Regulation on General Principles of Asset Classification and Formation of Reserves for Potential Losses by Microfinance Organizations in the Kyrgyz Republic Not Licensed to Accept Deposits

		Approved by Resolution No. 31/3 of the Board of the National Bank of the Kyrgyz Republic dated October 22, 2003

REGULATION on the general principles of asset classification and formation of reserves to cover potential losses and losses by microfinance organizations in the Kyrgyz Republic not having the right to accept deposits from individuals and legal entities

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 18, 2012 No. 19/7, October 31, 2012 No. 41/10, November 27, 2013 No. 45/16, April 15, 2015 No. 22/7, November 2, 2015 No. 65/1, June 15, 2017 No. 2017-P-12/25-12, May 30, 2018 No. 2018-P-12/20-2)

1. General Provisions

1.1. This Regulation defines the general principles of the asset classification system and the formation of reserves to cover potential losses and losses (hereinafter referred to as RPPU) for microfinance organizations (hereinafter referred to as MFOs) that have received a license or certificate from the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank) to conduct activities as a microfinance organization, but do not have the right to accept deposits from individuals and legal entities.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

1.2. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

1.3. MFOs that do not have the right to accept deposits may develop their own asset classification system, without violating the values of contributions to the formation of RPPU established in this Regulation.

2. Basic Concepts Used in This Regulation

2.1. Clients (borrowers) - individuals and legal entities, as well as communities of the type of solidarity liability groups (hereinafter referred to as SLG), which is understood as a voluntary association of participant-individuals (at least 3 people) engaged in activities aimed at generating income (including entrepreneurial activities). At the same time, members of the SLG jointly guarantee the fulfillment of obligations of each group member and are responsible for the full repayment of received credit funds jointly, under any circumstances in accordance with the legislation of the Kyrgyz Republic.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

2.2. Credit risk - the risk of the client's failure to fulfill obligations to return assets.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

2.3. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

2.4. Group lending - provision of a microcredit under the joint liability of members of a solidarity liability group (SLG) for repayment of the debt on the principal amount of the microcredit and interest. Classification of group loans is carried out in accordance with the "Procedure for applying special classification of loans meeting certain criteria", approved by the Resolution of the Board of the National Bank dated March 2, 2006 No. 5/6.

(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. 22/7)

2.5. Individual lending - provision of a microcredit under the individual liability of the client (individual or legal entity) for repayment of the debt on the principal amount of the microcredit and interest.

3. Classification of assets of microfinance organizations not having the right to accept deposits from individuals and legal entities

3.1. MFOs classify assets and form RPPU in order to timely cover potential losses and losses on assets subject to credit risk.

3.2. Assets of MFOs carrying credit risk include:

• microcredits;
• financial leases;
• factoring;
• MFO funds in deposit accounts in commercial banks and other financial and credit organizations;
• investments;
• other assets subject to credit risk.

3.3. MFOs conduct classification and form the corresponding RPPU with respect to other property, i.e., property (assets) accepted in repayment of microcredits or assets similar to loans.

3.4. When classifying MFO assets subject to credit risk, both quantitative and qualitative characteristics of the asset's condition are taken into account, including:

quantitative characteristics of the asset's condition:

• delay in scheduled payments of the principal amount or interest;
• incomplete (partial) repayment of scheduled payments of the principal amount or interest;

qualitative characteristics of the asset's condition:

• restructuring of the asset;
• presence and quality of collateral;
• presence and quality of guarantees (sureties), reliability of the guarantors (sureties) themselves;
• solvency and financial position of the borrower (when carrying out factoring operations - the payer on payment demands): the condition, size and type of property belonging to the borrower, the condition of funds and business conditions, the borrower's ability and skill to correctly spend borrowed funds and receive the expected (planned) income, the presence of additional sources of income (for example, income from other types of activities, income of other family members);
• dependence of asset recoverability on specific conditions and characteristics of production and sale of products and services for various types of client business (trade, consumer services, crop farming, animal husbandry, etc.);
• client's credit history. The MFO must take into account the current credit discipline of the borrower on any other loan, in case the borrower has an outstanding debt to other financial and credit organizations. In this regard, it is necessary to monitor the presence of other loans with the client in other financial and credit organizations at the time of considering the application, using information obtained from the client/borrower, through the credit information bureau, or by any other available means 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 his 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 within 3 working days upon the borrower's request information about the receipt of a loan and about the borrower's compliance with the credit discipline for its provision to another financial and credit organization. The MFO may obtain information about other loans of borrowers and about his credit discipline by any other available means within the legislation of the Kyrgyz Republic;
• the degree of dependence of the client's business on climatic and weather conditions, force majeure circumstances and other potential threats;
• whether the client has obligations to the MFO on any other assets, and to which classification category they are assigned;
• interdependence of MFO clients from each other, in which the insolvency of one client may lead to the non-fulfillment of financial obligations to the MFO by another client.

(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. 22/7, June 15, 2017 No. 2017-P-12/25-12)

3.5. Classification of assets of MFOs that do not have the right to accept deposits from individuals and legal entities is carried out according to the following categories:

• Standard;
• Assets under supervision;
• Substandard;
• Doubtful;
• Losses.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

3.6. Assets may be considered Standard if the repayment of debt occurs in accordance with the repayment schedule or a delay in scheduled payments was allowed, but no more than 30 days, and at the same time:

• the client has a satisfactory financial position, stable sources of income;
• the client has a positive credit history, i.e., for a long time has proven himself as a reliable borrower;
• in individual lending, the debt on the principal amount and interest is fully secured by collateral that is in demand and can be realized in acceptable terms and at an acceptable price, or there is a guarantee of a reliable guarantor;
  - (excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 27, 2013 No. 45/16).

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 27, 2013 No. 45/16)

3.6-1. Assets under supervision are called assets, the characteristic features of which are:

• the presence of an outstanding debt in other financial and credit organizations on any other loan for the borrower - an individual, including an individual entrepreneur without forming a legal entity, with the exception of loans issued under targeted state programs of the Government of the Kyrgyz Republic;
• repayment of debt by the borrower - an individual, including an individual entrepreneur without forming a legal entity, and the debt of his spouse(s), parents and children on loans, with the exception of loans issued to them under targeted state programs of the Government of the Kyrgyz Republic, to this MFO and/or other financial and credit organizations from a single source of income. At the same time, a single source of income for repayment of debt to a financial and credit organization is understood as the aggregate income of the above-mentioned persons, taken into account by the financial and credit organization when making a decision to issue a loan, including income from entrepreneurial activities.

Note: These signs do not apply to overdrafts within salary projects.

(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. 22/7, May 30, 2018 No. 2018-P-12/20-2)

3.7. Assets may be considered Substandard if signs appear indicating the risk of incomplete repayment of the asset debt, in particular:

• payments on interest and/or on the principal amount of debt are overdue for a period from 31 to 90 days;
• the client's payments on debt cover only part of the scheduled payments on the principal amount and/or interest;
• the debt on the principal amount and interest is not fully secured by collateral or there is a tendency to reduce the liquidity of collateral (collateral becomes difficult to realize, depreciates, loses its товарный вид, etc.);
• the presence of an overdue debt of more than 30 days on the principal amount and/or interest on any other loan for the borrower - an individual, including an individual entrepreneur without forming a legal entity, with the exception of loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this MFO and/or other financial and credit organizations;
• the presence of an overdue debt on the principal amount and/or interest of more than 30 days on a loan of the spouse(s), parents and children of the borrower - an individual, including an individual entrepreneur without forming a legal entity, to this MFO and/or other financial and credit organizations, with the exception of loans issued to them under targeted state programs of the Government of the Kyrgyz Republic, provided that the source of repayment of all the above-mentioned loans is the same. At the same time, the same source of repayment of loans is understood as the aggregate income of the above-mentioned persons, taken into account by the financial and credit organization when making a decision to issue a loan, including income from entrepreneurial activities.

Note: The signs specified in paragraphs five and six of this paragraph do not apply to overdrafts within salary projects.

• tendencies of deterioration in the client's solvency and financial position have appeared, and this may affect his ability to timely fulfill obligations to repay the debt on the principal amount and/or interest.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated May 18, 2012 No. 19/7, October 31, 2012 No. 41/10, May 30, 2018 No. 2018-P-12/20-2)

3.8. Assets may be considered Doubtful if the repayment of debt is doubtful, nevertheless, they cannot yet be classified as losses. Signs of doubtful assets, in particular, are:

• delay in payments for a period from 91 to 180 days on interest and/or on the principal amount of debt;
• significant deterioration (up to the actual absence) of collateral and/or guarantee coverage, and non-provision by the client or impossibility of providing additional collateral or guarantee coverage;
• significant deterioration in the client's solvency and financial position, in which he is unable to fulfill obligations to return the MFO asset;
  - (excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

3.9. Assets may be considered losses if their quality has deteriorated so much that the return of assets is unlikely. After exhausting all legal opportunities for the return of such assets, they must be accounted for off-system for at least three years in case of possible repayment of debt.

Assets are considered losses if, in particular:

• payments on the principal amount of debt and/or interest are overdue for more than 180 days;
• the client is on the verge of bankruptcy or declared bankrupt;
• the client is unable or refuses to repay the debt to the MFO or is generally absent;
  - (excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10, May 30, 2018 No. 2018-P-12/20-2)

3.10. All loans to the borrower - an individual, including an individual entrepreneur without forming a legal entity, obtained in this MFO, must be assigned the worst of the classifications applied to his loans.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10)

4. Features of classification of assets of microfinance organizations not having the right to accept deposits from individuals and legal entities

4.1. Classification of other MFO property

4.1.1. Other MFO property, i.e., property (assets) accepted in repayment of loans or assets similar to loans, immediately after its recognition in the balance sheet is classified as at least Substandard.

4.1.2. Other property is classified as losses if it is not sold by the MFO after the following periods have expired:

• One year - for movable property;
• Three years from the moment of arising of the right of ownership - for immovable property, with the exception of agricultural land, for which the realization periods are established by the legislation of the Kyrgyz Republic.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated November 2, 2015 No. 65/1, May 30, 2018 No. 2018-P-12/20-2)

4.2. Classification of MFO investments

4.2.1. MFOs assess the quality of their investments and their classification, taking into account, in particular, the following factors:

• the situation in the market and the financial condition of the organizations in which MFO funds are invested;
• terms and volumes of investment;
• the possibility of returning invested funds;
• profitability of the investment;
• whether the organization in which MFO funds are invested has obligations to the MFO on any other assets, and to which classification category they are assigned.

4.2.2. Investments in securities of the Government of the Kyrgyz Republic and the National Bank are not classified, and no RPPU is created for them.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3. Classification of restructured MFO assets

4.3.1. Restructured loans are loans for which the MFO provides preferences (relief) to the borrower on an individual basis by changing the terms of the contract (with the mandatory conclusion of a new contract or an additional agreement to the credit contract), differing from the usual lending practice of the MFO in order to ensure the repayment of the borrower's debt. At the same time, changing the interest rate and/or the term of the loan until the repayment of the principal amount/interest leads to a change in expected future cash flows.

Restructuring represents:

• changing the terms of an existing credit contract due to a deterioration in the borrower's financial condition by providing more favorable terms to the client for loan repayment, differing from the usual lending practice of the MFO to ensure the repayment of the borrower's debt;
• full or partial refinancing of an asset, when the borrower uses the credit provided by the MFO to repay another loan in another FCO (debt on the principal amount or interest on it) provided that the debtor is experiencing financial difficulties;
• changing the terms of the contract by partially writing off the principal amount of the loan.

Changing the initial terms of the loan contract and its refinancing, not associated with a deterioration in the borrower's financial condition, are not restructuring of the loan (for example, converting the loan currency from foreign to national and others).

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.2. Indicators of the occurrence of financial difficulties for the client on a restructured asset may be the following circumstances:

• an unclassified loan on which restructuring was carried out, and on which there were fully or partially overdue payments for more than 30 days, at least 1 time within the last 3 months or;
• on a refinanced loan, in cases where the client did not make payments on the principal amount or interest on a parallel loan in this MFO, fully or partially for more than 30 days, at least 1 time within the last 3 months before the refinancing of the above-mentioned loan.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.3. Restructuring should be primarily aimed at creating conditions for loan repayment by easing requirements for the borrower, while restructuring should not allow the application of a constant practice of reducing the volume of periodic payments by increasing the repayment terms on the existing loan.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.4. Restructuring may be applied to both classified and unclassified assets.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.5. A classified restructured asset cannot be attributed to unclassified loans until the conditions of paragraph 4.4 of the Regulation are met.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.6. Making changes to the credit contract when the borrower is experiencing financial difficulties by partially repaying the loan debt through the realization of collateral on this loan should be considered as loan restructuring.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.7. Assets that have been restructured are classified by MFOs as at least "asset under supervision".

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.8. A restructured asset must be classified as "substandard" if there are overdue payments of more than 30 days on it or if this asset has been restructured again.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.3.9. A restructured asset must be classified as "doubtful" in the event of delays of more than 30 days.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

4.4. In the event of repayment of all overdue debt, assets classified as "doubtful" or "losses" are transferred to the "substandard" category, at the same time, the MFO may transfer a classified "substandard" asset to the category of unclassified assets when all the following conditions are met:

• absence of overdue amounts;
• timely full payment of the last three installments, according to the schedule;
• current activities and financial condition of the borrower allow full compliance with the terms of restructuring.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 30, 2018 No. 2018-P-12/20-2)

5. Formation of a reserve to cover potential losses and losses by microfinance organizations not having the right to accept deposits from individuals and legal entities

5.1. MFOs assess the adequacy of RPPU monthly based on the results of the monthly assessment of asset quality.

5.2. MFOs create RPPU at the expense of expenses regardless of the amount of income received, making contributions to RPPU through the active balance sheet account "Expenses for the creation of a reserve to cover potential losses and losses" in an amount sufficient to maintain the reserve at a level corresponding to the current assessment of the quality of MFO assets.

5.3. MFOs create general and special RPPUs for the corresponding classification categories, making the following sizes of contributions, indicated in percentage terms of the asset amount:

General RPPUs:	Special RPPUs:
Standard - from 0% to 5%	Substandard - 25%
Assets under supervision - 10%	Doubtful - 50%
	Losses - 100%

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated April 15, 2015 No. 22/7)

5.4. MFOs create the following types of general and special reserves to cover their potential losses and losses:
a) RPPU on loans, leases and factoring;

---

b) RPLD for investments and other assets that carry credit risk;

c) RPLD for other property.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of May 30, 2018 No. 2018-P-12/20-2)

5.5. RPLD are accounted for on off-balance sheet accounts corresponding to the respective assets of the MFO, with allocation to expenses.

5.6. Based on the results of the monthly assessment of asset quality and classification, the MFO calculates the amount of contributions to the RPLD for each asset. Then, the calculated contributions to the RPLD are summed up by reserve types. To determine the adequacy of the RPLD, the calculated reserve sizes by RPLD types are compared with the reserve sizes determined during the previous classification. In cases where the RPLD sizes on the balance sheet are less than the RPLD sizes calculated in accordance with the results of the monthly assessment of asset quality and classification of the MFO's assets, additional contributions to the RPLD must be made to bring the reserves into compliance with the calculated sizes for the current period.

5.7. Regular verification of the adequacy of the RPLD to the current state of the MFO's assets is carried out by the internal auditor (internal audit service) of the MFO, whose duty is to immediately inform the management of the MFO about identified deficiencies.