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24.01.2017

Regulation on „large” exposures and Regulation on Banks' Transactions with Their Related Parties, approved by the DCA of the NBM no. 240 from December 9, 2013

 

Regulation on „large” exposures

Regulation on Banks' Transactions with Their Related Parties

 

UNOFFICIAL TRANSLATION

Note: This English is a working document and serves merely for information purposes. The National Bank of Moldova and its staff bear no responsibility for potential losses due to errors arising from the text translation. The only authentic text is that published in Monitorul Oficial al Republicii Moldova.

 

Official Monitor of the Republic of Moldova no. 17-23/97from January 24, 2014

 

Approved by
the Decision of the Council of Administration
of the National Bank of Moldova
no. 240 from December 9, 2013

 

REGULATION
on
large” exposures

CHAPTER I
GENERAL PROVISIONS

1. This Regulation establishes the maximum acceptable limits for the concentration risk of bank's exposure to parties and/or group of related parties, portfolio exposures concentrations and the requirements related to „large” exposures management, and aims to minimize the losses the bank may incur as a result of the exposure concentration.

2. For the purpose of this Regulation, the following terms shall be used:
1) Group of related parties are referred: 
a) two or more individuals or legal entities, which are exposed to the same risk, as a result of the fact that one of them directly or indirectly controls the other one or other ones;
b) two or more individuals or legal entities, between which there is not a relationship of control as defined in letter a) of this subparagraph, but which shall be regarded as exposed to the same risk as they are related parties, so if one of them will experience financial difficulties, the other or all of the others may also encounter repayment difficulties.
While determining the related parties exposed to the same risk, the following situations shall be taken into account, but not limited to: persons of first and second degree kinship, the joint property ownership, the existence of common managers, the issuance of guarantees; the performance of interdependent business relationships that cannot be replaced in a short term, the fact that most businesses are based on the relation with a certain person; direct or indirect holding of at least 20% from the voting rights or share capital of the legal entity.
c) party/parties through which one or more transactions (operations) are carried out in the interest of other party/parties and which are considered to be influenced by them within the transactions (operations) due to the existence of certain working relations, civil relations or other relations between these parties.
2) Control – shall be considered the notion of „control” specified in art.3 of the Law on Financial Institutions no.550-XIII from July 21, 1995. This definition is not applicable to control relations the public authorities have over enterprises (institutions).
3) Exposure – any asset and/or off-balance sheet item reflected in the balance sheet and/or off - balance sheet, which may be exposed to credit risk (the risk that debtor and/or contracting party will not be able to honor its obligations to bank).
Total exposure of a bank to any related party or group of related persons includes the following items:
a) Credits granted - any release of funds to a person on condition of their repayment and payment of interest or other charges for the use of these funds;
b) Financial lease receivables;
c) Contractual commitments of the bank to grant or invest funds, which include the followings, but are not limited to:
commitments to grant credits; 
commitments to make payments (directly or indirectly) to a third party in case of failure to honor the payment obligations by a bank's client, according to the client's agreement with the third party or based on other conditions;
       guarantee commitment or security (surety) in favor of a third party, including standby letters, guarantees and other similar agreements;
any commitment to acquire a debt security or other right to make a payment of a sum of money;
commitments to place deposits in the future;
d) equity interest held in the capital of legal entities;
e) securities issued by legal entities, except securities owned temporarily by the bank in its own name, but on other persons account.
f) funds placed with licensed and foreign banks, except the positions mentioned in subparagraph 4) from this section.
g) funds placed overnight with licensed and foreign banks and overnight loans granted to licensed banks and foreign banks, except the positions mentioned in subparagraph 4) from this section.
h) Funds deposited in „Nostro” accounts opened with the licensed banks and foreign banks, except the positions mentioned in subparagraph 4) from this section.
4) When determining the total exposure, the followings shall not be included:
a) Funds deposited in „Nostro” accounts, placements with banks, funds placed overnight with banks and overnight loans granted to banks, rated not lower than BBB-/Baa3 by at least one of the agencies Standard & Poor's, Moody's and Fitch-IBCA, and if the bank is resident of a country with the above-mentioned ratings or higher. In the event that the rating assigned to a bank or country varies among agencies, the rating of the agency that assigned the lowest rating shall be taken into consideration; 
b) exposures recorded in the ordinary course of settlement during the two working days following the payment, in the case of foreign exchange transactions;
c) exposures recorded in the ordinary course of settlement during five working days following the payment or delivery of the securities, whichever the earlier in the case of transactions for the purchase or sale of securities;
d) delayed receipts of funding and other exposures arising from client activity which do not last longer than the following business day, in case of the provision of funds transfer services, including the payment services, clearing and settlement in any currency and correspondent banking services or financial instruments clearing, settlement and custody services to clients;
e) intra-day exposures to institutions providing those services, in case of the provision of funds transfer services, including the payment services, clearing and settlement in any currency and correspondent banking services;
f) exposures deducted from Total Regulatory Capital.
5). Net Exposure to any related party or group of related persons includes the Gross Credit Exposure minus the sum of the following items:
a) Exposures secured by:
government securities, issued by the Ministry of Finance of the Republic of Moldova;
securities issued by the National Bank of Moldova (National Bank Certificates);
securities issued by the Government of a state member to the Organization of Economic Cooperation and Development, which is rated not less than BBB-/Baa3 by at least one of the agencies Standard & Poor's, Fitch-IBCA and Moody's. In the event that the rating assigned to a bank or country varies among agencies, the rating of the agency that assigned, the lowest rating shall be taken into consideration;
the guarantee of the Government of the Republic of Moldova or by the Government of a State member to the Organization of Economic Cooperation and Development, rated not lower than BBB-/Baa3 by at least one of the agencies Standard & Poor's, Moody's and Fitch-IBCA, and if the bank is resident of a country with the above-mentioned ratings. In the event that the rating assigned to a bank or country varies among agencies, the rating of the agency that assigned the lowest rating shall be taken into consideration.
international organizations and multilateral development banks, listed in the Annex of this Regulation, with the condition that: the right resulting from the insurance is enforced only in case of the client's inability to meet its commitments to the bank; the clause on insurance is irrevocable and expressly stipulated; the insurance can be enforced so that neither the insurer nor any other person is in a position to contest the legal rights of the bank resulting from the guarantee.
b)  Banks exposures, which are irrevocably secured until the end of maturity period, by the non-bank affiliated persons, by pledge-pawn in cash on accounts opened with the bank that granted the credit.
c) Money resources obtained by the bank in the form of loan that shall be used for the irrevocable guarantee of loans granted by the bank.
6)  "Large" Exposure is the Net Exposure of the bank to any related party or to a group of related persons, making up ten percent (10 %) or more of the bank's Total Regulatory Capital.
7) „Total Regulatory Capital” is defined in the „Regulation on Risk-Weighted Capital Adequacy”.
8) „Total Credit Portfolio” means the sum of the bank’s credits (including factoring, bills of exchange, discounted bills of exchange, credit cards, temporarily allowed overdrafts, financing commercial transactions, REPO arrangements, guarantees placed with a bank) and finance lease receivables less the Allowance for Loan and Lease Losses.

3. Banks shall have in place internal policies and procedures for the identification, evaluation, monitoring and verification of portfolio exposure concentrations, including for the identification of data on related parties to which the bank is exposed, with other persons, including the changes made in the previously presented data.

 

CHAPTER II
MAXIMUM ALLOWED LIMITS

4. The undertaken Net Exposure of the bank to a related party or group of related parties shall not exceed 15 % of the bank's Total Regulatory Capital.

5.  In addition to the limit set in paragraph 4, of the bank, whose total loan portfolio is greater than the minimum required amount of capital, the following limitations shall be applied:
1)  The amount of net debt on loans granted to ten persons, including groups of related parties, which represent by size the first net debt on loans minus the allowance for loan losses and the provisions on conditional commitments shall not exceed 30% of the total credit portfolio of the bank, including groups of related parties, which is after the first net debt on the loan amount less provision respective commitments.
The amount of net debt on loans shall be calculated as the difference between the total of granted loans, finance lease receivables, contractual commitments of the bank to grant funds (according to paragraph 2 subparagraph 3) letters a)-c) of this Regulation) and the total of insurance (in accordance with paragraph 2 subparagraph 5 of this Regulation) related to them.
2) The sum of all “large” exposures shall not exceed more than five times the bank's Total Regulatory Capital.
3) The total amount of the net exposure of the bank in Moldovan Lei linked to foreign exchange rate to individuals, including those practicing entrepreneurial activity or other type of activity shall not exceed 30% of the total regulatory capital, out of which total net exposure, other then the mortgage shall not exceed 10% of total regulatory capital.

51. The aggregate amount of net debt on loan granted and contracted with the bank by the shareholders holding, directly or indirectly, or controlling less than 1 percent of the bank’s equity capital, including their related parties, shall not exceed 20% of the total regulatory capital of this bank. The amount of net debt on loan shall be calculated in accordance with paragraph 5 (1) the second sentence of this regulation.

6. In case the limits in section 5 contradict each other, the tougher limitations shall be applied.

7.  Banks shall comply at any time with the limits provided in the Chapter II of this Regulation.

71. Failure to comply with the limits set at paragraphs 4 – 51 shall lead to sanctions specified in Article 38 of the Law on Financial Institutions, and to downward adjustment, if needed, as per decision of the Executive Board of the National Bank of Moldova, of the regulated capital by the amounts exceeding the limits set in the relevant paragraphs. In case that the limits are exceeded at the same time, the National Bank of Moldova shall exercise the powers specified in the first sentence of this paragraph and the regulated capital shall be decreased by the amount of the largest exceeding.

 

CHAPTER III
DECISIONS ON EXPOSURE ASSUMPTION AND REPORTING

8. The decision on the conclusion of any transaction, which would result in a "large" exposure, shall be taken by the majority of members of the bank’s Board before the conclusion of the respective transaction.

9. Banks shall submit to the National Bank of Moldova a report on total “large” exposures existing on the reporting date, in accordance with the reporting requirements of the normative acts of the National Bank of Moldova.

 

Annex
To the Regulation

on “large” exposures

 

List of international organizations and multilateral development banks

  1. International organizations:
    1. European Union;
    2. International Monetary Fund;
    3. Bank of International Settlements;
    4. European Financial Stability Facility
    5. European Stability Mechanism;
    6. An international financial institution established by two or more Member States, which has the purpose to raise funds and provide financial assistance to the benefit of its members that are affected or threatened by severe financing problems.
  1. II. Multilateral development banks:
    1. International Bank for Reconstruction and Development;
    2. International Finance Corporation;
    3. Inter-American Development Bank;
    4. Asian Development Bank;
    5. African Development Bank;
    6. Council of Europe Development Bank;
    7. Nordic Investment Bank;
    8. Caribbean Development Bank;
    9. European Bank for Reconstruction and Development;
    10. European Investment Bank;
    11. European Investment Fund;
    12. Multilateral Investment Guarantee Agency
    13. International Finance Facility for Immunization
    14. Islamic Development Bank

 

Published in the Official Monitor of the Republic of Moldova no. 17-23/97 of January 24, 2014

Approved by
the Decision of the Council of Administration
of the National Bank of Moldova
no. 240 from December 9, 2013

Note: throughout the Regulation 'acting in concert' shall be replaced by 'related', in the appropriate grammatical form, in line with NBM Decision no. 269 of October 17, 2016, in force since November 4, 2016.

 

REGULATION
on Banks' Transactions with Their Related Parties

CHAPTER I
GENERAL PROVISIONS

1. This Regulation sets forth requirements for bargaining, approving, registering, carrying out and reporting transactions with related parties, exposures associated with these transactions, as well as specific identification features of the bank's related parties as set out by the National Bank of Moldova while carrying out its oversight function with a view to protecting the interests of the bank, its customers, preventing conflict of interests, mitigating the risk of concentration of the bank's exposures to its related parties.
[Item 1 supplemented by NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

2. For the purposes of this Regulation, the following definitions shall apply:
1) Related parties are any parties related to another party as defined by Article 3 of the Law on Financial Institutions no. 550-XIII of July 21, 1995. For the purposes of letter g) of this definition, the parties having 'other types of relations' include at least the following parties:
divorced individuals, individuals engaged in guardianship and curatorship relations, the in-laws of relatives up to the third degree of kinship, spouses of relatives and in-laws;
individuals engaged in relations similar to those of spouses (living together as spouses) or to those of parents and children;
• individuals engaged in relations leading to social and/or economic dependence between two or more individuals;
2) exposure - for the purposes of this Regulation, the notion 'exposure' is used as defined in the Regulation on Large Exposures. For the purposes of this Regulation, bank exposure to its related party also includes the bank's exposure to another party that is related to another bank that is exposed to the first party (the bank's related party);
3) the notions 'exercising control', 'total exposure' and 'group of related parties' shall apply according to the definitions of 'exercising control', 'total exposure' and 'group of related parties' set forth in the Regulation on Large Exposures;
4) transactions with related parties are any transfers of funds or contractual obligations between the related parties and the bank, no matter whether a fee has been levied or not.
[Item 2 as set forth in the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

3. The total regulatory capital is defined in the Regulation on Risk-Weighted Capital Adequacy.

4. The Tier I capital is a component of the total regulatory capital, which is defined in line with the Regulation on Risk-Weighted Capital Adequacy.
[Item 4 supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016].

 

CHAPTER II
TRANSACTIONS WITH PARTIES RELATED TO BANKS

Section 1
Transactions

5. The transactions with related parties shall reflect the bank's interests and shall not be carried out on more advantageous conditions than such with non-related parties (except for bank employees that are not related to the bank). The related parties shall be liable to the bank whenever their personal interests prevail over the bank's interests. For the purposes of this Regulation, the more advantageous conditions than those provided to the parties that are not related to the bank are specified at letters a) - g) of paragraph (8) of Article 31 of the Law on Financial Institutions.
[Item 5 supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

6. The banks must be cautious when concluding transactions with related parties. The banks shall carry out transactions with related parties only after having collected sufficient data (documentation) to justify the effectiveness of the transactions, as well as to assess related risk. The bank shall abstain from transactions with a party for which it cannot determine and verify whether it is not related to the bank.
[Item 6 supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

 

Section 2
Lending/placement

7. A bank may provide loans/perform placements to related parties on the same conditions as to non-related parties (except for bank employees that are not related to the bank). A bank shall not charge lower interest rates and fees from related parties than those charged under similar conditions from non-related parties (except for bank employees that are not related to the bank).

8. A bank must impose the same collateral requirements and conditions on loan/placement repayment to the related parties, and shall require the submission of complete financial statements and information on the efficient use of credit.

9. The credit risk assumed by the bank when extending credit/performing placements to related parties shall not be greater than that associated with credit/placements to non-related parties.

10. A bank shall apply the same measures to related parties with regard to credit/placements repayment as to non-related parties.

 

Section 3
Accepting deposits / obtaining loans

11. A bank may accept deposits/obtain loan from related parties under the same terms and conditions as for non-related parties.

12. A bank has no right to pay to related parties higher interest rates/fees on deposits/loans than those paid to other parties on similar deposits/loans.

13. A bank has no right to offer preferential terms on deposits/loans to related parties, allow overdrafts (debit balances on liability accounts) on such terms on the respective accounts of the related parties

 

CHAPTER III
MAXIMUM LIMITS

14. The total bank exposure to a related party and/or a group of parties related to the bank's related party shall not exceed 10 percent of the bank's total regulatory capital.

15. The aggregate amount of bank’s total exposure to related parties and/or groups of parties related to the bank's related parties shall not exceed 20 percent of the Tier I capital of the bank.

16. The banks shall comply at any time with the limits set in this Chapter.

161. Failure to comply with the limits set at paragraphs 14 and/or 15 shall lead to sanctions specified in Article 38 of the Law on Financial Institutions, and to downward adjustment, if needed, as per decision of the Executive Board of the National Bank of Moldova, of the regulated capital by the amounts exceeding the limits set in the relevant paragraphs. In case that the limits are exceeded at the same time, the National Bank of Moldova shall exercise the powers specified in the first sentence of this paragraph andthe regulated capital shall be decreased by the amount of the largest exceeding.
[Item 161 supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016].

 

CHAPTER IV
APPROVAL, RECORD KEEPING AND REPORTING OF TRANSACTIONS

17. Any transaction with a related party shall be approved, prior to its conclusion, by the majority of members of the bank’s Board, except for the following transactions, which are approved by the executive body of the bank:
   a) when the transactions with related parties do not lead to the formation or increase of the total exposure of the bank to a related party and/or group of parties related to a bank's related party and the transaction amount does not exceed the amount of MDL 1 million;
   b) when the transactions with related parties, following the conclusion of which the bank’s total exposure to each of the bank's related party and/or each group of parties related to a bank's related party shall not exceed MDL 1 million;
At its decision, the bank's Board may also approve the aforementioned transactions of  up to MDL 1 million. The related party that has a material interest in a transaction shall leave any meeting at which that transaction is discussed. In case the management exercises the aforementioned powers, the internal audit subdivision shall report regularly (at least quarterly) to the bank's Board on the amount of such transactions and the correctness of approval of these transactions. If a party becomes related to the bank, after the conclusion of a transaction with him/her/it, the bank's Board shall be notified without delay about the occurrence of such relationship and existing transactions, and appropriate measures shall be taken, in reasonable time, order to comply with the provisions of this Regulation, as well as to review the relevant those transactions to assess related risks and eliminate preferential conditions, should such exist.
[Item 17 amended by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

18. The decisions of the bank’s Board, of the executive body on concluding transactions with related parties must contain information regarding the terms and conditions of the transactions, as well as the confirmation that the transactions are performed exclusively in the interests of the bank and on the same terms, under the same conditions as the transactions with non-related parties.
[Item 18 amended by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

19. The bank shall keep and maintain a Register of its related parties and a Register of the transactions with the bank's related parties. The transactions with related parties shall be recorded in the corresponding register, specifying the transaction's nature, date, contract number, amounts and terms. As for the lending/borrowing transactions, there shall be indicated their insurance and insurers. The records on both registers shall be kept for at least 5 years from the date when the party has ceased to be a related party and/or when the liabilities have been repaid.
[Item 19 amended by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

20. The banks shall have in place policies and procedures approved by their Boards for knowing their related parties, determining the banks' exposure to related parties, as well as the total amount of the exposures, as well as to monitor and report about them through an independent exposure management process, including policies on transactions with related parties. The bank's Board shall review at least once a year the transactions with related parties, in force at the time of the review, in order to assess related risks and eliminate preferential conditions, should such exist.

201. The bank shall identify and collect information on its related parties. The list of related parties shall be submitted to the bank’s Board quarterly.
[Item 201 supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

21. The banks shall submit to the National Bank of Moldova a report on transactions with the banks' related parties and the report on the banks' related parties to them, in line with requirements set forth by the acts of the National Bank of Moldova for reporting.
[Chapter V (items 22-28) supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

 

Chapter V
IDENTIFICATION OF THE BANK’S RELATED PARTIES BY THE NATIONAL BANK OF MOLDOVA

22. As part of its oversight function, the National Bank of Moldova may presume certain parties as bank’s related parties, taking into account the nature of the relations and transactions with the bank, based on one or more identification features provided for in the annex to this Regulation, based on the definition set out in Article 3 of the Law on Financial Institutions.

23. The National Bank shall notify a bank electronically, through official channels used for correspondence with banks, about the decision issued under paragraph 22, not later than the next working day, and, if needed, send a hard copy of the notification to the bank.

24. Until the bank provides to the National Bank of Moldova evidence of lack of affiliation, within 15 working days from the date of receiving the notification under paragraph 23, the parties identified by the National Bank of Moldova under paragraph 22 shall be presumed as being parties related to the bank as of the date when the transaction has been performed.

25. Once the bank provides evidence proving that there is no affiliation between the bank and the parties identified by the National Bank of Moldova under paragraph 22, the Executive Board of the National Bank of Moldova may decide to cancel or amend the notification, within at least 10 working days from the expiry of the term specified in paragraph 24, and inform the bank without delay about it or, if otherwise, it shall decide to qualify the parties concerned as the bank's related parties and inform the bank about the compulsory requirement to record,within 5 working days, those parties in the Register of the bank's related parties and the Register of transactions with the bank's related parties, as well as update the lists prepared in line with paragraphs 201 and 21 and any other data reported to the National Bank of Moldova as of the latest reporting date.

26. If the bank fails to provide to the National Bank of Moldova evidence proving that there is no affiliation between the bank and the parties identified under paragraph 22, the decision of the Executive Board of the National Bank of Moldova shall remain in force and the bank shall record, within 5 working days, those related parties in the Register of the bank's related parties and the Register of transactions with the bank's related parties, as well as update the lists prepared in line with paragraphs 201 and 21 and any other data reported to the National Bank of Moldova as of the latest reporting date.

27. If a party is identified as related to the bank based on the decision of the Executive Board of the National Bank of Moldova, the bank's executive body shall notify the Board without delay about it and about existing transactions with those parties and take the appropriate measures to ensure compliance with the provisions of this Regulation, as well as review these transactions to assess related risks and eliminate preferential conditions, should such exist.

28. The Banks may use in the process of identification of its related parties at least the related party identification features specified in the annex to this Regulation.
[Chapter V (items 22-28) supplemented by the NBM's Decision no. 269 of October 17, 2016, in force since November 4, 2016]

 

Annex
to the Regulation on
Banks' Transactions with Their Related Parties

Checklist used by the National Bank of Moldova to identify the parties that have relations or perform transactions with the bank and/or its related parties

1. Nature of relations:

1) Exclusiveness:

  • a party does not have any credit history with other financial institutions not related to the bank and appears as a debtor/counterpart of a single bank or of the bank’s related parties, while the transactions performed by that party cannot be justified from the economic viewpoint (except for the cases when the financing received from a number of banks makes little sense, for example, in case of mortgages/loans granted to individuals for purchasing housing, which is the sole place of residence of those individuals);

2) Economic dependence:

  • a party carries out economic activity in a sector in which the bank and/or the bank’s related parties have a dominant position on the market associated with this sector (including ancillary activities and services);
  • the funds received from the bank or from the bank’s related parties are an important source of income of the party;
  • the party does not carry out any significant economic activity or does not report any proceeds (including fictitious legal entities or legal entities registered in offshore zones);
  • the party is dependent on the bank or on the bank’s related parties, so that the financial problems faced by the bank or the bank’s related parties might lead to financial problems in the activity of the party;
  • the party mainly acts as a representative of the bank or of the bank’s related parties;
  • the party belongs to a group of debtors that are related to each other through joint economic activity, to which the bank grants substantial loans, even when one of the debtors belonging to the group is the bank’s related party;
  • the party belongs to a group of parties that are related to each other through joint economic activity, and the collateral for their loans is provided by a single pledger and/or at least one of the debtors is the bank’s related party;

3) Common infrastructure:

  • the party is registered at the same or similar address (physical or virtual), has the same residence, web page and other similar identification features as those of the bank or the bank's related parties;
  • the party uses the same structural components, particularly IT and accounting systems as the bank or the bank’s related parties (including through outsourcing);
  • the party employs the same manager as the bank or the bank’s related parties, or an employee of the party is a manager at the bank and/or the bank's related parties, or vice versa;
  • the party employs a legal adviser jointly with the bank or authorizes the bank or parties related to the bank to ensure his/her/its legal representation, or the party is a specialized entity founded to perform certain functions and is controlled by the bank or the bank’s related parties;
  • the party has the same suppliers of goods and services, or the same customers as the bank or the bank’s related parties;

4) Insufficient transparency:

  • the available information on the structure of ownership of a party does not allow for identification of the shareholders holding directly or indirectly a substantial interest in the equity capital of the party and of its ultimate beneficiary owners;
  • the ownership structure of the party is unreasonably complicated and intricate;
  • the party fails to cooperate with the National Bank of Moldova with regard to the disclosure of information about its relations with the bank and/or the bank’s related parties;
  • the party is not registered in the country where it carries out its main activity and there are no reasonable economic or financial reasons to act this way;
  • the party does not negate/refute in an official manner the available public information on its affiliation to the bank;

5) Other relations:

  • the party is related to another party or a number of parties as described in the Regulation on holdings equity interest in the capital of banks.

2. Nature of transactions:

1) The object of transaction and the purpose for which the funds are used:

  • the transactions are performed and the funds are used for other purposes than the main types of activity of the party;
  • the funds received from the bank are used for other purposes than those stated when contracting the loan;
  • the bank cannot identify and verify the purpose of using the funds;
  • the funds are used by the bank’s related parties or, directly or indirectly, in their interest (including for repaying the loans /borrowings to other financial institutions, acquiring assets and paying for services);

2) Documentation:

  • there are no available documents concerning the transactions or the available documents do not meet the requirements of the law (including insufficient number of documents or unavailability of certain documents);
  • the available documents do not reflect the actual profile and economic substance of the transaction;

3) Transaction standards – the transactions would not normally be performed by the bank under a number of circumstances, as follows:

  • some of the internal rules on lending are not available or not fully described by the banks internal regulations;
  • the transactions are performed in violation of the bank's internal regulations;
  • the amount of the loan granted is not justified from the viewpoint of the debtor's type of activity;
  • there is a significant discrepancy between the geographical location of the party and the substance/conditions of the transaction;
  • the legal form of the transaction does not reflect its economic rationale;
  • the loan contract between the party and the bank envisages certain preferential conditions, which allows for cancellation of certain obligations towards the bank or transfer of the loan to a bank’s related party;
  • the debtor/counterpart enjoys individual treatment with regard to repayment, which differ from the general repayment conditions set for other debtors/counterparts of the bank;
  • the number of the party's employees does not match the type of activity conducted by the party and/or the purpose of the transaction between the bank and the party;
  • the party has failed to obtain the documents/licenses/authorizations required for carrying out the activity for which the loan was provided (for example, it has failed to obtain authorization/permission for starting construction etc.), within 6 months from the date of obtaining the loan/borrowing;

4) Contractual clauses – the conditions for concluding transactions that are in place at other banks (according to best practices) have not been met, including in the cases below:

  • certain contractual clauses are missing or are incomplete;
  • the amount of the loan granted does not reflect the purpose of activity conducted by the debtor and the debtor's ability to generate cash flow to ensure loan repayment;
  • there is a significant mismatch between the contractual conditions, obligations and rights;
  • the parties have contractual relation that allows them to cancel their obligations towards the bank and/or transfer the obligations to a party related to the bank;
  • the contract includes provisions for loan repayment by the debtor that differ from the provisions of other contracts (the conditions are more favorable);

5) Indebtedness – another bank would not provide the loan (according to best practices), including in the cases described below:

  • the loan cannot be repaid within the required term and in the required form, given the creditworthiness of the debtor and the sources of income available to him/her/it;
  • the loan cannot be repaid within the required term and in the required form, given the income generated by the loan invested by the debtor;
  • the rating of the loan (or the quality of investment)/transaction is below the minimum level acceptable by the bank;

6) Internal control instruments – the internal control systems are insufficient for carrying out transactions compared to the control systems used in other situations, including:

  • the transaction was performed based on a procedure that differs from the one used in case of similar counterparts;
  • the risk management unit has not expressed a positive opinion regarding such transaction or has expressed a negative opinion regarding it;
  • the amount of the transaction exceeds the internal limit set by the bank for such counterparts and there is no economic justification for the bank's engaging in such transactions;
  • the assets sold/services provided to the bank cannot be identified or there is no evidence of their existence at the moment of performing the transaction;
  • the loans extended to the party were not classified as nonperforming in due time (including in case of loan restructuring), or provisions for losses on assets/conditional commitments have not been calculated accurately;
  • the bank has failed to launch the procedure of collecting the overdue payments or of selling the loan collateral;

7) Interest rates, commission fees and prices:

  • the interest rates, commission fees and operational proceeds (expenses) associated with transaction differ from the current conditions in the market/contractual conditions set for other debtors/counterparts;
  • the price of selling assets and/or services provided by the bank differ substantially from the current conditions in the market;
  • the price of purchasing assets and/or services provided to the bank differ substantially from the current conditions in the market;

8) Collateral and guarantees:

  • the party has concluded a liability offsetting contract with the bank or with the bank’s related parties;
  • the bank has accepted the debtor's/counterpart's collateral that is of a worse quality that the collateral accepted from other customers.

[Annex supplemented by the NBM's Decision no.269 of October 17, 2016, in force since November 4, 2016]