheet over the loan debt is the bank's obligation to return the excess funds to the pledgor.

If the Bank acquires real estate as a result of the first public auctions being declared unsuccessful, within the framework of judicial recovery, the bank returns to the pledgor the excess of the purchase price over the loan debt within the terms established by the legislation of the Kyrgyz Republic.

If, as a result of the second public auctions being declared unsuccessful, the bank retains the real estate, the property is accepted onto the bank's balance sheet at a cost no lower than the minimum price established in accordance with the legislation of the Kyrgyz Republic. The excess of the price upon the bank's sale of the property over the loan debt is an obligation of the bank that is subject to return to the pledgor.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 26, 2018 No. 2018-P-12/58-10)

23. When transferring to the category "Other property" the real estate specified in subparagraph b) of paragraph 3 of this Regulation, it must be accounted for at the lower of net book value (cost minus amortization and impairment loss) and fair value on the date of transfer. Any excess of net book value over fair value must be charged to the expenses of the current period.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, June 15, 2017 No. 2017-P-12/25-12)

24. With any subsequent decrease in the value of other real estate, the bank must recognize an impairment loss up to the fair value minus maintenance or selling costs. If after the impairment of the real estate its fair value minus maintenance or selling costs increases, the bank must recognize this increase, but only in an amount not exceeding the previously accumulated impairment loss.

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

25. Any current expenses for repair and maintenance of other real estate, as well as costs associated with accepting the real estate onto the bank's balance sheet (costs for legal documentation of the real estate, organization of auctions, and other costs) must be charged to the expenses of the period in which they were incurred.

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

26. Real estate specified in subparagraph a) of paragraph 3 of this Regulation is classified in accordance with the Regulation on the classification of assets and corresponding allocations to the reserve for covering potential losses and losses.

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

5. Requirements for the valuation of other real estate

6. When accepting within the framework of out-of-court foreclosure on pledged property or transferring real estate into the category "Other property," the fair value of the property must be confirmed by an appraiser/valuation organization in accordance with the legislation of the Kyrgyz Republic.

The requirement for the valuation of real estate is not mandatory if:

a) the value of the property when considering the credit application and before applying the established coefficients does not exceed 1,000,000 som;

b) the valuation of the real estate was carried out within the last six months before the transfer of the real estate into the category "other property";

c) the bank has documentary evidence of the possibility of selling the property in accordance with paragraph 31 of this Regulation within 90 days from the date the bank obtained rights to this property;

d) there are results of failed public auctions.

Acceptance of real estate into the category "Other property" by the bank within the framework of judicial recovery of pledged property is carried out in accordance with the legislation of the Kyrgyz Republic.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 23, 2013 No. 39/7, October 28, 2015 No. 64/5, December 26, 2018 No. 2018-P-12/58-10, December 28, 2022 No. 2022-P-12/83-7)

28. The bank must periodically conduct work to identify signs of possible impairment of other real estate in order to confirm the value of the property accounted for on the balance sheet, but no less than once a year.

The value of non-residential objects of other real estate of specific purpose, held by the bank for more than three years, must be confirmed by an appraiser/valuation organization every two years.

Exceptions to this requirement are the following real estate objects:

• objects that cannot be realized due to restrictions established by the court;

• objects whose realization value is determined by a court decision;

• objects for which the bank has concluded financial lease agreements/sales of real estate in installments or other similar agreements.

The primary revaluation of the property must be carried out within 6 (six) months from the date of expiration of the term specified in paragraph 5 of this Regulation.

The appraiser/valuation organization may carry out the valuation of the same other real estate of the bank no more than twice in a row.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 28, 2015 No. 64/5, June 15, 2017 No. 2017-P-12/25-12, December 28, 2020 No. 2020-P-12/75-3, December 28, 2022 No. 2022-P-12/83-7)

29. The bank's order for the valuation of other real estate by an appraiser/valuation organization must be drawn up in writing, and the appraiser/valuation organization's report on the valuation must include the valuation order and contain the valuation results for all parameters specified in the bank's valuation order.

For the valuation of other real estate, the bank must conclude a contract for the conduct of valuation with an appraiser/valuation organization in accordance with the requirements of legislation.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2022 No. 2022-P-12/83-7)

6. Sale of other real estate

7. The bank must realize other real estate no later than the term established by paragraph 5 of this Regulation.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 21, 2022 No. 2022-P-12/81-8)

31. The bank must account for real estate in the "Other property" category until all of the following conditions are met:

a) receipt from the buyer of a sum of money constituting no less than 15% of the total selling price in the case of selling the property to a person not connected with the bank and no less than 40% - in the case of selling the property to a person falling under the definition of a person connected with the bank or an affiliated person of the bank, if the bank finances the remaining part by providing a loan. In this case, the bank's participation must be limited only to its role as a lender, that is, the terms (interest rates, repayment term, amortization, etc.) must correspond to the terms of credit products provided by the bank for similar purposes. If the sale of the property is financed by a loan at a rate lower than the current market interest rate, the bank must discount the loan and bring the yield on the loan to the market rate in accordance with IFRS;

b) data on the buyer reflect their ability to make subsequent payments and are confirmed by relevant documentation, including an analysis of solvency;

c) the bank has transferred to the buyer the bulk of the risks and rewards associated with owning the property, that is, transferred the right to use and own the property. The degree of the bank's participation in the ownership of the property is an important factor for the purposes of determining the operation as a "sale".

Upon fulfillment of all the above conditions simultaneously, the bank may account for the asset on the balance sheet as a loan to the client.

Features of transferring other real estate to the status of financing in accordance with Islamic financing principles are provided for in paragraph 34-3 of this