Regulation on the Classification of Loans in Credit Unions (approved by the Board of the National Bank of the Kyrgyz Republic dated April 12, 2006 No. 10/6)

Registered in the Ministry of Justice of the Kyrgyz Republic on May 11, 2006.

Registration number 51-06

	Approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated April 12, 2006 No. 10/6

REGULATION

on the classification of loans in credit unions

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of

May 18, 2012 No. 19/7, October 31, 2012 No. 41/10, April 15, 2015 No. 22/7, November 2, 2015 No. 65/1 )

1. General Provisions

2. Basic Concepts

3. Classification of Loans of Credit Unions

4. Formation of PPLU

1. General Provisions

1.1. This Regulation is developed in accordance with the Laws of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic", "On Banks and Banking Activity in the Kyrgyz Republic" and "On Credit Unions", according to which credit unions are obliged to create reserves to cover potential losses and damages on loans.

1.2. This regulatory act establishes requirements for credit unions regarding the classification of loans and the formation of corresponding reserves to cover potential losses and damages (hereinafter referred to as PPLU).

2. Basic Concepts

2.1. Credit risk is the risk of the borrower failing to fulfill its obligations in accordance with the terms and conditions of the contract between the credit union and the borrower.

2.2. Restructured loans are loans for which the credit union, due to the deterioration of the borrower's financial condition, grants concessions to the borrower in order to obtain the remaining debt or part of it by re-concluding the contract with them due to a change in the terms of the contract (change in interest rate and/or principal amount, extension of the loan - change in loan repayment terms, change in payment frequency, etc.).

3. Classification of Loans of Credit Unions

3.1. Loan classification is based on the regular assessment of loan quality depending on the degree of credit risk and the determination of adequate PPLU.

3.2. Loan classification is carried out based on preliminary analysis, including:

quantitative characteristics of the loan status:

• overdue scheduled payments on the principal and/or interest;

• incomplete (partial) repayment of scheduled payments on the principal and/or interest;

qualitative characteristics of the loan status:

• borrower's solvency, i.e., the borrower's ability to generate profit from the use of borrowed funds and to timely repay scheduled payments both on interest and on the principal, the condition and value of its property, the presence of other sources of income (income of family members, income from other types of activities, etc.);

• the presence of any other loan issued by other financial and credit institutions. In addition, the credit union must take into account the borrower's current credit discipline on any other loan, in case the borrower has outstanding debt to other financial and credit institutions. In this regard, it is necessary to monitor the presence of the client's other loans in other financial and credit institutions at the time of consideration of the application, using information obtained from the client/borrower, through the credit information bureau, or by any other available means. 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 institutions and about compliance with credit discipline on these loans at least once every six months. At the same time, all financial and credit institutions are obliged to provide within 3 working days upon the borrower's request information about the receipt of the loan and about the borrower's compliance with credit discipline for its provision to another financial and credit institution. The credit union may obtain information about other loans of borrowers and about their credit discipline by any other available means within the framework of the legislation of the Kyrgyz Republic;

• reasons for loan restructuring;

• the presence and liquidity of collateral;

• the presence and reliability of guarantees (sureties).

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of

October 31, 2012 No. 41/10)

3.3. The National Bank establishes general and special categories of loan classification and norms for contributions to the PPLU from the remaining principal amount of the loan:

General PPLU:	Special PPLU:
Standard - 0%	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 of

April 15, 2015 No. 22/7)

3.4. Loans are considered standard if scheduled payments on interest and/or principal are overdue for a period of no more than 30 days. At the same time, the borrower must have a satisfactory material position, a stable source of income, and easily realizable collateral as security.

3.4-1. Assets under supervision are assets whose characteristic features are:

• the presence of an unpaid debt in other financial and credit institutions for any other loan, with the exception of loans issued under targeted state programs of the Government of the Kyrgyz Republic(*);

• repayment of debt by a borrower-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 credit union and/or other financial and credit institutions from a single source of income(*). At the same time, a single source of income for repayment of debt to a financial and credit institution is understood as the total income of the above-mentioned persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These features do not apply to overdrafts within the framework of salary projects.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of

October 31, 2012 No. 41/10, April 15, 2015 No. 22/7)

3.5. Loans may be considered substandard if there are signs indicating a deterioration in the borrower's financial condition and his ability to timely repay the loan debt.

Characteristic features of substandard loans are:

a) non-repayment of scheduled payments on interest and/or principal for a period from 31 to 60 days (inclusive) after the scheduled payment date;

b) insufficiency of the borrower's cash flows to cover debt on interest and/or principal;

c) loan extension 1 time;

d) the loan is not fully secured by collateral or repayment of debt depends on the realization of collateral, or the collateral is depreciated and/or becomes difficult to realize;

e) the presence of an overdue debt of more than 30 days on the principal and/or interest on any other loan, with the exception of loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this credit union and/or another financial and credit institution(*);

f) the presence of overdue debt on the principal and/or interest of more than 30 days on the loan of the spouse(s), parents and children of the borrower-individual, including an individual entrepreneur without forming a legal entity, to this credit union and/or other financial and credit institutions, 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 loans is the same(*). At the same time, the same source of repayment of loans is understood as the total income of the above-mentioned persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These features do not apply to overdrafts within the framework of salary projects.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of May 18, 2012 No. 19/7, October 31, 2012 No. 41/10)

3.6. Loans are classified as doubtful if:

a) payments on interest and/or principal of the debt are overdue for a period from 61 to 90 days (inclusive);

b) the loan was extended 2 times;

c) the borrower's financial condition and solvency have seriously deteriorated and the possibility of repaying the debt to the credit union is doubtful and unlikely;

d) collateral is absent.

3.7. Loans are considered unprofitable (losses) if one of the following events occurs:

a) payments on interest and/or principal are overdue for a period of more than 90 days;

b) the loan was extended more than 2 times;

c) borrower's insolvency or bankruptcy.

3.8. After referring a loan to the category of unprofitable loans, the credit union must take all measures to ensure the return of the principal amount of the loan and interest on it. After exhausting all legal opportunities for loan repayment, its accounting is transferred to off-balance sheet accounts, where it must be accounted for for at least five years. In case of loan repayment, the procedure for repayment of the debt amount is carried out in accordance with the legislation of the Kyrgyz Republic.

3.9. The credit union must classify restructured loans depending on the reasons for restructuring, while the classification category of loans cannot be higher than substandard.

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

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of

October 31, 2012 No. 41/10)

3.11. Classification of other property in credit unions:

1. other property of credit unions, i.e. property (assets) accepted in repayment of loans or assets similar to loans, immediately after its recognition in the balance sheet is classified at least as substandard;

2. other property is classified as losses if it is not sold by the credit union after the following periods have expired:

• one year - for movable property;

• two years from the moment the right of ownership arose - for immovable property.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of

November 2, 2015 No. 65/1)

4. Formation of PPLU

4.1. Credit unions must maintain PPLU at a level sufficient to cover possible losses on loans. The amount of the reserve is determined based on the results of periodic assessments of the quality of the credit union's loans.

4.2. PPLU is accounted for and reflected in the balance sheet of the credit union on a separate contractual account to the corresponding account. In order to determine the real financial condition of the credit union, the PPLU is created at the expense of expenses, regardless of the amount of income received, in an amount sufficient to maintain the reserve at a level corresponding to the current assessment of the quality of the credit union's loans.

4.3. According to the classification of loans, the required size of PPLU is calculated for each loan in accordance with the established contribution norms. The required contributions to the reserve for each loan are summed up and the total size of the PPLU at the end of the reporting period is determined. To determine the adequacy of the PPLU, the calculated size of the reserve is compared with the size of the reserve determined during the previous classification. In the event that the size of the PPLU in the balance sheet is less than its total size, the credit union must make additional contributions to the PPLU to bring the reserve in line with the calculated size at the end of the reporting period. Additional contributions to the PPLU are not made if the amount of the actually formed reserve in the balance sheet is greater than or equal to the calculated amount of the PPLU.

4.4. The amount of PPLU in the balance sheet that exceeds the total required size at the end of the reporting period (month) may be directed to reduce expenses for the creation of PPLU.

4.5. Each credit union is obliged to carry out regular (monthly) checks of the adequacy of the PPLU to the quality of loans. In order to prevent conflicts of interest, the assessment of the adequacy of the PPLU must be carried out by a person (department, committee) not associated with the issuance of loans.

4.6. The credit union may choose a more conservative approach to loan assessment, for which, in addition to this regulation, it may develop internal regulations and procedures for assessing the adequacy of credit risks, without violating the value of contributions for the formation of PPLU established by this Regulation.