Resolution of the Board of the National Bank of the Kyrgyz Republic No. 2020-P-33/10-1-(NFKU) of 11 March 2020 on Amendments to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

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Date of creation: 2020-03-16

Resolution of the Board

of the National Bank

of the Kyrgyz Republic

dated 11 March 2020

No. 2020-P-33/10-1-(NFKU)

On Amendments to Certain Regulatory Legal Acts

of the National Bank of the Kyrgyz Republic

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 Activities", the Board of the National Bank of the Kyrgyz Republic resolves:

1. To introduce amendments to the following resolutions of the Board of the National Bank of the Kyrgyz Republic (attached):

• "On Approval of the Regulation on Minimum Requirements for Credit Risk Management in Microfinance Organizations Not Attracting Deposits" dated 25 September 2013 No. 35/14;

• "On Approval of the Regulation 'On Minimum Requirements for Credit Risk Management in Credit Unions'" dated 23 December 2009 No. 50/7.

2. 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.

3. This resolution enters into force upon the expiry of fifteen days from the day of official publication.

4. To the Department for Supervision of Non-Bank Financial and Credit Organizations: bring this resolution to the attention of microfinance companies, microcredit companies, microcredit agencies, credit unions, the Association of Microfinance Organizations (a legal entity association), OJSC "Financial Company of Credit Unions", the National Association of Credit Unions and Cooperatives (a legal entity association), regional departments and the representative office of the National Bank of the Kyrgyz Republic in Batken Oblast.

5. To assign control over the execution of this resolution to the member of the Board of the National Bank of the Kyrgyz Republic supervising the Department for Supervision of Non-Bank Financial and Credit Organizations.

Chairman T. Abdygulov

Annex

to the Resolution of the Board

of the National Bank

of the Kyrgyz Republic

dated 11 March 2020

No. 2020-P-33/10-1-(NFKU)

Amendments to Certain Regulatory Legal Acts

of the National Bank of the Kyrgyz Republic

1. To introduce the following amendments to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation on Minimum Requirements for Credit Risk Management in Microfinance Organizations Not Attracting Deposits" dated 25 September 2013 No. 35/14:

In the Regulation on Minimum Requirements for Credit Risk Management in Microfinance Organizations Not Attracting Deposits, approved by the above-mentioned resolution:

• To supplement the Regulation with clauses 10-1 and 11-1 as follows:

"10-1. An MFO has the right to issue loans through a remote/distance service channel, subject to compliance with the requirements specified in the Regulation

"On Minimum Requirements for the Provision of Remote/Distance Services in the Kyrgyz Republic", approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated 15 April 2015 No. 22/3, other regulatory legal acts of the National Bank, and in accordance with the internal policies and procedures of the MFO.

The amounts of loans issued through a remote/distance service channel must not exceed 15,000 soms (equivalent in foreign currency) under contracts signed with a simple electronic signature, and 150,000 soms (equivalent in foreign currency) under contracts signed with an enhanced unqualified electronic signature.";

"11-1. The relevant body of the MFO is obliged to review the credit policy for its adequacy, the systems of limits, tools and procedures for credit risk management, and the internal audit system for credit risk management. The relevant body of the MFO is also obliged, as necessary, to review the credit policy as the MFO's risk profile changes, as regulatory legal acts of the National Bank change, as the organizational structure and personnel of the MFO change, and under other circumstances affecting the lending process, but not less than once a year.";

• To restate clause 12 as follows:

"12. The credit policy defines the strategy, criteria, parameters and procedures that employees of the MFO must follow in the activity of providing, processing, monitoring, classifying loans and managing credit risk.

The MFO must ensure possible periodic training of MFO employees on lending and monitoring, on issues of analyzing and assessing the borrower's solvency taking into account the methodology for assessing borrowers' solvency implemented in the MFO, on working with problem loans, as well as on other lending issues, including communication with clients, and on other requirements of the legislation of the Kyrgyz Republic and the principles of responsible lending.

If a guarantee (suretyship) serves as the sole collateral, the MFO must conduct a thorough analysis of the financial condition of the guarantor (surety) in order to determine the ability to fulfill the guarantee obligation, including the responsibility and solvency of the guarantor/surety.

MFOS, taking into account the risks on the loan, may not conduct an analysis of the solvency of the guarantor or surety if the suretyship is additional collateral for the loan.";

• To supplement the Regulation with clause 13-1 as follows:

"13-1. The credit policy of the MFO must contain methodologies for assessing borrowers' solvency. For these purposes, the MFO may, at its discretion, develop an internal credit rating system or use external sources of credit ratings. The internal risk rating system corresponds to the nature, size and complexity of the types of activities carried out by the MFO.

If the MFO has an internal credit rating system, this internal rating system must contain a comprehensive assessment of the borrower's financial condition as the main indicator of its future solvency and reflect the disclosure of data on borrowers.

Credit rating is the main indicator of loan quality. A credit rating must be assigned at the initial stage of approval of loan issuance, and may also be assigned during subsequent monitoring of the loan, its extension or change in the terms of the loan agreement or restructuring of the loan. The developed credit ratings determining the solvency of borrowers are established in the form of alphabetic, numeric or alphanumeric symbols that indicate the risks when issuing loans by the MFO. The MFO assigns a credit rating taking into account certain characteristics related to the borrower and the loan itself.

Approaches to analyzing borrowers' solvency when determining the credit rating may be based on various methods:

• quantitative – using appropriate indicators that allow determining the credit rating (coefficient method, rating models, scoring models);

• forecast, which relies on statistics from past years and is aimed at modeling the life of the borrower's loan and the probability of its insolvency;

• qualitative, which uses a system of diverse qualitative indicators.

For the purposes of conducting an effective assessment of the borrower's solvency when issuing a loan, the MFO may, at its discretion, also develop its own model, which consists of approaches most meeting the requirements for assessing borrowers and loans provided by the MFO. The following may be taken as a basis:

• the coefficient method, allowing a comprehensive assessment of the financial condition of borrowers and the quality of loans;

• the rating model – automated assessment by the coefficient method by calculating an integral indicator, which is the most convenient and simple to use;

• the scoring model – assessment of creditworthiness in points by assigning the borrower to a certain group;

• a model based on assessing future cash flows against the borrower's obligations;

• a model using statistics from past years, etc.

The internal credit rating system may be used to make a decision on issuing a loan; determine the cost of the loan; assist the MFO in monitoring credit risk; create a reserve to cover potential losses and damages; manage received and necessary information; distribute loans according to the credit rating scale, as well as determine the previous position and possible future movement of loans along the credit rating scale; assess general risks and trends in the loan portfolio.

The use of an internal credit rating system may allow forming a database with historical data that will evaluate certain types of loans by credit rating indicators over time, which may allow the MFO to assess its credit risk more accurately.

If the MFO has an internal credit rating system, this internal rating system must contain the distribution of powers for:

• assigning the initial rating to the borrower (upon receipt of a loan application);

• analyzing the assigned rating (when analyzing all documents on the client's activities, its solvency and collateral);

• final approval of loan issuance.

The decision on issuing loans according to the credit rating is made for loans to individuals and individual entrepreneurs in the amount of up to 100,000 (one hundred thousand) soms.

Subsequently, for loans issued to individuals and individual entrepreneurs in the amount of up to 100,000 (one hundred thousand) soms, it is necessary to periodically conduct payment monitoring, with the monitoring frequency according to this Regulation, as well as analysis of assigned credit ratings in order to monitor the fulfillment of credit obligations and develop recommendations on changing the rating, if necessary.

In addition, the MFO is obliged to constantly maintain a database and a log of loans for which non-standard decisions were made upon issuance (individual interest rates, collateral structure, and others).";

• To supplement the Regulation with clause 14-1 as follows:

"14-1. The right to issue loans may be divided into several levels of officials, and these persons bear responsibility in accordance with the legislation of the Kyrgyz Republic for violations committed by them in lending.";

• To restate clause 16 as follows:

"16. The executive body of an MFO that has the right to issue loans in foreign currency bears responsibility for the implementation of the MFO's credit policy and is obliged to develop and implement in the MFO's activities policies, regulations and procedures for identifying, measuring, monitoring and controlling credit risk, including credit risk caused by currency risk. The executive body of an MFO that has an additional license (indication in the license) to carry out all or some of the operations in foreign currency must ensure a comprehensive system for continuous identification, assessment, monitoring and control of credit risk caused by currency risk, as well as ensure a reporting system for controlling, analyzing and monitoring credit risk caused by currency risk.";

• To restate subclause 2-1 of clause 20 as follows:

"2-1) request from one or several credit bureaus information about the borrower (credit report) and, at the discretion of the MFO, about persons related to the borrower in accordance with the requirements of the legislation of the Kyrgyz Republic;";

• In clause 22:

subclause 1 after the words "receive in hand" shall be supplemented with the words "or in electronic form";

in the fifth paragraph, the words "on the list and amount of all payments" shall be replaced with the words "on the list of expenses (payments)";

the clause shall be supplemented with subclause 3 as follows:

"3) use the services of the MFO through remote/distance customer service using an electronic signature.";

• To restate clause 28 as follows:

"28. After analyzing the loan application, the MFO must draw up a conclusion indicating the expediency of issuing a loan to the borrower, submitted for consideration to the Credit Committee/authorized official together with the client's loan application and other necessary documents provided by the client at the request of the MFO, in accordance with the requirements of this Regulation and the internal documents of the MFO.

If the list of documents set out in Annex 1 to this Regulation was received by the MFO through remote/distance customer service using an electronic signature, then in such case this decision may be sent through remote/distance customer service.

In case of refusal to issue a loan, the conclusion must indicate the reasons, and the MFO must notify the borrower of the decision made in accordance with the procedure established in the MFO.

If the MFO has an internal credit rating system, the result issued by the MFO's internal credit rating and containing the rating value on the expediency/inexpediency of providing a loan to the borrower may be considered as the corresponding conclusion.";

• To restate clause 29 as follows:

"29. The loan agreement concluded between the MFO and the client, including in the form of an electronic document signed by means of an electronic signature that allows verifying its belonging to a party to the agreement, with all annexes thereto and other contracts/agreements, shall be drawn up in the state or official language (with the client being given the right to choose the language).

Each party concluding the agreement must receive an original copy of the loan agreement signed by all parties, or in the form of an electronic document signed by means of an electronic signature that allows verifying its belonging to a party to the agreement. The loan agreement must not contradict the legislation of the Kyrgyz Republic, as well as regulatory legal acts of the National Bank. The MFO must obtain from the client a receipt, signed in paper or electronic form, signed by means of an electronic signature, confirming that the client has received the original agreement or an electronic document signed by means of an electronic signature. A mark on the MFO's copy of the loan agreement that the client has received the original agreement is equated to such a receipt. The fact of the client's receipt of funds must be confirmed by the corresponding document.

The number of original copies of loan agreements must be not less than the number of parties concluding the agreement. In group lending, when one of the parties is a GSO, the number of original copies of the loan agreement for the GSO must be not less than the number of GSO participants who signed the agreement. The MFO must ensure the preservation of all original documents to the loan agreement in accordance with the legislation of the Kyrgyz Republic.

At the same time, loan agreements issued through a remote/distance service channel in the amounts established by regulatory legal acts of the National Bank may be signed by means of an electronic signature that allows verifying its belonging to a party to the agreement.";

• To supplement the Regulation with clause 33-1 as follows:

"33-1. If the interest rate on issued loans exceeds the maximum permissible interest calculated in accordance with the Law of the Kyrgyz Republic "On Restricting Usurious Activities in the Kyrgyz Republic", the MFO must ensure compliance with the requirements of the said Law, including:

• in case of non-fulfillment of obligations by the borrower to the creditor, seizure of the borrower's collateral property shall be carried out exclusively through judicial procedure;

• when determining the monetary and/or material obligations of the borrower to the creditor, the amount of the penalty (fines, interest) accrued for the entire period of the loan or credit must not exceed 20 percent of the amount of the loan issued.";

• To restate subclause 9 of clause 34 as follows:

"9) the client's right to early repayment of the loan in full or in part at any time without charging penalties (commissions and other fees), subject to prior written notification to the MFO 30 (thirty) calendar days before the day of such repayment. At the same time, this condition establishes the period after which (after sending the notification) the borrower may make early repayment of the loan. The notification may specify a different period for early repayment, provided that the notification is sent to the MFO not less than 30 (thirty) calendar days before the day of early repayment;";

• To restate the first paragraph of subclause 5 of clause 35 as follows:

"5) the right of each GSO participant to early repayment of the loan in its part, without any penalties, subject to notification to the MFO not less than

30 (thirty) calendar days before the day of such repayment. In case of early repayment of the loan by one of the GSO participants, the MFO may request the written consent of the GSO participants.";

• To supplement clause 35 with subclause 6 as follows:

"6) confirmation of receipt by GSO members of loan funds, including those received through a remote/distance service channel using an electronic signature.";

• In clause 36:

the first paragraph shall be restated as follows:

"36. The MFO must familiarize the client with the list of expenses (payments) of the client, which is drawn up in tabular form in accordance with Annex 3 to this Regulation, which is an integral part of the loan agreement and is signed by both parties, including in the form of an electronic document signed by means of an electronic signature that allows verifying its belonging to a party.";

the clause shall be supplemented with the sixth paragraph as follows:

"The amount of the payment made, insufficient to fully fulfill the loan obligation, shall first repay the principal amount of the debt, then the creditor's costs of obtaining performance, and in the remaining part – interest and penalty.";

• To restate clause 37 as follows:

"37. After concluding a loan agreement with the client, including in the form of an electronic document signed by means of an electronic signature that allows verifying its belonging to a party to the agreement, and after the client receives funds, the borrower must be given, in paper or electronic form, at least the following documents:

1) the loan agreement signed by the parties, with all documents attached thereto;

2) a payment schedule indicating dates and amounts of repayment, attached to the loan agreement or in the form of an electronic document signed by means of an electronic signature.";

• To supplement clause 38 with the second and third paragraphs as follows:

"Storage of the credit file on an electronic medium in the form of scanned versions of original documents that do not require signing by the parties and/or in the form of electronic documents signed by an electronic signature is permitted, provided that the MFO ensures information security of digital data, including with the use of access levels, compliance with backup copying, etc., in accordance with regulatory legal acts of the National Bank and the legislation of the Kyrgyz Republic.

For loans issued through a remote/distance service channel, the borrower's credit file may be maintained in electronic form in a database (on electronic media) for not less than the storage periods for documents on paper. At the same time, access to databases of electronic documents must be ensured in accordance with the legislation of the Kyrgyz Republic.";

• The first sentence of clause 39 after the words "including making an entry in the Journal" shall be supplemented with the words ", or an electronic document signed by means of an electronic signature";

• Subclause 2 of clause 41 shall be supplemented with the second paragraph as follows:

"Secondary sources are necessary to provide additional guarantees of loan repayment in case problems arise with loan repayment.";

• In clause 57-1, the words "upon the expiry of 15 days from the moment of sending the notification" shall be replaced with the words "upon the expiry of 15 calendar days from the day of sending the notification";

• To restate clause 59 as follows:

"59. If the MFO's actions on working with 'problem' loans have not led to a positive result, the MFO carries out the following measures:

• contacting guarantors and sureties;

• applying to court;

• other measures.";

• In Annex 1:

• To restate clause 12 as follows:

"12. Information on the income of the surety.

If a suretyship or guarantee is provided for loans the amount of which exceeds the maximum amount of a microcredit established by regulatory acts of the National Bank, information on the income of the surety, and also in the case where the suretyship is the main collateral for the loan, the borrower provides the following information on the income of the surety:

• written guarantee or suretyship indicating the corresponding loan agreement, the amount for which the guarantee is issued, the expiry date of the guarantee;

• decision of the relevant body of the guarantor on issuing the guarantee;

• consent of the spouse of the surety (if any) to issue the suretyship;

• constituent documents of the guarantor;

• financial statements of the guarantor for the last year (if the guarantee is the sole collateral);

• salary certificate for the last 3-12 months (the MFO has the right to independently determine the period for which the salary certificate must be submitted), or other documents confirming information on income (if the surety is an individual);

• analysis of the solvency of the guarantor or surety.";

2. To introduce the following amendments to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Minimum Requirements for Credit Risk Management in Credit Unions'" dated 23 December 2009 No. 50/7:

In the Regulation on Minimum Requirements for Credit Risk Management in Credit Unions, approved by the above-mentioned resolution:

• To supplement the Regulation with clause 5.2.5-1 as follows:

"5.2.5-1. If the interest rate on issued loans exceeds the maximum permissible interest calculated in accordance with the Law of the Kyrgyz Republic "On Restricting Usurious Activities in the Kyrgyz Republic", the credit union must ensure compliance with the requirements of the said Law, including:

• in case of non-fulfillment of obligations by the borrower to the creditor, seizure of the borrower's collateral property shall be carried out exclusively through judicial procedure;

• when determining the monetary and/or material obligations of the borrower to the creditor, the amount of the penalty (fines, interest) accrued for the entire period of the loan or credit must not exceed 20 percent of the amount of the loan issued.";

• The tenth paragraph of clause 5.2.6 shall be restated as follows:

«- the right of a member to early repayment of a loan in whole or in part at any time without the imposition of penalties (commissions and other charges), subject to prior written notification to the credit union 30 calendar (thirty) days before the day of such repayment. At the same time, the specified condition establishes the period after which (following the sending of the notification) the member may make early repayment of the loan. The notification may specify a different period for early repayment, provided the notification is sent to the credit union not less than 30 calendar (thirty) days before the day of early repayment;»;

• in clause 5.2.7.:

in the first paragraph, the word "rights," shall be excluded;

supplement with a fifth paragraph of the following content:

"The amount of a payment made that is insufficient to fully discharge the loan obligation shall repay first the principal amount of the debt, then the creditor's costs of obtaining performance, and in the remaining part, interest and penalty.";

• in clause 7.3.4., the words "upon expiry of 15 days from the moment of sending the notification" shall be replaced by the words "upon expiry of 15 calendar days from the day of sending the notification".

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