NATIONAL BANK OF THE KYRGYZ REPUBLIC

RESOLUTION

of December 26, 2018 No. 2018-P-12/58-10-(NPA)

On Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic on Issues of Collateral Recovery and Lending

In accordance with Articles 20 and 68 of the Law of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic, Banks and Banking Activity," the Board of the National Bank of the Kyrgyz Republic

RESOLVES:

1. Make amendments and additions to the following Resolutions of the Board of the National Bank of the Kyrgyz Republic (attached):

• "On Approval of the Regulation "On Asset Classification and Corresponding Provisions for Potential Losses and Impairments" of July 21, 2004 No. 18/3";

• "On Approval of the "Order of Operation of Commercial Banks and Other Financial and Credit Organizations Licensed and Regulated by the National Bank of the Kyrgyz Republic with Collateral Property" of July 4, 2012 No. 28/7";

• "On Approval of the Regulation "On Certain Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic with Real Estate" of August 29, 2012 No. 36/2";

• "On Approval of the Instruction on Determining Capital Adequacy Standards for Commercial Banks of the Kyrgyz Republic" of July 21, 2004 No. 18/2;

• "On Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic" of June 30, 2010 No. 52/4.

2. This Resolution shall enter into force upon the expiration of fifteen days from the date of its official publication.

3. 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.

4. The Department of Supervision and Licensing Methodology shall bring this Resolution to the attention of the Non-Commercial Partnership "Union of Banks of Kyrgyzstan," commercial banks, the State Development Bank of the Kyrgyz Republic, the Non-Commercial Partnership "Association of Microfinance Organizations," microfinance companies, and JSC "Financial Company of Credit Unions," as well as all structural subdivisions, regional departments, and the representative office of the National Bank in the Batken region.

5. Control over the implementation of this Resolution shall be entrusted to the Board Member overseeing the Department of Supervision and Licensing Methodology for Banks.

Chairman of the Board of the National Bank of the Kyrgyz Republic		T. Abdygulov

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

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

1. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Asset Classification and Corresponding Provisions for Potential Losses and Impairments" of July 21, 2004 No. 18/3":

in the Regulation "On Asset Classification and Corresponding Provisions for Potential Losses and Impairments," approved by the aforementioned Resolution:

• paragraph 4.1.1. be worded as follows:

"4.1.1. Normal assets are those secured by at least 120% of the asset value with collateral (pledge) consisting of:

• short-term state treasury bills (hereinafter - STTBs) (if the maturity of STTBs occurs before the maturity of the asset, the bank must accept cash proceeds from the maturity of STTBs as collateral, or accept additional similar STTBs as security;

• funds held in a separate deposit account in this bank. A separate deposit account refers to a segregated deposit account of an individual or legal entity. Client settlement accounts and correspondent bank accounts cannot be used as security;

• other securities included in the listings of stock exchanges of the Kyrgyz Republic in the highest and next-to-highest listing categories in accordance with the legislation of the Kyrgyz Republic (hereinafter - other securities), provided that the minimum requirements established by Appendix 1 to this Regulation are met.

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

Note: Refined standard bars are manufactured and marked bars of precious metals issued (released) by the National Bank or an assay 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 for gold and not less than 99.90 percent of the alloy mass for silver/platinum.

The following conditions must be met:

1) the contract for the provision of the asset and the pledge contract must specify that these funds, STTBs, and other securities serve as security for the funds provided by the bank, and the bank has the right to seize them without a separate order in case of the client's failure to fulfill its obligations;

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

3) the pledge contract must provide for the prohibition of further re-pledge of these funds, STTBs, and other securities;

4) in any case, the bank must develop corresponding procedures and conduct internal control ensuring all procedures related to the documentation of the pledge and the safety of funds, STTBs, and other securities until the end of the term specified in the contract;

5) funds in the deposit securing 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 exchange rates. If the deposit is in the same currency as the loan, it must cover the loan amount by at least 100%, and a deposit in a currency different from the loan currency must cover by at least 120% in som equivalent;

6) mandatory weekly revaluation of the deposit is required if funds in a currency different from the asset's currency are provided as security;

7) if the value of the collateral decreases as a result of revaluation, the bank must immediately demand an increase in its value in accordance with the requirements of this Regulation and ensure compliance with this requirement within 10 working days;

8) if the requirements specified in sub-paragraphs 1-7 are not met, such an asset will be considered not fully secured and 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.

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 a Provision for Potential Losses and Impairments (PPLI) in the amount of 0% to 2% regardless of the income structure, in accordance with the bank's internal policy. These requirements apply to preferential loans issued under the cooperation between the Government of the Kyrgyz Republic and the Government of the Russian Federation (Kyrgyz-Russian Development Fund - hereinafter the Development Fund), including loans funded by resources attracted and guaranteed by the Development Fund from other foreign financial institutions, including previously issued loans, the repayment of which will be carried out through financing from the Development Fund and involves changing the initial terms of the loan agreement. Loans of banks cannot be restructured, and previously issued loans included in the "classified" assets category cannot be financed using the Development Fund's resources."

2. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the "Order of Operation of Commercial Banks and Other Financial and Credit Organizations Licensed and Regulated by the National Bank of the Kyrgyz Republic with Collateral Property" of July 4, 2012 No. 28/7":

in the Order of Operation of Commercial Banks and Other Financial and Credit Organizations Licensed and Regulated by the National Bank of the Kyrgyz Republic with Collateral Property, approved by the aforementioned Resolution:

• sub-paragraph "b" of paragraph 14 be worded as follows:

"b) security for loans only with goods in circulation and precious metals must be at least 150% of the loan amount, except for gold refined standard bars issued by the National Bank.";

• paragraph 23-1 be worded as follows:

"23-1. The pledge contract must contain a provision for the assessment of the pledged property at the time of recovery (upon the occurrence of events for the recovery of property), which is determined by the agreement of the pledgee with the pledgor, and with respect to real estate - is determined by an additional agreement of the pledgee with the pledgor involving independent appraisers holding the appropriate certificate in accordance with the requirements of the legislation of the Kyrgyz Republic.

In this regard, after the decision to conduct auctions for the sale of real estate accepted in repayment of the borrower's debt is made, but before the start of the aforementioned auctions, its fair value must be determined in accordance with the requirements of the Regulation "On Certain Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic with Real Estate," approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic.";

• supplement with paragraph 30-1 of the following content:

"30-1. If before the date of sale of the collateral at auctions or its acquisition by the pledgee, the borrower (pledgor) offers the pledgee a candidate for a buyer who can offer a price covering the debt amount, such person has the right of pre-emption. In this case, the pledgee must not refuse to sell the collateral. An agreement restricting the right specified in this paragraph is invalid.";

• supplement with paragraph 31-1 of the following content:

"31-1. Upon receiving notification from the pledgee, the borrower (pledgor) has the right:

1) to conclude an agreement with the pledgee on the satisfaction of its claims secured by the collateral out of court; or

2) to conclude a notarized agreement with the pledgee on the voluntary transfer of the pledged property in repayment of the debt after the grounds for seizure of the collateral arise; or

3) to file a lawsuit in court for the conduct of seizure procedures and sale of the collateral in judicial order, if the out-of-court seizure procedure is not provided for in the pledge contract and/or agreement on satisfaction of claims, or arbitration agreement."

3. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Certain Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic with Real Estate" of August 29, 2012 No. 36/2":

in the Regulation "On Certain Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic with Real Estate," approved by the aforementioned Resolution:

• in paragraph 2, after the words "having the right to attract deposits," add the words ", JSC "Financial Company of Credit Unions";

• paragraph 6 be worded as follows:

"6. The counting of the term for holding other real estate begins from the date when:

1) the protocol on the results of the auctions is registered in the authorized state body, and the pledgee acquires ownership rights to the collateral obtained in repayment of previously issued loans/transactions carrying credit risk (including based on civil law transactions).

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

2) the property is accepted onto the bank's balance sheet by agreement without conducting auctions, then the counting of the term begins from the date when ownership rights to the real estate obtained by the bank in repayment of previously issued loans/transactions carrying credit risk are registered in the authorized registration body;

3) the bank's Board decides 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 other reasons in accordance with the act) and decides on the need for its sale. This decision must be approved by the Board of Directors.";

• in sub-paragraph "g" of paragraph 7, after the words "by this Regulation," add the words "and the legislation of the Kyrgyz Republic;";

• in paragraph 21, exclude the words "No. 18/3 of July 21, 2004";

• paragraph 22 be worded as follows:

"22. Within the framework of the recovery of pledged property, the excess of the amount at which real estate is accepted onto the bank's balance sheet over the loan debt is an obligation of the bank 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 judicial recovery order, the bank returns to the pledgor the excess of the purchase price over the loan debt within the timeframes 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 price not 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 subject to return to the pledgor.";

• in paragraph 27:

the first paragraph be worded as follows:

"When accepting pledged property within the framework of out-of-court seizure procedures or transferring real estate to the "Other Property" category, the fair value of the property must be confirmed by an independent professional appraiser in accordance with the legislation of the Kyrgyz Republic.";

sub-paragraph "a" be worded as follows:

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

• in sub-paragraph "a" of paragraph 31, replace the figures "25" and "50" with "15" and "40" respectively;

• paragraph 31-1 be worded as follows:

"31-1. When concluding a financial lease contract/sale of real estate in installments or other similar contract, the bank may classify this asset (other property) as a "substandard" asset with the formation of a provision for potential losses and impairments in the amount of 25% in accordance with the Regulation on Asset Classification and Corresponding Provisions for Potential Losses and Impairments, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic. In the event of payment delays and violation of the repayment schedule under the newly concluded contract, classification must be carried out in accordance with the established requirements of the National Bank.

In this regard, in the case of the sale of real estate in installments and receipt of a deposit from the buyer, the part of other property secured/covered by the deposit is classified as a "normal asset," and the unsecured/uncovered part, in accordance with the established requirements of the National Bank. The contract must contain an unconditional right of the bank not to return the received deposit to the buyer in case of the buyer's failure to fulfill the installment sale contract or other similar contract.

Funds received as a deposit must be accounted for in a separate account in this bank and may not exceed 20% of the value of the real estate.

Subsequent payments made towards the purchase of the real estate, in case of termination of the sales contract, are returned to the buyer.".

4. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Instruction on Determining Capital Adequacy Standards for Commercial Banks of the Kyrgyz Republic" of July 21, 2004 No. 18/2":

in the Instruction on Determining Capital Adequacy Standards for Commercial Banks of the Kyrgyz Republic, approved by the aforementioned Resolution:

• in paragraph 4.3:

sub-paragraph 1 be supplemented with paragraph "z" of the following content:

"z) gold in the form of refined standard bars issued by the National Bank.";

in paragraph "b" of sub-paragraph 4, after the words "in standard bars," add the words ", except for gold refined standard bars issued by the National Bank".

5. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic" of June 30, 2010 No. 52/4":

in the Regulation "On Minimum Requirements for Credit Risk Management in Commercial Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic," approved by the aforementioned Resolution:

• paragraph 2-1 be worded as follows:

"2-1. This Regulation applies to other assets carrying credit risk (including correspondent accounts, securities, interbank placements, etc.).";

• supplement with paragraph 3-2 of the following content:

"3-2. Blanket loans are loans issued by the bank without any security, except for overdrafts on payment cards within salary projects, and are issued exclusively to a creditworthy borrower (only a resident) based on their reputation and assessment of their income level.";

• the second sentence of paragraph 4 be worded as follows:

"Cross-border loans are loans issued to residents/non-residents for financing activities exclusively outside the Kyrgyz Republic, with the concept of resident/non-resident corresponding to the concept defined in the legislation of the Kyrgyz Republic.";

• the title of Section 2 of the Regulation be worded as follows:

"2. Credit Policy and Credit Strategy of the Bank";

• paragraph 6 be worded as follows:

"6. Credit operations of the bank are carried out in accordance with its internal credit policy and credit strategy, approved by the Board of Directors of the bank.

The credit strategy may be included in the Bank's Business Plan as a separate/additional section.";

• supplement with paragraphs 6-1, 6-2, 6-3 of the following content:

"6-1. The credit strategy must at least consider and include the following:

• target lending markets and their general characteristics that the bank plans to achieve (including the level of diversification, planned indicators in the assessment of the quality of the credit portfolio, etc.);

• main sources of financing for lending (the bank must specify the sources of lending financing, from which funds the lending is planned to be carried out, to increase the credit portfolio);

• requirement to conduct an analysis of indirect currency risk;

• ratio of the share of loans to the bank's assets;

• market conditions and the financial condition of the bank, as well as its risk appetite;

• expected rate of return and the size of the bank's capital;

• possible costs associated with the recovery of assets exposed to credit risk;

• short-term/medium-term/long-term plans of the bank;

• requirement to conduct an analysis of the credit portfolio, which will be carried out based on the bank's existing credit portfolio. In addition to this, the bank must have a methodology for conducting such an analysis that will allow assessing credit risk and indirect currency risk;

• current adequate economic indicators of the bank;

• organizational structure of the bank, technical capabilities and potential (qualifications, staff size) of the personnel and management of the bank responsible for the bank's credit activities. The relevant personnel must be informed about the credit strategy and ensure the clarity of the bank's credit strategy.

6-2. The Board of Directors periodically, but no less than once a year, reviews the financial and economic indicators affecting or provided for in the credit strategy and makes necessary changes if required.

6-3. The Board of Directors of the bank must ensure that the policy on appointments and remuneration in the bank does not contradict the credit risk management strategy.";

• paragraph 12-1 be worded as follows:

"12-1. Internal audit of the internal control system for credit risk must be conducted annually to determine the compliance of the bank's lending activities with the credit strategy, the bank's policy, and to identify deficiencies in the process of credit risk management, in credit policy, and in lending procedures.

Also, the bank must, within the framework of internal audit, assess the internal control system for credit risk caused by currency risk, including the classification of loans/assets in accordance with the established requirements of the National Bank."

Information on the subsequent implementation of corrective measures for deficiencies identified as a result of the internal audit of the internal control system of credit risk must be periodically transmitted to the Bank's Board of Directors, but no less than once every six months, and to the Audit Committee, at least once every quarter.

• paragraph 24 is recognized as having lost force;

• paragraph 6 of paragraph 25 is to be worded as follows:

"- a document from state bodies on registration (if the borrower is a legal entity or an individual engaged in entrepreneurial activity based on a certificate or patent), with the exception of loans issued under government programs aimed at the development of agriculture;";

• paragraph 4 of paragraph 26 is to be worded as follows:

"- the right of the client to subsequently appeal to the bank with a request for loan restructuring;";

• in paragraph 31, the words "p.30" are replaced with the words "paragraph 30";

• paragraph 42 is supplemented with the following seventh paragraph:

"- the obligation of the bank to cease the accrual of penalties (fines, penalties) after 15 days from the moment of sending the notice of the commencement of the procedure for recovery of the collateral for the borrower's loan, an individual, including an individual entrepreneur without forming a legal entity, provided that the amount of the penalty (fine, penalty) accrued for the entire period of the loan's action must not exceed 20 percent of the amount of the loan issued;";

• in paragraph 55:

the second paragraph is to be worded as follows:

"- the subject of the pledge and its market value (if necessary, taking into account the application of established coefficients);";

the sixth paragraph is to be worded as follows:

"- other requirements, as well as the obligations of the parties with respect to the pledge in accordance with the legislation of the Kyrgyz Republic.";

• the first sentence of paragraph 61 is to be excluded;

• in paragraph 75:

the sixth paragraph is to be worded as follows:

"- if necessary, the development of a program for changing the debt structure (review of the repayment schedule for the loan and interest payments, changes in lending forms, conducting restructuring, etc.).";

supplement the paragraph with the following paragraphs:

"When restructuring a loan, the bank must consider the current financial condition and the degree of the bank's trust in the borrower. The bank may restructure a loan only if the borrower has real opportunities to fulfill their obligations under the modified terms of their loan, which must be confirmed by the conducted analysis and relevant documents.

The borrower's credit file, whose loan has been restructured, must include all information about the borrower's current financial condition and their ability to repay the loan, as well as information and relevant documents about the conducted restructuring.";

• in the first paragraph of paragraph 79, the word "monthly" is replaced with the word "quarterly";

• supplement with paragraph 80-1 of the following content:

"80-1. The Bank may initiate the procedure for recovery of pledged real estate for a loan in case of systematic violation of the borrower's obligations for more than three consecutive months (according to the client's current repayment schedule) preceding the date of sending the notice of the commencement of the procedure for recovery of the collateral in an out-of-court manner.";

• in Appendix 1 to the Regulation:

the second paragraph of paragraph 22 is to be worded as follows:

"- the market value of the pledge (if necessary, taking into account the application of established coefficients);";

the eighth paragraph of paragraph 25 is to be worded as follows:

"- the market value of the pledge (if necessary, taking into account the application of established coefficients);";

• Appendix 5 to the Regulation is recognized as having lost force.