‘Approved’
Central Bank of
the Republic of Azerbaijan
Resolution № 29/1-2
22 July 2022

Regulation on prudential ratios and requirements related to credit risks, including large credit risk exposures

1. General provisions

This Regulation has been developed in accordance with Articles 34.2.5, 34.2.6 and 34.5 of the Law of the Republic of Azerbaijan on Banks and determine maximum amount of credit risks, aggregate large credit risks, as well as other related credit risks regarding credit exposures on a single borrower or a group of related borrowers and procedures for application of these ratios in banks and local branches of foreign banks operating in the Republic of Azerbaijan (hereinafter – banks).

2. Definitions

2.1. Definitions used herein bear the following meanings:
2.1.1. maximum amount of credit risks – the upper limit of the bank's credit exposure for a single borrower or a group of related borrowers;
2.1.2. amount of large credit risk – amount of credit exposure (large credit exposure) due from one borrower or a group of related borrowers exceeding 10% (ten) of bank's Tier I capital after deductions;
2.1.3. credit exposure – bank’s claim rights in connection with fulfillment of any type of liabilities, as well as any commitment made to provide funds, guarantee, warranty, purchase of debt securities and another right related to claiming the funds issued in any form under the agreement. Unless otherwise specified in this Regulation, principal debt on credit exposure is considered in calculations;
2.1.4. borrower – an individual or a legal entity who has a liability to the bank in any form on credit exposure;
2.1.5. non-bank financial institutions (NBFI) – financial institutions providing financial services other than attraction of deposits (savings) (non-bank credit institutions, credit unions, lessors, insurance, factoring, pawnshops and other similar organizations);
2.1.6. car loan - a loan granted for the purpose of acquiring a vehicle, the subject of collateral of which is that vehicle;
2.1.7. vehicle – the vehicle purchased by individuals for personal consumption;
2.1.8. real estate loan - a loan given to individuals for acquisition or construction of real estate for personal consumption;
2.1.9. the loan-to-value (LTV) ratio – the ratio of total loan amount (principal and interest to be calculated under the loan agreement) to the market value of collateral;
2.1.10. multilateral development banks – an international financial institution established by two or more countries to support economic development;
2.1.11. bank acceptance - a document providing for the bank's consent to execution of short-term debt liabilities;
2.1.12. liquid market – a market where there is a sufficient number of offers to buy and sell, and where it is possible to sell within a reasonable time and at a market price;
2.1.13. partially secured or unsecured credit exposure – when the types of collateral specified in Item 5.3 herein act as collateral for a credit exposure and their market value is less than 100% (one hundred) of the amount of the liability, and when other types of collateral, less than 150% (one hundred and fifty) except for the cases specified in this Regulation.
2.2. The debt-to-income (DTI) ratio used in this Regulation bear the meaning specified in the ‘Regulation on creation of special reserves for assets classification and loan loss provisioning’.

3. Group of related borrowers

3.1. Borrowers are considered related when:
3.1.1. one of the borrowers has significant influence on bank’s another borrower;
3.1.2. the same person (whether a borrower) has significant influence on two or more borrowers of the bank;
3.1.3. the person who has joint or subsidiary liability for obligations of any borrower is a borrower of the bank;
3.1.4. the same person (whether a borrower) has a joint or subsidiary liability on obligations of two or more persons who are borrowers of the bank;
3.1.5. a borrower gives a loan from a bank to another borrower in any form; or two or more borrowers together or separately transfer the loan they take from the bank to the same person (whether a borrower) (except for the cases when funds are transferred to the same goods or service provider by one or more borrowers for commercial purposes);
3.1.6. borrowers jointly use bank loans to generate income;
3.1.7. more than 50% (fifty) of one borrower's income or expenses (including consolidated income and expenses) is related to another borrower of the bank;
3.1.8. two or more borrowers use the same source to meet liabilities or pledge the same collateral, or more than 50% (fifty) of their income is earned from the same person.
3.2. A person is deemed to have significant influence over another person when:
3.2.1. it has a qualifying holding of 10% (ten) or more of the legal entity’s capital;
3.2.2. the person of the legal entity with qualifying holding, is the person with the right to influence legal entity’s decision-making based on a contract concluded with governing bodies or another authorized person or on other grounds, or may manage its affairs;
3.2.3. he/she is a founder (participant) with a joint or subsidiary liability on obligations of the legal entity.
3.3. A legal entity whose majority holding is owned by the state (and its staff) and another legal entity whose majority holding is owned by the state (its staff) are not included to a group of related borrowers.

4. Maximum amount of credit risks

4.1. The bank’s maximum amount of the credit risk on a single borrower or a group of related borrowers may not exceed 25% (twenty five) of Tier I Capital after deductions.
4.2. Maximum amount of partially secured or unsecured credit exposure(s) on a single borrower or a group of related borrowers may not exceed 10% (ten) of Tier I Capital after deductions, expect for credit exposures against the banks operating in the Republic of Azerbaijan; non-resident banks with a minimum investment rating issued by international rating agencies (Standard & Poor`s, Fitch Ratings, Moody`s, hereinafter – international rating agencies); real estate loans issued in accordance with the LTV ratio set in this Regulation. The following should be considered during calculation:
4.2.1. the portion of the market value of Group 5 securitization specified in the ‘Regulation on creation of special reserves for assets classification and loan loss provisioning’ over 25% (twenty five) of total amount of the credit exposure;
4.2.2. it is determined whether each credit exposure is separately classified as a partially secured or unsecured loan, and then the credit exposures attributed to the partially secured or unsecured loan category are aggregated on a single borrower or a group of related borrowers.
4.3. The credit risk of a systemically important bank on another systemically important bank may not exceed 15% (fifteen) of Tier I Capital after deductions.
4.4. Maximum amount of credit risks of the bank on non-bank financial institutions (NBFI) is set as follows:
4.4.1. credit exposure per NBFI should not exceed 7% (seven) of Tier I Capital of the bank after deductions;
4.4.2. aggregate credit exposure on NBFIs should not exceed 30% (thirty) of Tier I Capital after deductions.
4.5. The maximum amount of the credit risk of the bank on a car loan of one borrower should not exceed the following (only principal debt is considered in the calculation of the LTV ratio):
4.5.1. regardless of the price, when the production date is 3 (three) years or less at the time of the loan approval for electric vehicles – the LTV ratio 90%, if over 3 (three) years – the LTV ratio 60%;
4.5.2. regardless of the price, when the production date is 1 (one) year or less at the time of loan approval for hybrid vehicles – the LTV ratio 80%, over 1(one) year and 3 (three) years or less – the LTV ratio 60%, over 3 (three) years – the LTV ratio 50%;
4.5.3. when the production date on vehicles not attributable to sub-items 4.5.1 and 4.5.2 herein is 1 (one) year or less at the time of loan approval – the LTV ratio 60%, over 1 (one) year and 3 (three) years or less – the LTV ratio 50%, over 3 (three) years – 40%.
4.6. Except for the below cases, consumer loans are issued to borrowers whose DTI ratio is not over 70% (seventy):
4.6.1. If the LTV ratio is not over 100% when national currency denominated deposits with the same bank act as securitization of consumer loans (belonging to the borrower or a third party); bank metals are deposited as collateral – if the LTV ratio is not over 90%; when other precious metals – if the LTV ratio is not over 70%;
4.6.2. If foreign currency deposits with the same bank (belonging to the borrower or a third party) or bank metals deposited as collateral in the same bank act as securitization for consumer loans in foreign currency, if the LTV ratio is not over 90%.
4.7. Foreign currency denominated consumer loans are issued to borrowers who have income in a foreign currency. Consumer loans in a foreign currency are issued to borrowers who do not have income in a foreign currency as per sub-item 4.6.2 herein.
4.8. Aggregate amount of all credit exposures on consumer loans with 5 (five) year and over maturity (including restructured consumer loans) may not exceed 0,1% of Tier I Capital after deductions.
4.9. Real estate loans are issued only in the national currency. At that, the maximum amount of the bank’s credit risk on a real estate loan per borrower should not exceed the following (only principal debt is considered in calculation of the LTV ratio):
4.9.1. when issued to an individual who does not own a residential area for purchase of a residential area and is secured with a mortgage of that residential area – the LTV ratio 85%;
4.9.2. the real estate loan not attributable to sub-item 4.9.1 – the LTV ratio 70%.
4.10. The amount of aggregate large credit risk exposures may not exceed 8 (eight) times of Tier I Capital of the bank after deductions.
4.11. Bank’s large credit exposure is created or increased to the level specified in this Regulation at the decision of the Supervisory Board.

5. Exceptions allowed and the role of securitization in calculation of the maximum amount of credit risks

5.1. When calculating maximum amount of credit risks, principal amount of credit exposure is recorded less relevant general reserves.
5.2. The following credit exposures are not considered (not included to calculation) in the calculation of the maximum amount of credit risks:
5.2.1. due to the Government of the Republic of Azerbaijan and the Central Bank of the Republic of Azerbaijan (hereinafter – the Central Bank);
5.2.2. due to governments and central banks of the countries with minimum ‘AA-’ country (sovereign) debt rating (or equivalent) issued by international rating agencies;
5.2.3. exposures on one day interbank operations (overnight/intraday);
5.2.4. exposures on interbank secured money market;
5.2.5. correspondent account balances (in case of banks operating in the Republic of Azerbaijan, as well as banks with minimum investment rating issued by international rating agencies).
5.3. When the following types of collateral act as securitization for a credit exposure, the unconditionally secured part of the credit exposure is reduced in the following manner during the calculation of the ratios defined in Part 4 herein (not included in the calculation):
5.3.1. government securities of the Republic of Azerbaijan, as well as securities issued by the Central Bank and in case of government guarantee – 100% (one hundred);
5.3.2. the national currency, bank metals or the currency of the countries with the minimum investment rating issued by international rating agencies (equivalent, in case credit exposure is not in the currency of securitization) – 100% (one hundred);
5.3.3. securities and guarantees (warranties) issued by governments or central banks of the countries with the minimum ‘A-’ country (sovereign) credit rating issued by international rating agencies (or equivalent) – 100% (one hundred);
5.3.4. securities and guarantees (warranties) issued by multilateral development banks with the minimum investment rating issued by international rating agencies – 100% (one hundred);
5.3.5. backed securities issued by the Mortgage and Credit Guarantee Fund of the Republic of Azerbaijan – 100% (one hundred);
5.3.6. guarantee of the funds established by the state that issues guarantees on execution of liabilities on bank loans – 80% (eighty);
5.3.7. securities and guarantees (warranties) issued by governments and central banks of the countries with the minimum investment rating issued by international rating agencies – 80% (eighty);
5.3.8. securities and guarantees (warranties) issued by banks with the minimum investment rating issued by international rating agencies, as well as those issued the banks operating in the Republic of Azerbaijan whose credit rating issued by international rating agencies is 3 (three) rates lower at most than the country (sovereign) debt rating of the Republic of Azerbaijan – 50% (fifty);
5.3.9. securities and guarantees (warranties) issued by financial institutions with the minimum ‘A-’ credit rating (or equivalent) issued by international rating agencies – 50% (fifty).
5.4. Except for the types of securitization specified in sub-items 5.3.1 and 5.3.2 herein, maximum amount of the credit risk on the credit exposure of other types of securitization specified in Item 5.3 that act as collateral (without reducing the secured portion of the credit exposure as per Item 5.3 herein) may not exceed 50% (fifty) of Tier I Capital of the bank after deductions.
5.5. At least the following terms and conditions should be provided along with the requirements specified in the normative act that regulates procedures for credit risk management in banks to consider the secured portion of the credit exposure in the calculation of the ratios specified in this Regulation:
5.5.1. the rights of the bank over collateral should be documented in accordance with the legislation;
5.5.2. maturity of the collateral should not fall below the maturity of the liability it secures;
5.5.3. the market value of collateral should be revalued at least once a year;
5.5.4. there should be a liquid market to sell the collateral.
5.6. The below portion of off-balance sheet liabilities are considered in calculation of the maximum amount of credit risks (included to the calculation):
5.6.1. 10% (ten) of liabilities that give the bank the right not to fully fulfill the liability unilaterally based on the agreement;
5.6.2. 20% (twenty) of off-balance sheet liabilities with up to one year maturity;
5.6.3. 50% (fifty) of off-balance sheet liabilities with over one year maturity;

5.6.4. credit lines, bank acceptance and obligations for buy/sell of securities are considered in full.

6. Elimination of violations regarding norms and reporting

6.1. If it is discovered that the bank has violated the ratios set in this Regulation, the Chief Risk Officer should inform the Central Bank no later than the next business day. The information should specify the reasons for the violation and measures to be taken for their elimination.
6.2. The bank should eliminate the violation of ratios if:
6.2.1. Tier I Capital of the bank decreases - within 60 (sixty) calendar days;
6.2.2. the market value of collateral decreases or is lost - within 60 (sixty) calendar days;
6.2.3. a single borrower becomes a group of related borrowers – within 60 (sixty) calendar days.
6.3. The bank delivers to the Central Bank the following information related to credit exposures on a monthly basis together with prudential reports:
6.3.1. bank’s large credit exposures without applying the requirements of Items 5.1 and 5.3 herein;
6.3.2. bank’s large credit exposures after the requirements of Items 5.1 and 5.3 herein are applied;
6.3.3. bank’s large credit exposures specified in Item 5.2 herein except for the credit exposures specified in sub-item 5.2.3 herein;
6.3.4. 20 (twenty) largest credit exposures to a single borrower or a group of related borrowers (regardless of whether the amount exceeds 10% (ten) of the bank's Tier I Capital after deductions).

7. Final provisions

7.1. The requirements of sub-item 4.2.1, Items 4.6, 4.8 and 5.4, as well as the requirement of sub-item 5.6.4 on considering credit lines in the calculation in full apply to credit exposures created after this Regulation takes effect.
7.2. The requirements of Items 4.6 and 4.8 herein do not apply to student loans issued at the expense of resources of the Education Student Loan Fund operating under the Ministry of Education of the Republic of Azerbaijan.