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Bank's lending policies

Extract from Regulations on Issue of Loans in Banks

4. Bank's lending policies

4.1. The bank's lending policies shall address the business of lending comprehensively and shall be used as guidance for lending transactions. Each bank's lending policy shall cover the following, in consistency with the scope, nature and complexity of its lending transactions:

4.1.1. Levels of authority. The lending policy shall clearly identify the levels of lending authorities of each department and unit involved in lending transactions. The existing banking laws, expertise and qualifications of employees shall be taken into account when assigning decision-making and loan application assessment authorities to the bank's business units and individual employees. In order to prevent any conflicts of interest, the credit risk evaluation as well as loan classification function of the bank should be separate and independent from the function responsible for overseeing the quality of the loan portfolio, as well as compliance, prudential reporting, internal requirements and limits. The bank shall appoint persons or business units responsible for discharging such functions. The bank's management shall take efforts to prevent the bank's promotional policy from conflicting with the lending policy (increasing the number and amount of loans granted in excess of the limits set should not be incentivized).

4.1.2. Lending limits and loan concentrations. The bank's policy shall identify limits, regular monitoring and reporting requirements with respect to all known loan concentrations (loan types, related parties, economic sectors, geographic regions, etc.). Determination of limits should incorporate the required level of return on each type of loan and the outcomes of sensitivity evaluation of the loan portfolio as well as borrowed funds used to finance loans. The bank policy shall set, at a minimum, the following limits with respect to the loan portfolio or the total capital, in compliance with the Central Bank's related prudential requirements: maximum exposure for each type and loan concentrations by type; ratio of total loans to total deposits; ratio of total loans to total deposits and other borrowed funds; maximum exposure per a single borrower or a group of connected borrowers and concentration of such loans; loan concentration by geographic location, including concentration by a single country or closely connected countries; loan concentration by major currencies; maximum exposure to related parties and concentration of such loans; loan concentration by borrower status (legal entities, individuals and unincorporated entrepreneurs); concentration by security type (real estate, securities, etc.); concentration of loans with the same maturity; concentration of loans with the same pledgor; concentration of non-performing loans; maximum unsecured (blank) exposure and concentration of such loans; maximum exposure by branch offices and concentration of such loans (if branch office is authorized to lend). Significant loan concentrations shall be reported to the management regularly. Loans in excess of the limits established, as well as loans to new sectors shall be granted only with the Supervisory Board's approval. Additional risk evaluation and monitoring procedures should be put in place for such loans.

4.1.3. Types and areas of lending. Each bank shall develop and put in place individual lending, monitoring and control policies for each type of loan, in consistency with the lending strategy and nature of different types of loans. If a need arises for types of loans not covered by the bank's existing lending strategy, appropriate procedures shall be developed to this effect. For loans to non-residents and persons operating outside the country, the bank's policies shall have risk assessment and monitoring procedures for the creditor's country of origin or operation. For loans in foreign currency (granted in and outside the country), the foreign exchange risk associated with such loans as well as the transfer risk associated with international transactions should be taken into account. In order to verify whether a loan is used in consistency with its stated purpose, the bank shall analyze the customer's operations when evaluating the loan application, as well as regularly monitor the customer's activities and take appropriate measures as it services the loan. The bank shall analyze the borrower's operations in accordance with the «Know Your Customer» standard of the Basel Committee for Banking Supervision.

4.1.4. Loan maturities and terms. The maturity/term of a loan (principal and interest) shall be predicated on the purpose, type, source of repayment of the loan, seasonal/periodic nature of the borrower's business as well as realistic cash flow projections. The lending policy shall identify the criteria for loan roll-overs and the bank's request for early repayment, which shall also be specified in the underlying loan agreements. For annuity payments on loans, the lending policy shall identify the terms and conditions of early/premature annuity payments and procedures for re-valuation and payment of annuities (reduction of annuity amounts and/or extension of annuity terms). For loans with down-payments (when the borrower pays upfront a portion of the property purchased using the loan proceeds from his own funds), the lending policy shall identify the related minimum requirements.

4.1.5. Setting interest rates on loans. The lending policy shall identify the economic and market conditions as well as various factors used to determine the interest rates for individual loans and different types thereof. When setting interest rates to be applied to loans, banks shall consider loan service costs, overal administrative costs, possible loan loss reserves and a sufficient margin of profit, portfolio losses, as well as whether additional fees would be charged. When the bank applies the minimum or maximum interest rates depending on the type of the loan, it shall identify the criteria for their application.

4.1.6. Discounts. Banks shall define relevant criteria for discounted loans. Clear and precise procedures should be determined for discounted lending, i.e., for granting loans to borrowers at more favorable conditions as compared to other borrowers who take loans of the same type, and such procedures should not be in conflict with the bank's overall lending strategy as well as the existing banking laws.

4.1.7. Appraisal and acceptance of collateral (means of insuring performance of credit obligations). The collateral shall have a value sufficient to safeguard the bank from any losses and damages that may arise in connection with the underlying credit transaction, yet shall not be treated as the only or principal source of repayment for the loan. The principal borrower must have a sound and safe financial position and sufficient funds generated in the normal course of business in order to repay the loan. A loan may be secured or unsecured (blank). The bank shall identify separate criteria for granting unsecured loans. Unsecured loans may be granted only to highly creditworthy and reputable borrowers with a proven adequate income. When granting an unsecured loan, the bank should request the borrower to present his financial statements (for individuals, a documentary evidence/statement of payroll and/or official income from other sources) and credit history covering a longer period of time. Financial statements (payroll statements) shall cover a period of at least six preceding months for individuals, and two years for legal entities. The lending policy shall identify acceptable ratios of market value of security to be pledged to loan value. For collateral accepted as security for a loan, the lending policy shall identify the procedures for collateral appraisal by the bank's expert or an external appraiser in accordance with the applicable laws. Criteria should be defined for appraisal of collateral by bank employees or external appraisers. Bank employees responsible for collateral appraisal shall have the necessary qualifications and expertise. Requirements with respect to qualifications, expertise and professionalism, as well as selection mechanisms of external appraisers shall be identified. Collateral securing loans in excess of 5% of the bank's total capital granted to a single borrower or a group of connected borrowers shall be evaluated separately by at least two external appraisers. If their evaluations differ from each other, the bank shall use the lower price of collateral. In order to minimize losses on loans secured with collateral, a conservative approach shall be used to determine the market value of the collateral, and stringent criteria shall be employed to select the appraiser. When collateral is accepted as security for a loan, the bank shall require all technical and legal documentation on the property provided as collateral. The bank's lending policy shall identify appropriate measures (such as periodic inspections, etc.) in order to detect any discrepancies and inconsistencies between the collateral-related documents and the actual availability and quality of the collateral, to make sure that the borrower maintains the collateral in an adequate condition, as well as to put in place insurance claims with respect to collateral. If loans are secured with securities, the bank shall identify the evaluation procedures with respect to such securities, in consideration of their real value and marketability. The bank's policy shall specify the possibilities, criteria and procedures of replacing the collateral, as well as revising the ratio of the value of the collateral to the loan value. Furthermore, the bank shall identify the minimum ratio of the new collateral's value to the loan value, in accordance with its policy and the Central Bank's related requirements. If the property provided by the borrower as collateral needs to be replaced, the bank shall make sure that the ratio of the value of the replacement collateral to the outstanding amount of the loan is not below the original level of the ratio. If a loan is secured with securities, warranties, guarantees or bank deposits, the bank shall review the terms of such collateral. If the term of such collateral is less than the maturity of the underlying loan or if the borrower needs to replace the collateral, the bank shall make sure that the quality and marketability/liquidity characteristics of the replacement collateral, as well as the ratio of the value of the replacement collateral to the outstanding amount of the loan, are not less than the characteristics of the original collateral. For the bank to have enough time to appraise the replacement collateral and make appropriate decisions with respect to such collateral, the replacement collateral should be furnished before the term of the original collateral expires. For the bank to determine the real market value and to ensure that the marketability of the collateral is monitored before the loan is matured, the bank shall regularly re-valuate the collateral. To this end, the bank's policies shall identify the amount of loans where the underlying collateral needs to be regularly revaluated, as well as the frequency of such revaluations. The bank's policy shall identify the response procedures with respect to adverse trends in the cost of collateral. The bank shall determine the collateral evaluation schedule, reporting system and individuals responsible for evaluation. For oversight of collateral securing consumer and micro-loans, the bank shall develop and put in place a specialized system in consideration of the characteristics of such collateral. This system shall verify whether collateral is adequate in relation to the terms and maturity of the loan. For loans secured with guarantees or warranties, the bank shall request comprehensive and detailed financial information on the guarantor. The structure and composition of such information shall be specified in the bank's policies.

4.1.8. Financial information on borrowers. The bank's policy shall require borrowers to submit financial statements in order to enable the bank to determine the borrower's ability to repay the loan both before and after the loan is granted. For incorporated borrowers, this requirement shall include the audited financial statements for the last financial year ended, tax returns, cash flow statement and other reports. Individuals shall be required to present a statement of payroll/salary and/or other officially ascertained sources of income. When the law requires legal entities to prepare their financial statements in compliance with the International Financial Reporting Standards, the bank shall specify submission of such statements as a condition of the loan. Assessment of the borrower's financial position should be documented. If necessary, banks may engage independent experts and advisors to assess the borrower's financial information and records. The bank's policy shall include an assessment of the borrower's performance on debts to other parties, warranties and other contractual obligations, in order to verify the completeness and accuracy of the borrower's financial information. To this end, banks may use the data and records of the Centralized Credit Registry. Furthermore, banks may obtain additional information from auditors, rating agencies, tax and other state authorities, etc. The borrower's financial position shall be monitored until the loan has been repaid in full.

4.1.9. Lending to a single borrower or a group of connected borrowers. When making a lending decision, the bank shall verify whether several borrowers constitute a group of borrowers in the sense of finance and management. In addition, the bank should define procedures for identification of loans grantable to a single borrower or a group of connected borrowers for various activities. The bank shall take account of the Central Bank's relevant regulations when developing lending procedures with respect to a single borrower or a group of connected borrowers.

4.1.10. Lending to the bank's related parties and persons acting on behalf of related parties. The bank's policy shall identify the terms and restrictions with respect to lending to the bank's related parties and persons acting on behalf of related parties (hereinafter referred to as «related parties»). Such terms and restrictions shall be in compliance with the Central Bank's relevant regulations. The bank's policy shall stress that related parties shall not enjoy any preferential treatment as far as lending is concerned compared to other borrowers of the same creditworthiness.