Appendix to   

Resolution No. 51/6 of   

the National Bank of the  

Kyrgyz Republic Board   

dated December 28, 2009 No.51/6  

  

  

  

  

Regulation “On Assets Classification and Relevant Deductions   

to Potential Losses Reserve when Conducting Transactions   

in accordance with the Principles of Islamic Banking and Finance”  

(Amendments and addenda are approved by Resolutions of the NBKR Board No.39/8 dated October 23, 2013, No.62/3 dated October 14, 2015, No.65/1 dated November 2, 2015, No.78/23 dated December 23, 2015, No.19/6 dated April 27, 2016, No.25/2 dated June 15, 2016, No.6/4 dated February 22, 2017, No.2017-П-12/25-1-(НПА) dated June 15, 2017,   No.2020-П-12/15-15-(RLA) dated March 24, 2020, No.2020-П-33/75-5-(NBFI) dated December 28, 2020, No.2021-П-12/36-3-(RLA) dated June 30, 2021)   

  

1. General Provisions  

  

1. This Regulation applies to the banks operating in accordance with the Principles of Islamic Banking and Finance, including banks that have an “Islamic Window” (hereinafter referred to as the bank).  

(As amended by Resolution No.2020-П-33/75-5-(NBFI) of the National Bank of the KR board dated December 28, 2020)  

2. The purpose of this Regulation is to establish minimum requirements for classification of assets and off-balance liabilities placed/accepted in accordance with the Principles of Islamic banking and finance (hereinafter referred to as the assets) and for creation of corresponding potential losses reserves (hereinafter referred to as the PLR) for regulation and supervision.  

3. For timely cover potential losses and for determination of a real financial position and work effectiveness the bank shall continuously conduct assessment of asset quality (classify assets) and create PLR at the level sufficient for provision of potential losses on assets.   

4. Assets which are requirements for individuals and legal entities, including banks, except for requirements for the Government of the Kyrgyz Republic and National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank), shall be classified.   

5. The PLR shall be created in case of asset impairment, i.e. reduction of asset cost in response to non-fulfillment or improper fulfillment by the client/partner/supplier (hereinafter referred to as the client) of the bank of liabilities on assets stipulated by contract terms or in case of a real threat of non-fulfillment (improper fulfillment) of such liabilities.  

The asset impairment value shall be calculated as the difference between the asset balance value (outstanding balance on asset) and its real (current) value as of the moment of assessment conducted in accordance with this Regulation.  

6. The basis for adequate assessment of the PLR shall be the asset classification system developed by the bank in accordance with this Regulation. The required value of deductions to the PLR shall be calculated from the sum of bank contributions consisting of both own and attracted funds (to be returned to the client in accordance with provisions of a contract signed by the bank and client).   

The bank activity which fails to provide an adequate level of the PLR shall be considered by the National Bank as an unreliable and unsound banking practice.  

7. Asset classification is indicative of the degree of the risk of losses which varies depending on a number of factors.  

8. The Bank shall regularly perform classification of its assets, including:  

- assets with the risk of loss in the result of non-fulfillment or improper fulfillment of contract terms by the client;  

- investment to securities issued in accordance with the Principle of Islamic banking and finance and/or company capital (in form of shares, financial participation in the capital of the company invested in);  

- interbank placements;  

- off-balance liabilities (letters of credit, guarantees, etc.);  

- other bank property accepted for asset repayment and/or as a compensation for bank losses;  

- any other assets not listed above but with a risk of default.  

Taking into account the specificity of certain types of assets and off-balance liabilities placed in accordance with the Principles of Islamic banking and finance, this Regulation determines specific requirements for classification of interbank placements, restructured assets, investment to securities issued in accordance with the Principles of Islamic banking and finance and/or company capital, other bank property and off-balance liabilities.   

9. For asset classification the bank shall analyze the data on cash flow and assess clients capability of obtaining a sufficient amount of funds for execution of contract terms. Taking into account the specificity of the Principles of Islamic banking and finance the contract shall stipulate regular submission by the client of financial and other statements which allow the bank to assess execution of contract terms by the client.   

At the same time lack of reliable financial information (for example, a balance sheet and income statement of clients certified by external auditor) and its proper analysis is a serious drawback. In accordance with the law of the Kyrgyz Republic the responsibility for completeness and reliability of statements and information submitted to the bank is borne by the client. Assuming the risks related to contract conclusion the bank shall verify reliability of submitted statements both before asset provision and afterwards until the bank funds are fully repaid.  

  

2. Main Terms Used in this Regulation   

  

10. Credit Risk is a risk of losses in the result of bank asset impairment in response to non-fulfillment or improper fulfillment by the client of its liabilities stated in the contract terms.  

11. Overdue Assets are bank assets on which:  

- the client failed to adhere to the contract terms execution schedule for a period of 30 days and over;  

- the schedule of regular payments is violated for a period of 30 days and over;   

- the terms of goods supply stipulated by the contract are violated for a period of 30 days and over;  

- the schedule of project implementation and financial flows is violated for a period of 30 days and over;   

- contract execution terms are violated by third parties for a period of 30 days and over.   

12. (Became invalid in accordance with Resolution No.6/4 of the National Bank of the Kyrgyz Republic Board dated February 22, 2017)  

  

13. Investments of the bank in securities and/or capital - investments of the bank in securities issued under the Principles of Islamic Banking and Finance, and/or the acquisition of shares or financial investment in the capital of companies whose purpose and activities comply with the Shariah Standards. 

Investments of the banks funds in the working capital of other companies and participation in joint projects are considered the credit risk assets. 

Non-market investments in securities are the investments in securities that are not quoted on the securities market, or the market for these securities is not developed, efficient, transparent and does not allow determining the fair value of these securities. At the same time, securities transactions may be of an episodic nature, and there is also no extensive, reliable and easily accessible information about a security for all persons. 

All other investments in securities are marketable.  

(As amended by Resolution No.2021-П-12/36-3-(RLA) of the National Bank Board dated June 30, 2021)  

  

3. General Requirements for Asset Classification  

  

14. Asset classification is performed on the basis of analysis of financial position of the bank client (hereinafter referred to as the client), collateral quality, client type on property form, industry, availability and reliability of guarantors, assessment of execution of previously assumed liabilities on bank assets, prospects of further development of clients business, and other factors.  

15. When performing asset classification one shall be guided by common sense and judgment to assign an asset to a certain classification category adhering to but not limited to the provision stipulated by this Regulation.  

16. To avoid various interpretations of definitions of classification categories quantitative and qualitative asset characteristics are introduced. A combination of two or more characteristics determines the classification category unless otherwise is stated in this Regulation.  

17. (Became null and void in accordance with Resolution No.2021-П-12/36-3-(RLA) of the National Bank of the KR Board dated June 30, 2021) 

17-1. When performing classification of assets of a bank group provided to the same client or a group of related clients, classification of such assets performed by each participant of the bank group shall be taken into account and such assets shall be classified based on the lowest category of classification performed by each participant of the bank group on such assets.  

17-2. When performing classification of assets the bank should take into account adherence by the client to contract terms on any other assets with a credit risk in case the client has an outstanding debt to other financial organizations. In this regard it is necessary to monitor other assets with a credit risk owned by the client or other financial organizations as of the moment of application consideration by using information received from the client through a credit-information bureau or in any other way in accordance with the law of the Kyrgyz Republic. Hereafter during the process of asset monitoring information received from the client on assets with a credit risk owned by it obtained from other financial organizations and information on adherence by the client to contract terms on such assets shall be taken into account. The contract of finance shall stipulate a liability of submission by the client of the stated information not less than once in six months during the period of contract validity. All financial organizations shall provide on request of the client and not later than on the next business day the information on obtaining the asset with a credit risk and on adherence by the client to contract terms for its submission to other financial organization.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2017 No.2017-П-12/25-1-(НПА))  

17-3. When analyzing secondary sources of assets repayment it should be taken into account that this usually entails a delay in payments due to the difficulty in determining the collateral sales cost, with legal charges and delays. These factors usually lead to the fact that the final debt payment received from a secondary source does not meet expectations.  

(As amended by Resolution No.2021-П-12/36-3-(RLA) of the National Bank Board dated June 30, 2021) 

17-4. If a bank relies entirely on a person acting as a surety provider or guarantor as a secondary source of repayment, then the bank should have full information about the financial position of this person in order to assess his ability to repay the debt if necessary. If the specified person has become the only source of debt repayment, the classification should take into account not only his solvency, but also the desire to repay the asset guaranteed by him, which should be drawn up in the appropriate document. If the information about the guarantor is unreliable or not available at all, then such a guarantee should not be taken into account when classifying the asset.  

(As amended by Resolution No.2021-П-12/36-3-(RLA) of the National Bank Board dated June 30, 2021)  

17-5. A significant deviation from the original source of repayment is a sufficient basis for classification, as is non-specific repayment terms or a past due asset. However, not all past due assets can be classified. An asset may be past due, but if at the same time it is backed by cash or government securities collateralized in a bank that has not yet been redeemed, then such an asset may be recognized as unclassified.  

(As amended by Resolution No.2021-П-12/36-3-(RLA) of the National Bank Board dated June 30, 2021)  

17-6. The written intent and ability of a customer to fulfill his obligations under the contract is the primary criterion for assessing the risk of an asset. This implies that the customer should have income or liquid assets sufficient to reduce or repay the debt to the bank, as agreed, within a reasonable and predictable timeframe.  

(As amended by Resolution No.2021-П-12/36-3-(RLA) of the National Bank Board dated June 30, 2021)  

18. Contractual relations between the bank and its clients reflected in corresponding contracts shall be carried out on the basis of the law of the Kyrgyz Republic and comply with the requirements of the Sharia.  

19. The requirements of this Regulation stipulate a minimum list of criteria necessary for asset classification. The National Bank and the bank itself shall have the right to introduce additional criteria of asset quality assessment on the basis of the requirements of this Regulation.  

  

4. Asset Classification   

  

20. For asset classification and PLR creation the following categories are established:  

Unclassified assets: 1) normal assets,  

2) satisfactory assets,  

3) assets under supervision   

Classified assets: 4) substandard assets,  

5) doubtful assets,  

6) assets classified as losses.  

  

§1. Unclassified Assets.  

  

21. Normal assets are assets which are provided at least 120% from the asset amount with collateral (in form of possessory pledge) consisting of funds placed by an individual or legal entity on a separate account opened in this bank to keep money. A clients settlement account and correspondent account of the bank may not be used as collateral.   

At the same time the following conditions shall be met:  

1) an asset provision contract and collateral contract shall stipulate that this money is the security for the funds provided by the bank and the bank shall have the right to collect it without notice in case the client fails to fulfill its liabilities;   

2) the collateral contract shall provide prevention of further repledge of these cash assets;  

3) the bank shall have corresponding procedures and perform internal control which guarantee proper execution of all procedures related to collateral registration and safety of funds attracted based on the Principles of Islamic banking and finance till the term stated in the contract expires;  

4) funds placed on a separate account and serving as asset financing shall be in the national currency of the Kyrgyz Republic or in the currency freely convertible to Kyrgyz soms on the basis of common and reliable currency quotations. If funds attracted based on the Principles of Islamic banking and finance are nominated in the same currency the asset is nominated, they shall provide the asset not less than 100%, and funds attracted based on the Principles of Islamic banking and finance in the currency different from the asset currency  not less than 120% in soms;   

5) if funds provided as asset security are provided in the currency different from the asset currency, weekly reassessment of funds attracted based on the Principles of Islamic banking and finance is required;   

6) if in the result of reassessment the collateral cost reduced the bank shall immediately require to increase the collateral value in accordance with the requirements of this Regulation and ensure fulfillment of this requirement within 10 business days;  

7) If the requirements specified in sub-paragraphs 1-6 are not met, then such an asset will not be considered fully secured and it must be transferred to another classification category. 

Banks may classify credit risk assets in the national currency as “normal assets” if they meet the requirements specified in Paragraph 22 of this Regulation. 

Banks may classify newly issued credit risk assets in USD as “normal assets”, if they meet the requirements specified in Paragraph 22 of this Regulation, with the formation of LLP in the amount of 0 to 2 percent, regardless of the structure income in accordance with the internal policy of the bank. At the same time, these requirements apply to preferred assets issued within the framework of cooperation between the Government of the Kyrgyz Republic and the Government of the Russian Federation (the Russian-Kyrgyz Development Fund - hereinafter referred to as the Development Fund), including assets at the expense of funds raised and guaranteed by the Development Fund from other foreign financial institutions, including previously issued assets, the repayment of which will be financed from the Development Fund and provides for a change in the original terms of the Financing Contract. 

At the expense of the Development Fund, the assets of banks cannot be restructured, as well as previously issued assets that are included in the category of “classified” assets cannot be financed. 

(As amended by Resolution No.2020-П-12/15-15(RLA) of the National Bank of the KR Board dated March 24, 2020)  

22. Satisfactory assets are the assets for which a customer fulfills the obligations under contract with the bank. 

Characteristic features, which demonstrate that the asset is satisfactory, are: 

- The financial condition of a customer is satisfactory; 

- The customers enterprise is stable, well capitalized; 

- Fulfillment of the contractual terms with the bank is carried out in a timely manner; 

- There is a collateral security, which can be levied and/or a guarantee/surety that meets the requirements of the Regulation 

- “On the Minimum Requirements for Credit Risk Management in the Process of Transactions Under the Principles of Islamic Banking and Finance”, approved by Resolution No.35/13 of the National Bank of the Kyrgyz Republic Board dated September 25, 2013, which can be used for the debt repayment; 

- The customer has a favourable credit history (there were no delays in fulfilling his obligations under the contract with the bank); 

- Changing the initial terms of the contract for a credit risk asset by converting the currency of this asset from a foreign currency into the national currency if this asset was not previously included in the category of “classified assets”.  

(As amended by the Resolutions of the National Bank of the KR Board No.19/6 dated April 27, 2016, No.2020-П-12/15-15(RLA) dated March 24, 2020) 

221. The Bank shall classify the asset in foreign currency (except currencies of member states of the Eurasian Economic Union (hereinafter referred to as the EAEU) at least as “satisfactory” in case the client who has been provided with this asset has the fraction of income (revenue) in foreign currency (except currencies of member states of the EAEU) in the total volume of its aggregate income (revenue) over 75 percent.   

Note: See the list of the EAEU member states here: http://www.eaeunion.org/.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2016 No. 25/2).  

22-2. The Bank may create LLP in the amount of 1 percent for financing in a foreign currency (except for financing issued at the expense of the Development Fund), regardless of the structure of the customers income, if the effective interest rate at the time of issuance of financing is 2 percentage points lower than the weighted average interest rate on the loans issued in a foreign currency published by the National Bank.   

Note: The information on the weighted average interest rate on credits in foreign currency is available from the official website of the National Bank: www.nbkr.kg.  

(As amended by the Resolutions of the National Bank of the Kr Board No.6/4 dated February 22, 2017, No.2017-П-12/25-1-(RLA) dated June 15, 2017,  No.2020-П-12/15-15(RLA) dated March 24, 2020)  

 

23. Assets under supervision are the assets that show certain negative trends, from which it follows that if appropriate measures are not taken for such assets, then their quality may deteriorate in the future. 

The characteristic features for an asset to be considered as the asset under supervision are: 

- Incomplete backing of an asset that otherwise has all the characteristics of a satisfactory asset; 

- The trends in the deterioration of the customers financial condition; 

- Changes in market conditions that may affect the fulfillment by a customer of the terms of the contract concluded with the bank; 

- Violation by a customer of the schedule for fulfilling the contractual terms for up to 30 days; 

- Violation of the schedule of planned payments for up to 30 days; 

- Violation of the goods delivery terms, according to the contract for up to 30 days; 

- Violation of the project implementation schedule, financial flows for up to 30 days; 

- Violation of the deadlines for the execution of contracts by third parties for up to 30 days; 

- The impossibility for the bank to monitor the collateral due to insufficient documentation, or due to the lack of experts in its assessment; 

- The planned decrease in the liquidity of collateral (lower prices, depreciation of currencies); 

- A restructured asset that did not have features of classified assets as of the date of restructuring; 

- Re-changing the contractual terms on the asset by converting the currency of this asset from foreign currency into national currency if this asset was not previously included in the category of “classified assets” and, at the same time, if this change is not associated with a deterioration in the customers financial condition; 

- Restructuring of classified assets that fall under the terms of Paragraph 34-4 of the Regulation. 

(As amended by the Resolutions of the National Bank of the KR Board No.19/6 dated April 27, 2016, No.6/4 dated February 22, 2017, No.2020-П-12/15-15(RLA) dated March 24, 2020).  

23-1. The Bank shall classify an asset in foreign currency (except currencies of the EAEU member states) with a credit risk at least as an “asset under supervision” in case the client provided with this asset has the fraction of income (revenue) ranging from 50 to 75 percent.   

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated April 27, 2016 No. 19/6).  

23-2. The Bank shall classify an asset in foreign currency (except for currencies of the EAEU member states) with a credit risk at least as an “asset under supervision” in case the client provided with this asset has a fraction of income (revenue) in foreign currency (except for currencies of the EAEU member states) less than 50 percent.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated April 27, 2016 No. 19/6).  

 

23-3. If the repayment schedule of an asset, both newly issued and existing, provides for uneven repayment of the principal on a non-monthly basis, while the maturity of the existing asset is more than two years (since January 20, 2016), then for such assets, subject to the absence deterioration in the quality of assets, it is necessary to increase LLP in the amount of 2% every six months, with the exception of the assets:  

- Issued under targeted state programs of the Government of the Kyrgyz Republic, providing for a grace period for asset redemption; 

- In the amount of less than 1% of the NTC in the aggregate issued to one customer; 

- In the amount of less than 10% of the NSC under the Mudarabah, Sharikah and Istisnaa contracts in the aggregate issued to one customer; 

- Interbank placements, including the assets issued to microfinance organizations; 

- Categorized as “classified” assets. 

After this rule enters into force, for all newly issued assets, it is necessary to create LLP in accordance with the above requirement for all existing assets categorized as the “unclassified”, including for all tranches within the same credit line.  

Also, an exception to this paragraph is the financing provided under the Development Fund, as well as financing provided under the guarantee of the Development Fund in accordance with Paragraph 21 of this Regulation.  

(As amended by the Resolutions of the National Bank of the KR Board No.19/6 dated April 27, 2016, No.2020-П-12/15-15(RLA) dated March 24, 2020) 

 

  

§2. Classified Assets  

  

24. Substandard assets are assets on which certain negative trends are observed which clearly show that the bank needs to create additional PLR and/or take corresponding measures targeted at asset quality improvement.  

An asset shall be considered a substandard asset if the following characteristics are peculiar to it:  

- violation by the client of the contract terms execution schedule for a period from 30 to 90 days;  

- violation of the regular payments schedule for a period from 30 to 90 days;   

- violation of goods supply terms stipulated by the contract for a period from 30 to 90 days;  

- violation of the schedule of project implementation, financial flows for a period from 30 to 90 days;  

- violation of contracts execution terms by third parties for a period from 30 to 90 days;  

- availability of reliable negative information on the clients financial position;   

- the assets collateral does not fully provide the asset or collateral quality is deteriorating or collateral value is reducing;  

- failure by the client-individual, including the client  unincorporated individual entrepreneur, to execute contract terms for over 30 days on any other asset with a credit risk, except for assets financed from targeted state programs of the Government of the Kyrgyz Republic in this bank and/or other financial organization;   

- failure by a spouse, parents and children of the client-individual, including unincorporated individual entrepreneur, to execute contract terms for over 60 days on assets with a credit risk to this bank and/or other financial organizations, except for assets financed from targeted state programs of the Government of the Kyrgyz Republic, provided that the source of repayment of all aforementioned assets is the same. In addition, it is understood that the same source of assets repayment with a credit risk is the aggregate income of the aforementioned persons accounted by the financial organization when they make a decision on asset provision, including the income from entrepreneurial activity.  

Note: The characteristics stated in the tenth and eleventh subparagraphs of this paragraph shall not be applicable to overdrafts within salary projects.  

(As amended by Resolutions of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4, June 15, 2017 No. 2017-П-12/25-1-(НПА))  

24-1. Recognized as invalid.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated April 27, 2016 No. 19/6).  

24-2. An asset should be classified as “substandard” if it is 90 days past due. At the same time, the qualitative features of such an asset cannot improve the classification category of the asset, with the exception of the assets that have collateral in accordance with Paragraph 21 hereof.  

An asset fully backed by a surety/guarantee should be classified as “substandard” upon the 60th day of payment delay, that is, before the deadline specified in this paragraph hereof. 

(As amended by the Resolutions of the National Bank of the KR Board No.6/4 dated February 22, 2017, No.2020-П-12/15-15(RLA) dated March 24, 2020).  

24-3. If on a restructured asset classified as an “asset under supervision” payments are delayed for over 30 days or such asset is repeatedly restructured it shall be classified as a “substandard asset”.  

In addition, if this “substandard asset” has collateral in form of immovable property and provides at least 120% from the asset sum the Bank may form a PLR in the amount of 15% during one year from the moment of repeated restructuring.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

24-4. If the repayment schedule of a newly issued asset provides for repayment of the principal on a non-monthly basis, and more than 80 percent of the principal is repaid upon the expiration of:  

- 3/4 of the total term of the asset, while the total term of the financing period is less than 3 (three) years;  

- 1/2 of the total term of the asset, while the total term of the financing period is more than 3 (three) years;  

then such assets should be classified as “substandard”, with the formation of LLP in the amount of 25 percent, except or the assets:  

- Issued under targeted state programs of the Government of the Kyrgyz Republic, providing for a grace period for asset redemption;  

- Interbank placements, including the assets issued to microfinance organizations;  

- In the amount of less than 1% of the NTC in the aggregate issued to one customer;  

- In the amount of less than 10% of the NSC under the Mudarabah, Sharikah and Istisnaa contracts in the aggregate issued to one customer.  

An exception to this paragraph are privileged assets issued under the Development Fund in accordance with Paragraph 21 hereof.  

(As amended by Resolution No.2020-П-12/15-15(RLA) of the National Bank of the KR Board dated March 24, 2020).  

 

25. Doubtful assets are characterized by clearly defined drawbacks (drawback) or weak points which bear the risk of non-fulfillment by the client of its liabilities under the contract. In this regard the possibility of debt repayment becomes doubtful and hardly probable. In case drawbacks are not eliminated there is a possibility that the bank will bear considerable losses.  

An asset shall be considered doubtful if the following characteristics are peculiar to it:  

- violation by the client of the contract terms execution schedule for a period from 90 to 180 days;  

- violation of the regular payments schedule for a period from 90 to 180 days;   

- violation of goods supply terms stipulated by the contract for a period from 90 to 180 days;  

- violation of the schedule of project implementation, financial flows for a period from 90 to 180 days;  

- violation of contracts execution terms by third parties for a period from 90 to 180 days;  

- availability of reliable negative information on the clients financial position;  

- loss-making activity not provided in the business plan agreed with the bank;  

- lack of information on the progress of project implementation and business plan execution in accordance with the terms of submission of such information stipulated in the contract between bank and client;  

- impossibility of proper monitoring of project implementation, including visits to objects of financing;   

- clients financial position has seriously deteriorated (or the client is on the verge of bankruptcy);  

- significant deterioration (or absence) of collateral and/or guarantee, and failure or impossibility to provide additional collateral or guarantee;  

- dependence of debt repayment basically on sales of collateral. And the collateral in such circumstances shall be in the form of movable and immovable property in the value sufficient for repayment to the bank of the principal sum of the debt, extra charges under the contract and probable expenses related to pledge rights exercising. It is supposed that collateral may be sold within the following terms:  

а) immovable property  not later than in 365 days;   

б) movable property  not later than in 120 days.   

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

25-1. An asset shall be classified as “doubtful” if debt repayment is 180 days delayed. In addition, qualitative characteristics of such assets may not improve the asset classification category, except for assets with collateral in accordance with paragraph 21 of this Regulation.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

26. Assets classified as losses shall be considered unrecoverable and a PLR on them is created in the amount of 100%. When all legal possibilities of recovery of such assets are exhausted such assets shall be reflected on off-system accounts for a period not less than five years.   

An asset shall be considered losses if the following characteristics are peculiar to it:  

- violation by the client of the contract terms execution schedule for a period of 180 days and over;  

- violation of the regular payments schedule for a period of 180 days and over;   

- violation of goods supply terms stipulated by the contract for a period of 180 days and over;  

- violation of the schedule of project implementation, financial flows for a period of 180 days and over;  

- violation of contracts execution terms by third parties for a period of 180 days and over;  

- the project the bank is a party of is not implemented in accordance with contract terms;  

- debt repayment basically depends on collateral sales;   

- absence of collateral or impossibility to sell the collateral due to absence of a marketing outlet;  

- incapability, refusal of the client to execute the terms of the contract with the bank;   

- unwillingness of the client to cooperate with the bank or absence of the client;  

- termination of clients business activity or declaration of its insolvency;  

- assets placed by the bank under the contract with a subject of offshore locations which are incompliant with the requirements of the National Bank.  

Note: In accordance with Resolution of the National Bank Board dated April 16, 2003 No.13/2 “On establishment of requirements for determination of entities and list of offshore locations”.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4, June 15, 2017 No.2017-П-12/25-1-(НПА))  

26-1. An asset shall be classified as “losses” if debt repayment is 360 days delayed. In addition, qualitative characteristics of such asset are not used during its classification, except for assets with collateral in accordance with paragraph 21 of this Regulation.   

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

26-2. Transfer of classified assets to the unclassified assets category shall be performed only if the following conditions are met:  

- no outstanding amounts;   

- timely and full payment by the client of the latest three contributions in accordance with the schedule.   

If the entire outstanding amount is repaid, assets classified as “doubtful” or “losses” shall be transferred to the “substandard assets” category.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2017 No.2017-П-12/25-1-(НПА))  

  

5. Separate Classification Cases  

  

27. In separate cases assets may be assigned to two classification categories, i.e. classification separation may be used.   

For example, funds attracted based on the Principles of Islamic banking and finance in the same bank (on a deposit account) may be used as asset collateral. Such funds cover only a part of the asset and there are no other sources of asset repayment. In this case the part of the asset secured with the funds attracted based on the Principles of Islamic banking and finance shall be classified as “normal asset”, while the unsecured part of the asset shall be classified as “losses”.  

271. In case the client is an individual, including unincorporated individual entrepreneur, and has several assets with a credit risk in the bank, all its assets shall be classified as its asset with the largest debt if this classification is lowest.  

  

6. Classification of Interbank Placements  

  

28. Unsecured interbank placements compliant with the Principles of Islamic banking and finance with a repayment term not more than 30 days shall be classified taking into account the following:  

- interbank placements overdue for a period from 2 to 10 days shall be classified as substandard;  

- interbank placements overdue for a period from 10 to 30 days shall be classified as doubtful;  

- interbank placements overdue for a period of over 30 days shall be classified as losses.  

29. For the purposes stated in paragraph 28 of this Regulation the entire sum of the funds on a correspondent account shall be classified, and the day of commencement of calculation of overdue payment on the correspondent account shall be the date of requirement to transfer the funds.  

30. Interbank placements secured with collateral and/or with a repayment period of over 30 days shall be classified in accordance with paragraphs 4 and 5 of this Regulation.   

  

7. Classification of Other Bank Property.   

  

31. After initial recognition in the balance sheet other bank property accepted for asset repayment and/or as compensation of bank losses shall be immediately classified as substandard.  

32. Other bank property accepted for asset repayment and/or as compensation of bank losses shall be classified as losses unless it is sold as the following terms expire:  

а) one year  for movable property,   

б) three years from the moment of emergence of the ownership right  for immovable property, except for agricultural lands the terms for which are established by the law of the Kyrgyz Republic.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

  

8. Classification of Restructured Assets  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No. 6/4).  

  

33. Restructured assets are assets on which the bank offers individual preferences (easing) by changing contract terms (with mandatory conclusion of a new contract or supplementary contract to a contract of finance) different from a common financing practice. In addition, changes in the markup and/or term of financing till repayment of the principal debt amount/markup shall lead to the change in expected future cash flows.   

Restructuring is:  

- a change in terms of the current contract of finance due to deterioration of the clients financial position by provision of more favorable conditions to the client on repayment of financing different from the bank practice;  

- a change in contract terms by partial relief of the principal sum of financing.  

Changes in the initial terms of the contract of finance and its refinancing not related to deterioration of the clients financial position shall not be asset restructuring (for example, converting the asset currency from foreign to national, and other).  

34. In case an unclassified asset is available on which restructuring has been performed and payments have been fully or partially delayed for over 30 days at least once during the latest three months, then such circumstance may be indicative of occurrence of financial difficulties in the client on the restructured asset.  

341. Restructuring may be performed in relation to both classified and unclassified assets.  

342. A classified restructured asset may not be assigned to unclassified assets till the terms stated in paragraph 34-4 of this Regulation are adhered to.  

343. Amendments to the contract of finance when the client has financial difficulties by partial repayment of debts on financing by sale of pledged property on such financing shall be considered as restructuring of finance.  

344. The bank may transfer the classified “substandard” asset to the unclassified assets category when all the following conditions are met:   

- absence of outstanding sums;  

- timely and full payment by the client of the latest three contributions in accordance with the schedule;   

- the client has no circumstances which could lead to its failure to adhere to the restructuring terms.   

If the entire outstanding overdue amount is repaid assets classified as “doubtful” or “losses” shall be transferred to the “substandard assets” category.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2017 No.2017-П-12/25-1-(НПА))  

345. The PLR on restructured assets shall be created for the entire balance value.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2017 No.2017-П-12/25-1-(НПА))  

  

9. Classification of Investment to Securities and/or Company Capital  

  

35. Investment to securities and/or company capital reflected in the balance sheet shall be assessed for their quality in accordance with the requirements of this Regulation and on the basis of submitted documents.  

36. The bank shall have financial statements (quarterly statements  for the latest completed reporting quarter and annual statements  for the three latest completed financial years confirmed and certified by an independent auditor) and other information on the invested company and/or issuer of securities. Availability of the aforementioned statements shall be the evidence of the fact that the bank has examined the issuer of securities. The bank shall conduct a corresponding analysis on the basis of submitted reports.  

37. Investment to securities and/or company capital shall be classified at least as “doubtful” in case information on the invested company is not available, including financial statements, analysis of future cash flows, market position, company business plan and other information which will allow assessing the quality of such investment.  

37-1.  The Bank may classify investments in Islamic securities of originators-residents of the Kyrgyz Republic as the “assets under supervision” in case of compliance with the requirements for Islamic securities set forth in part “b” of Subparagraph 2 of Paragraph 30-1 of the Regulation «On Securities Transactions of the Banks” approved by Resolution No.52/4 of the National Bank of the Kyrgyz Republic Board dated September 14, 2011.   

In the event of delisting of a security, a trend towards a deterioration in the financial condition of the issuer or originator, problems with officials of the issuer or originator, or changes in market conditions that may affect the performance of the issuer or originator of its obligations, the bank should classify this asset as “doubtful”.  

(As amended by Resolution No.2020-П-12/15-15(RLA) of the National Bank of the KR Board dated March 24, 2020)  

 

38. In case the financial position of the invested company and/or issuer of securities deteriorates (or if the invested company and/or issuer of securities is on the verge of bankruptcy) such investment shall be classified as doubtful.   

39. If the issuer or originator is declared insolvent, such investment should be automatically classified as a “loss”.  

(As amended by Resolution No.2020-П-12/15-15(RLA) of the National Bank of the KR Board dated March 24, 2020)  

 

40. Securities of central banks and governments of foreign states issued in accordance with the Principles of Islamic banking and finance shall be subject to classification if the bank can submit corresponding information that central banks and governments of these countries are solvent and pricing of these securities is transparent. For example, confirmation of long-term credit rating assigned by rating agency Moody's Investors Service (USA) or other financial information.  

Note: Equivalent rating assigned by rating agency Standart & Poors (USA) or a similar rating assigned by one of the following rating agencies: Japan Credit Rating Agency (JCR), Fitch Ratings, Dominion Bond Ratings Service (DBRS).  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated June 15, 2017 No.2017-П-12/25-1-(НПА))  

41. In case of disagreements on the issue related to assignment of an asset to a certain classification category between the bank and bank supervision inspectors the bank shall provide a corresponding analysis and evidence of correctness of its own classification.  

  

10. Classification of Off-Balance Liabilities  

  

42. Classification of off-balance liabilities is performed in the same procedure as classification of bank assets in accordance with the requirements of this Regulation.   

43. Off-balance liabilities shall be subject to classification depending on:  

- occurrence of the possibility that the bank will fulfill its liabilities on these off-balance liabilities;  

- possibility that the client will use this liability;  

- availability of collateral;   

- other factors.   

  

101. Classification of Cross-Border Assets and Assets Secured with Collateral Located outside the Territory of the Kyrgyz Republic  

  

43-1. Cross-border assets and assets with collateral located outside the territory of the Kyrgyz Republic shall be classified at least as assets under supervision at the moment of their provision.  

43-2. In case the collateral for the asset located outside the territory of the Kyrgyz Republic is over 50 percent of the total collateral value such asset shall be classified at least as an “asset under supervision”.  

  

11. Creation of a Reserve for Potential Loss Provision  

  

44. A reserve for potential loss provision is created from expenses of the bank and is a counter account to the corresponding asset category. A bank having an “Islamic window” shall create a PLR on assets placed in accordance with the Principles of Islamic banking and finance in addition to the PLR created in accordance with the Regulation “On classification of assets, corresponding deductions to the reserve of potential loss prevention”.   

The bank shall create the following reserves:  

- PLR on assets with a credit risk;  

- PLR on investment to securities issued in accordance with the Principles of Islamic banking and finance and/or to capital;  

- PLR on other bank property accepted for asset repayment.   

  

45. The reserve on off-balance liabilities shall be accounted as a bank liability.   

46. A PLR is divided into two parts  general and special reserves. General reserves are created on unclassified assets, special reserves  on classified bank assets.   

47. The National Bank shall establish the following values of deductions to PLR on assets:  

General reserves  

Special reserves  

Normal assets  

0 %  

Substandard assets  

15%/25 %;  

Satisfactory assets  

1/2/2.5 %   

Doubtful assets  

50 %;  

Assets under supervision   

5/10%  

Losses  

100 %.  

  

On “satisfactory” assets the bank shall create a PLR in the amount of 2%, except for assets stated in paragraph 22-1 of this Regulation on which the amount of the PLR shall be 2.5%, and in paragraph 22-2 on which the amount of the PLR shall be 1%.  

On “assets under supervision” the bank shall create a PLR in the amount of 5%, except for assets stated in paragraph 23-2 of this Regulation on which the PLR shall be 10%.  

(As amended by Resolution of the National Bank of the Kyrgyz Republic Board dated February 22, 2017 No.6/4).  

48. After calculation of the amount of all required deductions they are summed up on each type of reserve and common required amounts of deductions to the PLR are determined. These amounts are compared to the amount of the existing PLR according to the balance sheet. In case of deficiency of the existing PLR amount according to this balance sheet the bank shall bring it in compliance with the calculated required PLR amount till the end of a reporting month. The bank may create an additional deduction to the PLR only provided that it is capable of submitting evidence of the need in such measure.  

49. When assessing the PLR amount the bank shall consider the following:  

- historical losses;  

- trends in failures to pay for liabilities and assets. The bank shall arrange accounting and reporting which will show actual trends observed on losses, failures to pay for liabilities and assets;  

- trends in classified assets. They shall be considered in relation to the amount of bank assets and capital;   

- economic conditions. Deterioration of economic conditions usually means that bank clients will have difficulties which may affect their capability to repay assets and thus increase potential losses;  

- concentration of assets in a certain industrial sector, branch of economy or geographical location;  

- other factors which in the banks opinion influence the quality of assets.  

50. PLR adequacy depends on systematic assessment of bank assets. Each bank shall develop a system of assessment of its assets adequacy. Such assessment shall focus not only on assets quality but on the bank investment policy as a whole. Assessment may be conducted both using bank internal resources and by attracted external experts. Regardless of the selected variant a person conducting assessment shall be experienced and independent from the department responsible for placement of assets in accordance with the Principles of Islamic banking and finance. It means that the expert shall be provided with a freedom of action during assessment of any asset and all drawbacks shall be stated in a report made based on the results of such assessment. The report shall be submitted to the Board of Directors and Chairman of the Management Board of the bank.  

51. Asset classification and PLR calculation shall be conducted by the bank on a monthly basis as of the last day of each month, inclusive. PLR shall be created regardless of the income, in the amount sufficient for maintenance of the reserve at the level which corresponds to the current assessment of bank assets quality. Inadequacy of the created PLR to asset quality lead to incorrect reflection of the financial position of the bank and is considered as misrepresentation of statements.  

52. The bank shall develop a set of documents containing description of the bank policy related to analysis and classification of assets placed in accordance with the Principles of Islamic banking and finance, methodology and initial provisions on PLR creation and deductions, procedure of assessment of PLR adequacy in accordance with this Regulation.  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 1  

to the Regulation “On the Classification 

of Assets and Corresponding 

Contributions to the Loan Loss Provision 

in the Process of Transactions 

under the Principles of 

Islamic Banking and Finance” 

  

  

MINIMUM REQUIREMENTS 

Placed for Securities, 

Listed on the Stock Exchanges of the Kyrgyz Republic 

by the Highest and Next Highest Listing Category  

(As amended by Resolution No.2020-П-12/15-15(RLA) of the National Bank of the KR Board dated March 24, 2020) 

  

1. The issuer/originator of securities has an investment rating of at least “BBB” or “Baa2”, assigned by one of the rating agencies Standard and Poors, Fitch Ratings, Moodys Investors Service. 

2. These securities transactions are not episodic, i.e. at least 1 (one) securities transaction is concluded in the trading system of the stock exchange within a period of 30 (thirty) calendar days. 

3. The results of a retrospective analysis of the maturities of the issuer/originator of obligations under previously issued securities should give reason to believe that the issuer/originator had no debt to fulfill the obligations under the securities issued by it. 

4. Break-even activity of the issuer/originator of securities for the last 3 (three) years.