“Approved”
Financial Markets Supervisory Authority
of the Republic of Azerbaijan
Resolution № 16
07 July 2017

Chairman of the Board of Directors
_______________
Rufat Aslanlı

Regulations on prudential regulation of credit unions

1. General Provisions

These Regulations have been developed in accordance with Para 10 of Article 5 and Para 2 of Article 18 of the Law of the Republic of Azerbaijan on Credit Unions (hereinafter – the Law) and determine prudential norms and requirements, as well as reporting on activities of credit unions.

2. Definitions

2.0. Definitions used herein bear the following meanings:
2.0.1. fully secured loan - loan whose timely and full repayment is secured by collateral with the market value equal to or over the unpaid amount of this loan (pledged movable and immovable property), guarantee, warranty and other means as set under the Civil Code of the Republic of Azerbaijan.
2.0.2. partly secured loan – loan secured by collateral, the market value of which is less than the unpaid amount of the loan or by other securitization;
2.0.3. unsecured loan – loan without any security or whose security has no market value or not documented under the Civil Code of the Republic of Azerbaijan regardless its value;
2.0.4. current loan – loan, whose principal amount and interest are repaid as of the contractual date;
2.0.5. overdue loan - loan where payments against the principal amount or interest accrued thereupon, or the outstanding portion of either principal amount or accruals, are delinquent for more than 30 calendar days beyond the contractual maturity date;
2.0.6. capital – total of authorized capital and retained earnings (amount after taxes and obligatory deductions from profit) of a credit union.

3. Prudential norms and requirements

3.1. The following prudential norms and requirements are established on activities of credit unions:
3.1.1. minimum amount of authorized capital;
3.1.2. minimum amount of capital and its adequacy ratio;
3.1.3. maturity matching of assets and liabilities;
3.1.4. maximum amount of a loan to one member;
3.1.5. maximum amount of an unsecured loan;
3.1.6. requirements on special reserves to be created against expenses to cover possible losses depending on classification of loans.
3.2. New prudential norms and requirements and changes therein set by the Financial Markets Supervisory Authority of the Republic of Azerbaijan (hereinafter – the FIMSA) for functional credit unions take effect no earlier than one month, while changes to requirements to minimum amount and adequacy ratio of capital take effect no later than six months upon formal notification of credit unions.

4. Authorized capital

Authorized capital of a credit union should not fall below AZN 4000 (four thousand).

5. Capital and its adequacy ratio

5.1. Capital of a credit union shall not fall below AZN 4000 (four thousand).
5.2. The capital adequacy ratio should not fall below 0.25 within one year upon launch of a credit union, and no less than 0.20 later.
5.3. The capital adequacy ratio is calculated as the ratio of credit union capital to the sum of outstanding principal amount of current and overdue loans as of the reported date.

6. Maturity matching of assets and liabilities

6.1. Maturity of loans by a credit union and accrued interest should override maturity of credit union's liabilities.
6.2. The maturity matching norm of assets and liabilities shall equal minimum 1 or over.
6.3. The maturity matching norm for assets and liabilities is calculated as the ratio of total assets (current loans, payable interest and other assets) to total liabilities (externally attracted loans, interest accruals and other liabilities) as of the reported date at least on liabilities delinquent for 0-30, 31-90, 91-180, 181-365 and over 365 days.
6.4. Overdue loans of credit union members and debt amounts on interest accrued to them are ignored in total assets when calculating the maturity matching norm for assets and liabilities.

7. Maximum amount of a loan to one member

7.1. Maximum amount of a loan to one member shall not exceed 10 times of the share of the member in question in authorized capital of a credit union and 10 percent of the mutual loan fund, according to Para 2, Article 20 of the Law.
7.2. When calculating maximum amount of the loan to one member, his/her outstanding principal debt on credit liabilities to the credit union as of the date shall be taken into account.

8. Maximum amount of an unsecured loan

8.1. Maximum amount of unsecured loans to CU members should equal 0.2 or over.
8.2. Maximum amount of unsecured loans is calculated as the ratio of total unsecured loans and the unsecured portion of partly secured loans issued by CU to CU capital.

9. Special reserve fund

9.1. The credit union should evaluate all its loans at least once a quarter and create special reserves against expenses depending on loan classification to cover losses incurred as a result of its activities in order to have a distinct and unbiased view of its financial standing and transaction results.
9.2. The credit union analyzes all loans and relates them to relevant classification categories pursuant to these Regulations.
9.3. Loans are classified into standard and non-standard loans for classification purposes. Standard loans include satisfactory, while non-standard loans include non-satisfactory, doubtful and loss loans.
9.4. Special reserves are created in the following amounts on classifications:
9.4.1. satisfactory loans – 0% of outstanding amount of principal and interest, of which contractual maturity on principal amount and interest debt is delinquent for 30 days;
9.4.2. non-satisfactory loans - 30% of outstanding amount of principal and interest, of which contractual maturity on principal amount or interest debt is delinquent for 31-90 days;
9.4.3. doubtful loans - 60% of outstanding amount of principal and interest, of which contractual maturity on principal amount or interest debt is delinquent for 91-180 days;
9.4.4. loss loans - 100% of outstanding amount of principal and interest, of which contractual maturity on principal amount or interest debt is delinquent for over 181 days.
9.5. If a credit union identifies improvement of the quality of loans during assessment, the created reserves are reduced against crediting of a relevant expenses account or the reduced amount of the reserve, previously deducted from income, is recorded in income.
9.6. Loss loans are written off by a credit union from the balance sheet in the amount of principal and interest at the decision of the general meeting of a credit union, or, if authorized, the Supervisory Board.
9.7. Loans written off from the balance sheet are recorded in the off-balance sheet account for at least 5 years. Documents on loans written off from the balance sheet are stored within the period established in the Guidelines on maintenance of archivation in the banking system of the Republic of Azerbaijan.
9.8. Funds received by the credit union for repayment of assets previously written off from the balance sheet as loss loans are channeled to reduce relevant expenses account or reduced amount of the reserve previously deducted from income is included to income.

10. Reporting

10.1. The credit union delivers the following quarterly reports to the FIMSA on its operations:
10.1.1. general information (Annex 1);
10.1.2. information on managerial bodies and an internal auditor (Annex 2)
10.1.3. balance sheet (Annex 3);
10.1.4. income statement (Annex 4);
10.1.5. other reports on activities (Annex 5 -12).
10.2. Statements are signed by the chairman of the Management Board of the credit union and the member of the Management Board responsible for development of financial statements and stamped.
10.3. Reports are delivered in hard and soft copy until the 7th day of the month following the reported quarter.
10.4. Audited annual balance sheet, and income statement are submitted together with the auditor opinion no later than 31 May of the next year.