RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of April 23, 2014 No. 16/3

About approval "Regulations on classification of assets and the corresponding allocations to reserve on covering of potential losses and losses in the credit unions performing transactions according to the Islamic principles of banking and financing"

According to articles 7 and 43 of the Law of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic", the Board of National Bank of the Kyrgyz Republic decides:

1. Approve "The regulations on classification of assets and the corresponding allocations to reserve on covering of potential losses and losses in the credit unions performing transactions according to the Islamic principles of banking and financing" (are applied).

2. This resolution becomes effective after thirty days after official publication.

3. To legal management:

- publish this resolution on the official site of National Bank of the Kyrgyz Republic;

- after official publication to send this resolution to the Ministry of Justice of the Kyrgyz Republic for entering into the State register of regulatory legal acts of the Kyrgyz Republic.

4. To management of methodology of supervision and licensing to bring this resolution to the attention of Association of credit unions and cooperatives of Kyrgyzstan, National association of credit unions and specialized financial credit institute JSC Finance Company of Credit Unions.

5. To impose control of execution of this resolution on the vice-chairman of National Bank of the Kyrgyz Republic Chokoyev Z. L.

Appendix

to the Resolution of Board of National Bank of the Kyrgyz Republic of April 23, 2014 No. 16/3

Regulations on classification of assets and the corresponding allocations to reserve on covering of potential losses and losses in the credit unions performing transactions according to the Islamic principles of banking and financing

Chapter 1. General provisions

1. This Provision extends to the credit unions having the license of National Bank of the Kyrgyz Republic (further - National Bank) on carrying out transactions according to the Islamic principles of banking and financing (further - credit unions).

2. This Provision establishes the minimum requirements for credit unions on classification of the assets specified in Item 8 of this provision and also by creation of the corresponding reserves on covering of potential losses and losses (further - RPPU) for the purpose of regulation and supervision by National Bank.

3. For timely covering of potential losses and losses, and also for the purpose of determination of real financial condition and overall performance, credit unions shall carry out quality evaluation of assets on permanent basis (to classify) and create RPPU at the level sufficient for covering of possible losses and losses on assets.

4. RPPU is created in case of asset impairment, that is in case of decrease in their cost owing to non-execution or improper execution by the client/partner/supplier (further - the client) credit union of the obligations on asset provided by terms of the contract or existence of real threat of non-execution (improper execution) of these obligations.

The size of reduction in cost of asset is determined as difference between asset carrying amount (remaining balance of debt on asset) at the time of quality evaluation of asset and its actual (current) cost at the time of assessment made according to the this provision regulations.

For implementation of classification of assets the credit union shall trace constantly financial condition of the client and the course of accomplishment of terms of the contract. Taking into account features of the principles of Islamic banking and financing periodic provision by the client of the financial and other reporting allowing credit union to estimate accomplishment by the client of terms of the contract shall be provided in each agreement on financing.

Chapter 2. The basic concepts applicable in this provision

5. The credit risk is risk of losses as a result of reduction in cost of asset of credit union owing to non-execution or improper execution by the client of the obligations in accordance with the terms of the agreement.

6. Ceased to be valid according to the Resolution of Board of National Bank of the Kyrgyz Republic of 30.05.2018 No. 2018-P-12/20-2-(NFKU)

Chapter 3. General requirements on classification of assets

7. Classification of assets is based on regular quality evaluation of assets depending on degree of credit risk for determination of adequate RPPU.

When carrying out classification of assets it is necessary to be guided by the determinations and signs of categories of classification established by this Provision, but without being limited to them. Set of two and more signs determines category of classification if other is not established by this Provision.

Studying of quality characteristics is necessary for providing the complex analysis of quality of asset.

When carrying out classification of assets the signs on mortgage providing or guarantees (guarantee) determined by this Provision shall belong only to assets on which, according to policy of financing of the credit union / жилищно-сберегательной the credit company, needs availability of mortgage providing or guarantee (guarantee) as providing. Availability and quality of mortgage providing or guarantee (guarantee) as incentive for accomplishment of obligations and risk management tool of irrevocability of asset, being additional high-quality criterion of classification, allows to provide more reliable and complete assessment of asset.

8. The assets bearing in themselves credit risk belong to assets of credit union which are subject to classification including:

- assets, the credit risk bearing in itself;

- financial leasing according to the Islamic principles of banking and financing;

- the other property of credit union accepted in repayment of asset and/or as compensation of losses of credit union;

- investments into the securities issued according to the Islamic principles of banking and financing and/or in the capital of the company (in the form of shares, financial equity participation of the invested company);

- any other assets which are not listed above, but which bear in themselves risk of non-return.

9. Classification of assets is made on the basis of the preliminary analysis taking into account:

1) quantity characteristics of condition of asset, including:

- availability of delay of planned payments on the main amount and/or the markup/income;

- cases of incomplete (partial) repayment of planned payments on the main amount and/or the markup/income;

2) quality characteristics of condition of asset, including:

- solvency of the client, i.e. the client's capability timely to settle planned payments, both according to the markup/income, and on the main amount;

- condition and cost of pledge;

- availability of other sources of the income (income of family members, income from other types of activity, etc.);

- observance by the client of terms of the contract on any other asset if at the client the outstanding debt according to other obligations to other financial credit institutions is had. With respect thereto it is necessary to trace availability at the client of other assets and in other financial credit institutions at the time of consideration of the request, using information obtained from the client through credit and information bureau, or other available method within the legislation of the Kyrgyz Republic. Further, in the course of monitoring of asset on which the term of the agreement of financing did not expire it is necessary to consider information obtained from the client on availability at it other assets bearing in itself credit risk and received in other financial credit institutions and also information on observance of terms of the contract by it on these assets. By the agreement of financing the obligation of provision by the client at least, than once shall be provided in half a year, the specified information for the period of validity. At the same time all financial credit institutions shall provide within 3 working days at the request of the client information on receipt of the asset bearing in itself credit risk and on observance by the client of terms of the contract for its provision in other financial credit institution.

When carrying out classification of assets it is necessary to be guided by common sense and judgment for reference of asset to this or that category of classification, observing but not being limited to requirements of this provision.

10. If the classified asset is intermediate between two categories of classification of assets, then such asset should be referred to lower category.

11. When carrying out classification of several assets provided to the same client, classification by its asset with the greatest debt is applied to all its assets or other obligations to credit union if classification of this asset is the worst.

In case of availability at the client (physical person or legal entity) of several assets or other obligations in one credit union the last has the right not to apply the worst category of classification to all assets or other obligations if the worst category is appropriated to asset or other obligation of the client which financial condition worsened or worsens in view of the entered emergency states and/or emergency situations because of epidemics/pandemics and other force majeur circumstances (force majeure circumstances) and the related restrictions.

In this case the credit union can apply category of classification to each asset separately according to characteristic signs of category.

12. The contractual relations between credit union and its clients reflected in the relevant agreements shall be performed based on the legislation of the Kyrgyz Republic and not violate the requirement of standards of Sharia.

13. The credit union has the right to enter the additional quality criterions of assets which are not violating requirements of this provision.

Chapter 4. Classification of assets

14. For the purpose of classification of assets and creation of RPPU the following categories of assets are established:

1) standard assets;

2) assets under observation;

3) substandard assets;

4) doubtful assets;

5) losses

15. Assets are considered standard if there is availability of the following signs:

- planned payments according to the markup/income and/or the main amount are not overdue or overdue for the term of no more than 30 days inclusive;

- satisfactory financial condition of the client;

- the company of the client is stable, well capitalized;

- terms of the contract with credit union are timely satisfied;

- availability of ensuring agreement performance about financing by liquid pledge on all amount defined by the agreement;

- positive credit history of the client (i.e. the client did not allow delays in accomplishment of the obligations provided by the contract with credit union).

16. Under observation assets on which there are certain negative tendencies from which follows that if on similar assets adequate measures, then perhaps further deterioration in their quality are not taken are considered as assets.

The credit union shall classify asset as asset under observation in the presence of one of the following signs:

- emergence of tendencies of deterioration in financial condition of the client;

- change of market conditions which can influence accomplishment by the client of terms of the contract, concluded with credit union;

- violation by the client of the schedule of accomplishment of terms of the contract for a period of 31 up to 60 days;

- violation of the schedule of planned payments for a period of 31 up to 60 days inclusive;

- violation of delivery dates of goods, according to the agreement, for a period of 31 up to 60 days inclusive;

- violation of the schedule of project implementation, receipt of financial flows for a period of 31 up to 60 days inclusive;

- violation of completion dates of agreements by the third parties for a period of 31 up to 60 days;

- impossibility for credit union to carry out monitoring of pledge because of insufficient documentation or because of the absence of experts in its assessment;

- the planned reduction of liquidity of pledge (reduction of prices, fall of currency rate);

- availability of restructuring of asset;

- availability at the borrower - physical person, including the individual entrepreneur without formation of legal entity of overdue debt up to 30 days inclusive on the main amount and/or percent on any other credit, except for the credits issued according to target state programs of the Government of the Kyrgyz Republic in this credit union and/or other financial credit institution;

- availability of outstanding overdue debt up to 60 days inclusive the spouse(s), parents and children of physical person, including the individual entrepreneur, except for the assets issued to them according to target state programs of the Government of the Kyrgyz Republic provided that source of repayment of assets (debt) of the borrower to this credit union and assets (debt) of the above-stated persons same. At the same time the same source of repayment of assets is understood as the comprehensive income of the above-stated persons considered by financial credit institution in case of decision making about issue of asset including entrepreneurial income.

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

17. Assets on which the certain negative tendencies which are rather making it clear that to credit union are observed are considered as substandard assets it is necessary to deform RPPU and/or to take the adequate measures directed to improvement of quality of asset.

The credit union shall classify asset as substandard asset in the presence of one of the following signs:

- violation of the schedule of accomplishment of terms of the contract by the client for a period of 61 up to 90 days;

- violation of the schedule of planned payments for a period of 61 up to 90 days;

- violation of delivery dates of goods, according to the agreement, for a period of 61 up to 90 days;

- violation of the schedule of project implementation, receipt of financial flows for a period of 61 up to 90 days;

- violation of completion dates of agreements by the third parties for a period of 61 up to 90 days;

- availability of the reliable negative information about financial condition of the client;

- pledge quality degradation is observed, or pledge depreciates;

- availability of repeated restructuring of asset;

- failure to carry out by the client - physical person or the individual entrepreneur of terms of the contract more than 30 days inclusive on any other asset bearing in itself credit risk, except for the assets financed according to target state programs of the Government of the Kyrgyz Republic in this credit union and/or other financial credit institution.

Note: the sign specified in this paragraph does not extend to overdrafts within salary projects;

- failure to carry out by the spouse (oh), parents and the client's children - physical person or the individual entrepreneur of terms of the contract more than 60 days inclusive on assets, before this credit union and/or other financial credit institutions, except for the assets financed according to target state programs of the Government of the Kyrgyz Republic provided that source of repayment of all above-stated assets same. At the same time the same source of repayment of assets is understood as the comprehensive income of the above-stated persons considered by financial credit institution in case of decision making about issue of asset including entrepreneurial income.

Note: the sign specified in this paragraph does not extend to overdrafts within salary projects.

18. To doubtful assets accurately certain shortcomings (shortcoming) or weaknesses which bear in themselves risk of non-execution by the client of the obligations provided by the agreement in communication with what the possibility of debt repayment becomes doubtful and improbable are characteristic. If defects will not be eliminated, there is probability that the credit union will suffer considerable losses.

The credit union shall classify asset as doubtful asset in the presence of one of the following signs:

- violation of the schedule of accomplishment of terms of the contract by the client for a period of 91 up to 180 days;

- violation of the schedule of planned payments for a period of 91 up to 180 days;

- violation of delivery dates of goods, according to the agreement for a period of 91 up to 180 days;

- violation of the schedule of project implementation, receipt of financial flows for a period of 91 up to 180 days;

- violation of completion dates of agreements by the third parties for a period of 91 up to 180 days;

- availability of the reliable negative information about financial condition of the client;

- not provided business plan approved with credit union, unprofitable activities of the client;

- lack of information on the project progress and execution of the business plan according to the representation terms stipulated in the contract between credit union and the client;

- impossibility of implementation of proper monitoring of project implementation, including with departure on subjects to financing;

- serious deteriorations in financial condition of the client (or the client is on the verge of bankruptcy);

- paragraph thirteenth ceased to be valid.

- considerable deterioration (or actual absence) mortgage and/or warranty providing and not provision by the client or impossibility of provision of collateral mortgage or warranty security.

18-1. Repeatedly restructured asset shall be classified as "doubtful", in case:

- violations of the schedule of accomplishment of terms of the contract by the client more than for 30 days after repeated restructuring;

- violations of the schedule of planned payments more than for 30 days after repeated restructuring;

- violations of delivery dates of goods, according to the agreement more than for 30 days after repeated restructuring;

- violations of the schedule of project implementation, financial flows more than for 30 days after repeated restructuring;

- violations of completion dates of contracts by the third parties more than for 30 days after repeated restructuring.

19. The credit union shall classify asset as loss in the presence of one of the following signs:

- violation of the schedule of accomplishment of terms of the contract by the client for the term of 180 days and more;

- violation of the schedule of planned payments for the term of 180 days and more;

- violation of delivery dates of goods, according to the contract for term of 180 days and more;

- violation of the schedule of project implementation, financial flows for the term of 180 days and more;

- violation of completion dates of contracts by the third parties for the term of 180 days and more;

- if the project in which the credit union participates is not realized according to the agreement;

- paragraph of the eighth ceased to be valid.

- lack of mortgage providing or impossibility of realization of pledge due to the lack of the market;

- inability, refusal of the client to satisfy terms of the contract with credit union;

- unwillingness of the client to cooperate with credit union, or absence of the client;

- bankruptcy of the client.

20. After reference of asset to category of the assets classified as losses, the credit union shall take all measures for ensuring return of the main amount of asset and markups/income for it according to the legislation of the Kyrgyz Republic, including the appeal to judicial authorities. If all taken measures did not provide return of this asset, it is considered vnesistemno at least five more years. In case of return of asset, the procedure for repayment of outstanding amount is performed according to the legislation of the Kyrgyz Republic.

21. Classification of the restructured assets of credit unions

The restructured assets are assets on which the credit union provides to the client of preference (ease) in individual procedure by change of terms of the contract (with the obligatory conclusion of the new agreement or the supplementary agreement to the agreement of financing) for the purpose of ensuring return of debt of the client. At the same time change of markup and/or term of financing before repayment of the amount of the main duty / markup lead to change of the expected future cash flows.

Restructuring represents:

- change of conditions of the current agreement of financing in connection with deterioration in financial condition of the client by provision of more favorable conditions to the client on financing repayment, for ensuring return of debt of the client;

- change of terms of the contract by partial write-off of the main amount of financing.

Change of initial terms of the contract on financing, not connected with deterioration in financial condition of the client, are not restructuring of asset (for example, currency transfer of asset from foreign in national and others).

21-1. If not classified asset on which restructuring was made and on which fully or partially there were overdue payments more than for 30 days, at least 1 time within the last 3 months that this circumstance can be indicator of emergence of financial straits at the client on the restructured asset.

21-2. Restructuring can be applied in the relation of the assets both classified, and not classified.

21-3. The classified restructured asset cannot belong to not classified assets before accomplishment of conditions of Item 21-5 of the Provision.

21-4. Introduction of amendments to the agreement of financing when the client experiences financial difficulties, by partial debt repayment on financing for the realization account of pledged property on this financing shall be considered as financing restructuring.

21-5. In case repayment of all overdue debt, the assets classified as "doubtful" or "losses", are transferred to category "substandard", at the same time the credit union can transfer the classified "substandard" asset to category of not classified assets when all following conditions are satisfied:

- lack of the overdue amounts;

- timely complete payment of the last three fees according to the schedule;

- the client has no circumstances which can lead to non-compliance with conditions of restructuring.

Chapter 6. Classification of other property of credit union

22. After initial recognition in balance the other property of credit union accepted in repayment of asset and/or as compensation of losses of credit union, is classified directly as substandard.

23. The other property of credit union accepted in repayment of asset and/or as compensation of losses of credit union is classified as loss if it is not sold after the following terms:

1) one year - for personal estate;

2) three years from the moment of emergence of the property right - for real estate, except for lands of agricultural purpose on which terms are established by the legislation of the Kyrgyz Republic.

Chapter 7. Reserve on covering of potential losses and losses

24. Credit unions shall support RPPU at the level sufficient for covering of possible losses on assets. The amount of reserve is determined by results of periodic quality evaluations of asset of credit union.

25. RPPU is considered and reflected on balance of credit union in the separate contra asset account to the corresponding account. For the purpose of determination of real financial condition of the RPPU credit union it is created for the expenditure account, irrespective of the size of the gained income, in the amount sufficient for maintenance of reserve at the level corresponding to the current quality evaluation of asset of credit union.

26. RPPU is subdivided into two parts - general and special reserves. General reserves are created on assets under observation, special reserves - on substandard assets, doubtful assets, losses of credit union.

27. The National Bank establishes the following amount of contributions to RPPU on the assets placed according to the Islamic principles of banking and financing:

1) general reserves:

- standard - 0-2%;

- assets under observation - 5%;

2) special reserves:

- substandard - 25%;

- doubtful - 50%;

- losses - 100%.

28. According to classification of assets calculation of the RPPU required size for each asset bearing in itself credit risk according to the established regulations of assignments is made. Required allocations to reserve on each credit are summed up and the RPPU final size by the end of the reporting period is determined. For determination of adequacy of RPPU the calculated size of reserve is compared to the size of the reserve determined in case of the previous classification. In case the RPPU size on balance is less, than its final size, the credit union needs to make additional contributions to RPPU to bring reserve into accord with the calculated size by the end of the reporting period. Additional contributions to RPPU are not made if the amount of actually created reserve on balance is more or is equal to estimated amount of RPPU.

29. RPPU amount on balance which exceeds the final required size by the end of the reporting period (month) can be directed to reduction of expenses on creation of RPPU.

30. The credit union shall make monthly check of adequacy of RPPU to quality of assets. For the purpose of non-admission of conflict of interest, assessment of adequacy of RPPU shall be performed by person (department, committee) which is not connected with issue of asset.

31. The credit union has the right to choose more conservative approach to assessment of assets. For this purpose the credit union can develop the internal procedures according to adequacy of credit risks which are not violating requirements of this provision.

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