Rules on Economic Regulations Norms
(Prudential Norms) of Credit Union
1. General Provisions
Economic regulation norms (prudential norms) contained in these Rules have been developed in conformity with Law of
Azerbaijan Republic on the National Bank of Azerbaijan, Banks and Banking Activity in Azerbaijan Republic and Credit
Unions and Tax Code of Azerbaijan Republic.
In order to ensure sound and stable development of Credit Union (CU) system in Azerbaijan Republic, control its financial
position and regulate its functioning, the National Bank of Azerbaijan sets forth the following economic regulation
normatives (prudential norms):
1.
2.
3.
4.
5.
6.
7.
Minimum amount of share capital;
Minimum capital adequacy;
Balance of maturities
Maximum loan exposure with respect to one borrower
Maximum unsecured credit risks
Capital reserves maintained by the credit unions
Classification of credits, special reserve fund norms and establishment procedures
If necessary, these normatives may be changed by the National Bank of Azerbaijan. Amendments should be communicated
to the credit unions at least one month prior to their effectiveness.
Prudential normatives should be followed by the credit unions during reporting period.
Definitions
Secured loans are loans that are marketable and provided with collateral which costs 100 percent or more of the credit
amount.
Partially secured loans are credits that are marketable and provided with collateral which costs less than 100 percent of the
credit amount or if costs are over 100 percent is it doubtful that the declared value could be obtained.
Insecured loans are credits without collateral.
Current loans are credits which core amount and interests are recovered in due time.
Overdue credits are credits which arrears on core amount or interest rate have not been recovered by the time specified in
the contract or which interest have been capitalized or extended. If part of credits which was expected to be recovered by
installments has not been paid then full residual amount shall be considered as overdue. Amount of overdue credits means
total residual amount of credits without interests.
Capitalization of interest rate is addition of the interest rate amount to the residual amount of the credit when its payment is
due in conformity with contract. Capitalization of the credit also includes extended interest or interest documented as new
credits.
Bad loans are credits which have not been recovered within 180 days after due date. Bad loans also include credits which
would be impossible to be recovered irrespective of the due date. Examples of this are irrecoverable credits due to climatic
or natural disasters, as well as other force majeur circumstances.
II. NORMATIVES OF REGULATION OF ACTIVITIES
OF THE CREDIT UNION
1. MINIMUM AMOUNT OF SHARE CAPITAL
1.1 The purpose of the capital is to increase the CU revenues and to set up basis for its sustainable work and recover
potential deterioration of assets.
1.2 Total shares provided by the members of the CU shall constitute share capital of the CU. Minimum amount of share
capital shall be established as 20,000,000 manats
In view of requirements of the projects implemented through international agreements, ANB Board may set up different
amount.
2. MINIMUM CAPITAL ADEQUACY NORMATIVE
2.1 ANB shall set up normative for minimum required capital of the operational CU. Minimum required capital shall
not be less than 20 million manta. This amount (capital) is a total of chare capital of the CU, undistributed profit
(post tax and other payments), capital reserves (reserves established on the basis of undistributed profit or
contributions of the members) minus loss.
2.2 If standards of minimum share capital are increased by the ANB, required minimum capital of the existing CU
should be increased to match this within six months. Incompliance with this requirement will be considered and
violation of the prudential normatives.
2.3 For the existing credit unions, capital adequacy standards shall be established to ensure efficient management of
credit unions. Minimum capital adequacy limits the use of external funds in the credit union, thereby limiting the
risk carried by the individual credit unions and external lending institutions. Use of excessive external financing
increases control of external financial institutions over the CU and enables external interventions.
2.4 Capital Adequacy is established as a ratio of risk assets to equity:
E
CU1= -----------, where
RA
RA - is risk assets held by the credit union and equals total loans to members
E – total of the CU capital (share capital + undistributed profit + capital reserve – loss)
2.5 Minimum CU normative will be 0.25 during first 12 month of the operation and then 0.20.
3. MATURITIES BALANCE
3.1 Credit Union shall not take any responsibility with regard to maturity date of loans. Therefore, maturity dates of
provided credits and interests rates on them should be closer than maturity dates of mobilized loans and interest
rates on them. In other words, date of recovery of assets (credits) and interest rates should be closer than dates of
payment of liabilities.
3.2 Maturities balance ratio shall be determined on the basis of the following formula:
Total assets by the reporting date
(Current loans, interest rates due and other assets)
CU2 =
-----------------------------------------------------------Total liabilities by the reporting date
(mobilized credits, interest rates and other liabilities
Arrears of the members on overdue credits and interests will affect the total assets in calculation of the ratio.
Supervision over implementation of this normative by the CU will be performed by comparing assets and liabilities
indicated in the Form 5 (columns 2-6).
3.3 CU2 ration shall not be less than 1.
4.
MAXIMUM LOAN EXPOSURE WITH RESPECT TO ONE MEMBER
4.1
This ratio have been developed on the basis of the Law. The purpose of this ratio is to limit the potential for
excessive loan portfolio risk derived from one or a few members.
4.2
The following formula shall be applied in the calculation of the ratio:
Total of loan extended to each member
CU3 = ------------------------------------------------------Share of this member of in the share capital
K
CU4 = ----- , where
E
K is the cumulative total of loans (including overdue loans) of a member who have largest debt to the credit union;
E is the Mutual credit fund of the Credit Union. E should be formed up from the share capital, profit of the CU, as
well as funds mobilized from other sources as defined by the Law.
4.3
During calculation of total loans of each member of the credit union to determine the risk involving each credit,
past due loans also should be taken into consideration.
4.4
Maximum value of normative CU3 shall not be more than 10%, and CU4 not more than 0.1.
5. MAXIMUM UN-COLLATERALIZED LOAN
5.1 Article 10 of the Law of Azerbaijan Republic specifies that the Credit Union is responsible for its liabilities in the
amount of assets it holds, and members of the Credit Union are not responsible for liabilities not related to activities of
the Credit union. This Article stipulates the responsibility of the members for their liabilities to the Credit Unions
guaranteed with their assets.
In order to strengthen this responsibility and ensure loan repayment members of the CU should provide collateral. In
exceptional cases loans may be un-collaterized, i.e. without guarantee.
5.2
Maximum un-guaranteed loans held by the credit union are established as ratio of the total un-collatrealised or
unguarenteed loans to a credit institution’s equity.
Decision on extension of an unguarenteed loan shall be the responsibility of the credit committee and Management
Board. Such decision must be appropriately documented.
5.3
The total uncolateralised loans extended by a credit union to the credit institution’s equity shall be calculated by the
following formula:
 IrK
CU5 = ---------- , where
E
 IrK - total un-guaranteed or partially guaranteed loans extended by credit union.
E - is the total credit union equity.
5.4
The value of CU6 should not exceed 0.2.
6.
REQUIRED CAPITAL RESERVES MAINTAINED BY THE CREDIT UNION
6.1
Capital reserves are one of the main instruments designed for the management of the liquidity and financial stability
of the credit union. Capital reserves are established so that in the event of losses, the Union does not immediately
have to reduce share capital and can cover limited losses from the reserve.
6.2
This reserve is part of equity and established from the undistributed profit of the Union. In the beginning of the
credit union operations there is no such capital. The reserve capital may be built by withholding the credit union’s
annual profit (not to pay as dividend) and entering that part to the reserve as specified in the Charter of the CU. If
the amount of the capital is less than minimum amount determined by the National Bank then undistributed capital
shall fully be used for building the reserve capital. When the reserve has been established in line with the normative
specified in the Para 6.8 of this Section, this ratio can be reduced.
6.3
Members may also agree to pay special fee (cash or through transfer) to build the reserve, if this is envisaged in the
Charter of the CU.
6.4
Reserve capital one of the types of the capital as share capital. There is no requirement to keep capital reserve as
cash. The act of writing off a bad loan does not mean any money transaction at all. Funds paid in cash for
establishing reserve capital may be used to provide collaterized loans in conformity with credit policy of the CU.
6.5
Reserve capital shall be recorded in the “Reserve Capital” line of the balance and used to cover the losses incurred
as a result of activities of the CU. It means that this should reduce “bad loan” in the assets part and reserve capital
in the liabilities part of the Credit Union’s balance. Required capital reserves shall be maintained in the credit
union’s bank account or maintained in securities or other on balance account.
6.6
Reserve capital may be used only on the basis of resolution of the general meeting of the Credit Union.
6.7
This ratio shall be calculated by the following formula:
CR
CU6 = ------, where
OL
CR – is the size of the capital reserve as of the last day of the reporting period;
OL – is the total value of overdue loans on the credit unions loan portfolio. Amount of these loans should be
reduced by the amount of the reserve fund established for them.
6.8
The value of the normative CU7 is not less 1.
6.9
In case of default by a credit union of the prudential normatives, the National Bank may increase the amount of
required reserves.
2. CLASSIFICATION OF
ESTABLISHMENT
CREDITS,
SPECIAL
RESERVE
FUND
RATIO
AND
RULES
OF
ITS
7.1. If capital reserve set up by the CU for writing off bad loans is insufficient, Special Reserve Fund shall be established in
conformity with law. Establishment of the Special Reserve Fund will directly affect the capital of the CU. Though the
Special Reserve Fund is in the liability part of the balance, it reduces the net value of credits because it is a counter-active
account. This means that quality of the credit portfolio is determined by classification.
7.2. CU will perform classification of credits on the basis of length of expiration. Special reserve fund may be
established as per following norms:
Overdue credits
Classification of credits
For credits with up to 59 days
overdue
Unsatisfactory
Ratio of special reserve
fund established subject
to core amount of the
credit (per cent)
30
For credits with 60 to 179 days Insecure
overdue
For credits with over 180 days Bad
overdue
60
100
7.3 Establishment of special reserve fund for classified credits will be performed through following accounting records:
Debit: Allocation of reserve for expected credit loss (expenditure account)
Credit: Special reserve fund
III. WRITING OFF AND REGULATION OF FUNDS
1.1. Credits should be considered “bad” for their writing off. Bad loans are written off on the account of the special reserve
fund to be established 100% of the amount. This decision is taken by the Board and Credit Commission of the Credit
Union and promptly communicated to the Supervisory Board.
1.2. Writing off the credits is performed through the decision of the general meeting of the CU irrespective of the source of
writing off (special reserve fund or capital reserve).
1.3. Writing off the bad credits is performed through following accounting record:
Debit: Special reserve fund or capital reserve
Credit: Credit liability
1.4 Accounting of written off credits is kept through off balance sheet account during 5 years. Member who owes written
off loans shall be communicated semi-annually about the outstanding loan amount and interest rate in order to ensure
repayment. If not repaid during this period outstanding amount will be written of from the off balance sheet account.
1.5 If loans written off from the balance as bad loans on the account of special reserve fund or credit reserve are repaid,
they should be recorded as follows subject to the source of writing off:
Debit: Cash office or Settlement Account
Credit: Special Reserve Fund or Capital Reserve
1.6 If the factual amount of the Special reserve Fund exceeds the reserve to be established subject to classification of
credits them the outstanding amount will be transferred to the revenues account:
Debit: Special Reserve Fund
Credit: Unordinary revenues
IV. OTHER REQUIREMENTS AND CONDITIONS
FOR ACTIVITIES OF THE CRETID UNIONS
Following requirements and conditions are specified with regard to activities of the CU:
-
-
CU may provide credits only to its members
CU may open a manta account in any authorized bank (bank branch) in the area of location
Cash operations of the CU should be performed in conformity with rules set up by the ANB. Storing more than 50
million in the cash office of the CU shall be permitted following installation of the cash office meeting technical
requirements of the ANB.
Reduction of the share capital and payment of dividends during operation of the CU shall be allowed if economic
regulation normatives set up in these Rules are met.
Taking into account specific features of the banking activity, all amendments to the charter of the CU should be
communicated to the ANB.
-
Change of legal address of the CU, as well as substitution of services of one authorized bank (or its branch) with
another should be communicated to the ANB within five days.
CU shall not be eligible to be involved in production, trade and insurance activities, as well as in commercial
activity by participation in the capital of other legal entities.
V. ACCOUNTING AND REPORTING
1.1 CU will keep accounting and reporting in conformity with rules set up by the ANB and General Ledger.
1.2 Reports will be submitted to the ANB on quarterly basis. ANB may require shorter reporting period in order to
strengthen supervision over any CU.
1.3 Quarterly reports shall include balance sheet (Form 1), profit and loss statement (form 2) and Forms 3,4,5,6,7,8,9
attached to this rules.
1.4 Reports to the ANB by the CU should be submitted before 15th of the month following reporting quarter.
1.5 Annual report should be submitted before 15 January of the following year, balance sheet confirmed by auditor
opinion, profit and loss statement and auditor opinion should be submitted before 1 May.
1.6 Supervisory Board, Board of Directors and Credit Commission are responsible for accuracy of the submitted report.
VI. SUPERVISION OVER ACTIVITIES OF THE CREDIT UNION
AND MEASURES TO BE TAKEN BY THE ANB FOR
INCOMPLIANCE WITH ECONOMIC REGULATION NORMATIVES
1.1. Control over the work of the credit union shall be performed by the Supervisory Board.
1.2. ANB shall perform supervision of the work of the credit union by analyzing the statements on compliance with
economic regulation normatives, requirements and conditions. If required, the supervision may be performed through
audits on the field. ANB may delegate the responsibility for supervision to its territorial departments.
1.3. If required, AMB may require from the CU the following during statement analysis and audits:
-
Information, explanations, necessary documentation and explanations regarding these documents from the CU on
issues arising during supervision;
Documentation confirming implementation of compulsory recommendations provided to the CU on rectification of
deficiencies detected during supervision.
1.4 In case of violation of economic regulation normatives by the CU, minutes of the meeting where rectification of such
deficiencies was discussed and plan of actions should be attached to the quarterly reports submitted to the ANB.
1.5 Following actions shall be taken by the ANB in case of violation of the economic regulation normatives:
In case of violation of one or two economic regulation normatives, a letter to the Chairman of the Supervisory Board of the
CU requiring rectification of the situation within six months shall be sent. The CU should respond to the letter at latest
within one month and attach a plan of actions describing how it will be rectifying the situation. Outcomes of the actions
taken by the management of the CU shall be reviewed upon completion of the six months period. Appropriate decision shall
be taken by the ANB subject to implementation of the plan of action.
In case of violation of three or more normatives, a letter requiring submission of the actions plan signed by the heads of the
Supervisory Board and Steering Board and approved by the General Meeting describing actions to put in order all
normatives within six months period. Plan of actions should be submitted to the ANB within one month. Compliance with
the plan of actions shall be followed up by the ANB. If no more than two of the violated normatives have not been rectified,
ANB may allow additional three months period for rectification of all normatives. Following this activities of the CU will
be evaluated on the basis of the submitted reports.
These Rules shall be effective from 22 February 2001