Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 31, 2012 No. 41/10 on Amendments to Certain Regulatory Legal Acts

NATIONAL BANK OF THE KYRGYZ REPUBLIC

RESOLUTION

of October 31, 2012 No. 41/10

On Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

In order to reduce credit risks, in accordance with Articles 7 and 43 of the Law of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic", Articles 35, 35-1, 36-1, 39, 39-1 of the Law of the Kyrgyz Republic "On Banks and Banking Activity in the Kyrgyz Republic", Articles 5, 11 of the Law "On Microfinance Organizations in the Kyrgyz Republic", the Board of the National Bank of the Kyrgyz Republic

RESOLVES:

1. Approve the attached amendments and additions to the following regulatory legal acts of the National Bank of the Kyrgyz Republic:

• in 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 the Kyrgyz Republic of July 21, 2004 No. 18/3, registered in the Ministry of Justice of the Kyrgyz Republic on August 23, 2004, registration number No. 95-04;

• in the Interim Regulation on the general principles of asset classification and formation of reserves for covering potential losses and losses by microfinance organizations in the Kyrgyz Republic that do not have the right to accept deposits from individuals and legal entities, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of October 22, 2003 No. 31/3;

• in the Interim Procedure for the application of special classification of loans meeting certain criteria, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 2, 2006 No. 5/6, registered in the Ministry of Justice of the Kyrgyz Republic on April 7, 2006, registration number No. 35-06;

• in the Regulation on the classification of loans in credit unions, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of April 12, 2006 No. 10/6;

• in the Regulation on minimum requirements for credit risk management in commercial banks and other financial and credit institutions licensed by the National Bank of the Kyrgyz Republic, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2010 No. 52/4;

• in the Interim Rules on lending (overdraft) on bank payment cards, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of February 13, 2002 No. 8/6.

2. Commercial banks, microfinance organizations, credit unions, and the specialized financial and credit institution JSC "FKKS" must carry out the classification of loans and credit activity on loans issued after the entry into force of this Resolution in accordance with this Resolution.

3. This Resolution must also be applied in cases of restructuring and prolongation of loans after the expiration of the term of credit agreements and in other cases of drawing up additional agreements.

4. To the Legal Department:

• publish this Resolution on the official website of the National Bank of the Kyrgyz Republic;

• after official publication, send this Resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Regulatory Legal Acts of the Kyrgyz Republic.

5. This Resolution enters into force after 15 days from the date of official publication.

Published in the journal "Regulatory Acts of the National Bank of the Kyrgyz Republic", No. 7/2012

6. The Department of Supervision and Licensing Methodology is to bring this Resolution to the attention of commercial banks, microfinance organizations, the specialized financial and credit institution JSC "FKKS", and credit unions.

7. Control over the implementation of this Resolution is entrusted to the Deputy Chairman of the National Bank of the Kyrgyz Republic Z.L. Chokoev.

Chairman	Z. Asankozhoeva

	Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic of October 31, 2012 No. 41/10

AMENDMENTS AND ADDITIONS to certain regulatory legal acts of the National Bank of the Kyrgyz Republic

(In the edition of the Resolution of the Board of the National Bank of the KR of December 12, 2012 No. 48/10)*

1. Make the following amendments and additions to 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 the Kyrgyz Republic of July 21, 2004 No. 18/3:

a) in paragraph 1.1:

• replace the words "OsOO "Financial Company for Support and Development of Credit Unions" with "specialized financial and credit institution JSC "Financial Company of Credit Unions";

• after the words "commercial banks" add the words "microfinance companies having the right to attract deposits";

b) supplement Section 3 "3. General Instructions for Asset Classification" with paragraph 3.6-2 in the following wording:

"3.6-2. When classifying loans, the bank must take into account the borrower's current credit discipline on any other loan, in case the borrower has an 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. In the future, in the process of monitoring a loan for which the term of the credit agreement 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 a loan and about the borrower's compliance with credit discipline for its provision to another financial and credit institution. The bank may obtain information about other loans of borrowers and about their credit discipline by any other available means within the legislation of the Kyrgyz Republic.";

c) in paragraph 3.8, replace the words "One or a combination" with the word "Combination";

d) restate the fifth and sixth paragraphs of paragraph 5.1.2 in the following wording:

"- the presence of overdue debt for more than 30 days on the principal amount and/or interest on any other loan, except for loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this bank and/or another financial and credit institution(*);

• the presence of overdue debt on the principal amount and/or interest for more than 30 days on a loan of the spouse(s), parents and children of a borrower-individual, including an individual entrepreneur without forming a legal entity, to this bank and/or other financial and credit institutions, except for 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 aggregate income of the above persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity;

(*) These signs do not apply to overdrafts within salary projects.";

e) change the title of Section 6 "Section 6. Separation of Classification" to "Section 6. Separate Cases of Classification";

f) supplement Section 6 with paragraph 6.2 in the following wording:

"6.2. In the event that a borrower-individual, including an individual entrepreneur without forming a legal entity, has several loans in this bank, then all his loans are subject to the classification that was assigned to his loan with the largest debt, if this classification is the worst.";

g) in paragraph 13.7, restate the fourth sentence in the following wording:

"The check can be carried out both at the expense of the bank's internal resources and with the help of attracted external experts.".

(In the edition of the Resolution of the Board of the National Bank of the KR of December 12, 2012 No. 48/10)

2. Make the following amendments and additions to the Interim Regulation on the general principles of asset classification and formation of reserves for covering potential losses and losses by microfinance organizations in the Kyrgyz Republic that do not have the right to accept deposits from individuals and legal entities, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of October 22, 2003 No. 31/3:

a) restate paragraph 2.1 in the following wording:

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

b) restate paragraph 2.4 in the following wording:

"2.4. Group lending - provision of a microloan under joint liability of members of a group of joint liability (GSO) for repayment of the debt on the principal amount of the microloan and interest. Classification of group loans is carried out in accordance with the Interim Procedure for the application of special classification of loans meeting certain criteria.";

c) restate the eleventh paragraph of paragraph 3.4 in the following wording:

"- the client's credit history. The MFO must take into account the borrower's current credit discipline on any other loan, in case the borrower has an 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. In the future, in the process of monitoring a loan for which the term of the credit agreement 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 a loan and about the borrower's compliance with credit discipline for its provision to another financial and credit institution. The MFO may obtain information about other loans of borrowers and about their credit discipline by any other available means within the legislation of the Kyrgyz Republic.";

d) supplement paragraph 3.5 after the second paragraph with a paragraph of the following content:

"- Assets under observation";

e) supplement with paragraph 3.6-1 in the following wording:

"3.6-1. Assets under observation are assets whose characteristic features are:

• the presence of an outstanding debt on any other loan, except for loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this MFO and/or other financial and credit institutions by a borrower-individual, including an individual entrepreneur without forming a legal entity(*);

• repayment of debt by a borrower-individual, including an individual entrepreneur without forming a legal entity, and debt of his spouse(s), parents and children on loans, except for loans issued to them under targeted state programs of the Government of the Kyrgyz Republic, to this MFO 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 aggregate income of the above persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These signs do not apply to overdrafts within salary projects.";

f) restate the fifth and sixth paragraphs of paragraph 3.7 in the following wording:

"- the presence of overdue debt for more than 30 days on the principal amount and/or interest on any other loan, except for loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this MFO and/or other financial and credit institutions(*);

• the presence of overdue debt on the principal amount and/or interest for more than 30 days on a loan of the spouse(s), parents and children of a borrower-individual, including an individual entrepreneur without forming a legal entity, to this MFO and/or other financial and credit institutions, except for 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 aggregate income of the above persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These signs do not apply to overdrafts within salary projects.";

g) exclude the fifth paragraph of paragraph 3.8;

h) exclude the fifth paragraph of paragraph 3.9;

i) supplement Section 3 with paragraph 3.10 in the following wording:

"3.10. All loans of a borrower-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.";

k) supplement paragraph 5.3 after the third paragraph with a paragraph of the following content:

"- Assets under observation - 10%."

3. Make the following amendments and additions to the Regulation on the classification of loans in credit unions, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of April 12, 2006 No. 10/6:

a) supplement paragraph 3.2 after the sixth paragraph with a paragraph in the following wording:

"- 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 an 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. In the future, in the process of monitoring a loan for which the term of the credit agreement 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 a 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 legislation of the Kyrgyz Republic.";

b) supplement paragraph 3.3 after the second paragraph with a paragraph of the following content:

"- Assets under observation - 10%";

c) supplement Section 3 with paragraph 3.4-1 in the following wording:

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

• the presence of an outstanding debt on any other loan, except for loans issued under targeted state programs of the Government of the Kyrgyz Republic, in this credit union and/or other financial and credit institutions by a borrower-individual, including an individual entrepreneur without forming a legal entity(*);

• repayment of debt by a borrower-individual, including an individual entrepreneur without forming a legal entity, and debt of his spouse(s), parents and children on loans, except for 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 aggregate income of the above persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These signs do not apply to overdrafts within salary projects.";

d) restate sub-items d) and e) of paragraph 3.5 in the following wording:

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

e) the presence of overdue debt on the principal amount and/or interest for more than 30 days on a loan of the spouse(s), parents and children of a borrower-individual, including an individual entrepreneur without forming a legal entity, to this credit union and/or other financial and credit institutions, except for 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 aggregate income of the above persons, taken into account by the financial and credit institution when making a decision on issuing a loan, including income from entrepreneurial activity.

(*) These signs do not apply to overdrafts within salary projects.";

e) supplement Section 3 with paragraph 3.10 in the following wording:

"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 his loans.".

4. Make the following amendments and additions to the Interim Procedure for the application of special classification of loans meeting certain criteria, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 2, 2006 No. 5/6:

a) exclude paragraph 2.2;

b) supplement with Section 2-1 in the following wording:

"2-1. Classification of loans issued to a group

of joint liability under the guarantee

of members of a group of joint liability

2-1.1. Special classification must be applied to loans issued to a group of joint liability under the guarantee of members of a group of joint liability.

2-1.2. In the event that a borrower-individual, including an individual entrepreneur without forming a legal entity, in addition to a loan obtained in this bank/FCU as part of a group of joint liability, has any other individual loan or a loan issued as part of this or any other group of joint liability, in this or any other bank/FCU, then all loans of a borrower-individual, including an individual entrepreneur without forming a legal entity, obtained in this bank/FCU and subject to special classification in accordance with this Procedure, must be classified as "assets under observation" in the absence of overdue debt on the principal amount and interest.

In the event of the formation of overdue debt on the principal amount and/or interest on a loan obtained by a borrower-individual, including an individual entrepreneur without forming a legal entity, in this bank/FCU and subject to special classification, then a classification must be applied to it depending on the number of days of delay in accordance with this Procedure.

2-1.3. Loans issued to a group of joint liability must be recognized as doubtful, in the event that there are serious internal problems in the group of joint liability that may lead to the dissolution of the group and non-fulfillment of obligations to repay the loan. In the event that a group of joint liability is on the verge of dissolution or for any other reason its members are unable to bear joint liability for obligations to the bank/FCU, then the loan of this group of joint liability must be recognized as a loss.

2-1.4. To all loans of a borrower-individual, including an individual entrepreneur without forming a legal entity, obtained in this bank/FCU and subject to special classification in accordance with this Procedure, the worst of the classifications applied to his loans must be assigned.";

c) exclude paragraph 4.5-1.

5. Make the following additions to the Regulation on minimum requirements for credit risk management in commercial banks and other financial and credit institutions licensed by the National Bank of the Kyrgyz Republic, approved by the Resolution of the Board of the National Bank of June 30, 2010 No. 52/4:

a) supplement paragraph 42 with paragraphs of the following content:

"In addition, the credit agreement must contain:

• the obligation of the client-individual, including an individual entrepreneur, to provide information about the presence of loans in other financial and credit institutions, including loans of the spouse(s), parents and children, and about compliance with credit discipline on these loans not less than once every six months;

• the obligation of banks 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 credit discipline on this loan for its provision to another financial and credit institution;

• the obligation of the bank to cease charging penalties (fines, penalties) after 15 days from the date of sending a notice about the start of the procedure for recovery of the pledged property of a borrower-individual, including an individual entrepreneur without forming a legal entity.";

b) supplement Section 6 "Work with "problem loans" with paragraph 78-1 in the following wording:

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78-1. The bank must cease accruing penalties (fines, interest) after 15 days from the moment of sending a notice of the commencement of the enforcement procedure on the pledged item for a “problem loan” of an individual borrower, including an individual entrepreneur without legal entity formation.

6. Paragraph 4.5 of the Temporary Rules on lending (overdraft) by bank payment cards, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of 13 February 2002 No. 8/6, shall be set out in the following wording:

4.5. The primary source of repayment of overdraft debt and its interest is the amount of the client’s salary payments transferred to the bank. An additional source of repayment may be a guarantee commitment of an organization, in which the organization undertakes to fulfill the client’s obligations in case of insufficient funds and the client’s refusal to repay the overdraft debt and interest.