Amendments related to non-performing loans, financial services and financial organisations18 march 2016, 17:28
GRATA Finance & Securities Group has released a legal alert covering important legal developments in the Kazakhstani legislation that occurred in 2015.
Most of the changes were introduced in the legislation pursuant to adoption in May 2015 of a new policy document – the Plan of the Nation: 100 Steps for Implementation of 5 Institutional Reforms – governing the development of Kazakhstan in the short-term perspective.
The legal review covers the following areas:
1. Law on Corruption Countermeasures
2. New Civil Procedure Code
3. Law on Astana International Financial Center
4. Law on Judicial System
5. Law on Supreme Judicial Council
6. Resolution on Application of Bankruptcy and Rehabilitation Legislation by the Courts
7. New Commercial Code
8. PPP Law
9. Law on WTO Accession
10. Law on Special Defensive, Antidumping and Compensational Measures
11. Law on Ownership Right Further Protection
12. Law on Amendments to Electric Power Industry
13. Law on Amendments Related to Non-performing Loans, Financial Services and Financial Organisations
14. Law on Agricultural Cooperatives
15. Privatisation Decree
16. Rules of Electronic Trades
17. New Procurement Law
Each of them is addressed in a separate release on our website, whereas the today’s release deals with the Law on Amendments Related to Non-Performing Loans, Financial Services and Financial Organisations.
LAW ON AMENDMENTS RELATED TO NON-PERFORMING LOANS, FINANCIAL SERVICES AND FINANCIAL ORGANISATIONS
The Law on Amendments Related to Non-Performing Loans, Financial Services and Financial Organisations (Law of the Republic of Kazakhstan dated 24 November 2015 no. 422-V "On Introduction of Amendments and Additions to Some Legislative Acts of the Republic of Kazakhstan on Issues of Non-Performing Loans and Assets of the Second – Tier Banks, Provision of the Financial Services and Activity of Financial Organisations and the National Bank of Kazakhstan") (the “Law”) came into effect from 1 January 2016, except certain provisions as described below.
The purposes of the Law are to improve the mechanisms of protecting the rights of financial services’ consumers and work of the second-tier banks with insolvent borrowers, creation of additional mechanisms for dealing with non-performing assets of banks, ensuring the stability of the financial system and further development of Islamic finance in Kazakhstan.
The Law amends 7 codes and 35 laws of the Republic of Kazakhstan. Some of the provisions of the Law have retrospective effect (i.e. cover the relations and agreements that arose BEFORE the enactment of the Law) as indicated below.
(A) Amendments Aimed on Dealing with Non-Performing Assets and Ensuring Stability of Financial System
Change of Loan Repayment Order. The Law has changed the general repayment order for non-bank loans and established mandatory repayment order for the bank loans and microcredits. Thus, currently, as a general rule, in case if the amount received from the borrower as a repayment under non-bank/microcredit loan agreement is not sufficient, such amount shall first be applied to discharge the principal and interests amounts, and only after that penalties and expenses shall be discharged (previously, the repayment amount received from the borrower shall have been applied vice versa).
In case of the bank loans and microcredits provided to individuals, the following mandatory repayment order is established: (i) overdue principal; (ii) overdue interest; (iii) penalties; (iv) due principal; (v) due interest; (vi) enforcement expenses of the creditor. If the payment has not been made by the borrower within 180 consecutive calendar days, the following mandatory repayment order shall apply: (i) overdue principal; (ii) overdue interests; (iii) due principal; (iv) due interest; (v) penalties; (vi) enforcement expenses of the creditor.
Change of loan repayment order is aimed at decrease of number of non-performing loans in the financial system and improvement of quality of banks and microfinance organisations credit portfolios.
Amendments to Measures of Influence of the National Bank. The Law has introduced certain amendments to the so called “measures of influence” that can be applied by the National Bank to banks, insurance (reinsurance) companies, microfinance organisations, pension fund, mortgage organisations and subjects of the securities market (the “regulated organisations”) for breaches of prudential requirements and Kazakh legislation.
First of all, such measure as “letter-obligation” has been abolished, so the National Bank now can generally apply three remaining measures: written prescription, written notification and written agreement.
Secondly, in case of written prescription issued for breach of legislation by a regulated organisation, the Law gave opportunity to the regulated organisations to develop their own plan of measures to address committed breaches as well as reasons and conditions resulted in committed breaches (previously, the mentioned organisations had to perform the measures prescribed by the National Bank and could not suggest their own plan of measures).
Thirdly, written notification will now be issued to notify the regulated organisation about possibility of sanctions to be applied to it by the National Bank in case of repeated breach of legislation within one year from the moment of written notification (previously, notification was issued in relation to the sanctions that could be applied for the first breach without waiting for the repeated breach or if the breach was not cured within the period established by the National Bank).
Further, the Law clarified that “written agreement” shall be mandatorily signed by the regulated organisation.
Protection of Banks against Requisition of the Land Plots.Under Kazakh law if a land plot is not used in accordance with its purposes (e.g. agriculture, construction etc), it shall be subject to requisition by the state.
The Law clarified that requisition of such land plots from the Kazakh banks can take place only after 6 months from the moment of acquisition of such land plots by the bank in the course of enforcement of pledge over such land plots.
Strengthening Criminal Liability of Financial Organisations’ Management. Management of the financial organisations, banking and insurance holdings, major shareholders-individuals and management of major shareholders – legal entities can be now, inter alia, deprived of the right to hold management positions for the period from 5 years and up to the life term for deliberate bankruptcy, bringing to insolvency, abuse of authority if these actions caused heavy damage to financial organisation (previously, they could be deprived of the right to hold management positions for the period of up to 5 years).
Introduction of Administrative Liability for Manipulation with Currency Exchange Rate. Participants of financial market are now subject to administrative liability for transactions concluded for the purposes of manipulation with prices for financial instruments and market currency exchange rate. The administrative liability constitutes the fine of 10% of the amount of the transactions concluded for the purposes of manipulation.
Organisations for Acquisition of Doubtful and Bad Assets. Previously, in order to get rid of doubtful and bad assets, the banks were entitled to sell such assets either to special organisation established by the National Bank (JSC “Fund of Bad Assets”) or to special subsidiaries of the bank established particularly for the purpose of dealing with bad assets. Now the banks, in addition to options mentioned above, are entitled to establish special organisations for acquisition of doubtful and bad assets together with the National Bank and sell their bas assets to such organisations. In this case relevant risks are shared between the bank and the National Bank as regulator.
Right Not to Pay Dividends. A bank, an insurance (reinsurance) company is now entitled not to pay dividends on its privileged shares in case such payment will cause breach of prudential requirements applicable to the bank/insurance (reinsurance) company provided that such right is contemplated in the prospectus of shares issuance.
The Law clarified that the shareholders of a Kazakh joint stock company are not entitled to claim dividends payment if the dividends have not been accrued due to the following reasons: (i) negative own capital of a joint stock company or possibility of negative own capital as a result of dividends payment; or (ii) there would be risk of insolvency of a joint stock company as a result of dividends payment.
Subordinated Debt of Banks and Insurance Organisations. The Law introduced the definition of “subordinated debt” of banks and insurance organisations. Subordinated debt is an unsecured debt of the bank/insurance organisation under bonds issuance or loan that simultaneously satisfies the following criteria: (a) the debt is issued for not less than 5 years; (b) creditors cannot claim repayment earlier than upon 5 years from the moment of issuance of debt; (c) debt can be voluntary repaid by the bank/insurance organisation provided that such repayment shall not cause breach of prudential requirements by the bank/insurance organisation; and (d) upon liquidation of the bank/insurance organisation, such debt shall be satisfied in the next to the last turn, prior to satisfaction of common shareholders’ claims.
Subsidiaries of the bank/insurance organisation and organisations in which the bank/insurance organisation holds 20% of shares or more are prohibited to issue the subordinated debt to the bank/insurance organisation (by the way of acquiring the bonds of the bank/insurance organisation and/or issuing the loans to the bank/insurance organisation).
Insurance (reinsurance) companies that previously were able to issue shares only (and not other types of securities) and attract loans from banks for the period of not more than 3 months and for the amount of not more than their own capital, are now also able to attract subordinated debt in the form of bonds or loans without limitations.
Branches of Non-Resident Banks, Insurance (Reinsurance) Companies, Insurance Brokers. Pursuant to the Law, non-resident banks, non-resident insurance (reinsurance) companies and insurance brokers will be able to open their branches and perform banking/insurance activities in Kazakhstan, subject to permission issued by the National Bank and subject to certain requirements (opening of branches of such non-residents was previously prohibited in Kazakhstan).
In order to be able to open branch in Kazakhstan, non-resident bank shall, inter alia, have not less than USD 20 billion total assets, provide confirmation from financial regulator of the country of its residence that such non-resident bank holds a valid banking license, confirmation that there is an agreement between Kazakhstan and country of its residence on exchange of information etc.
In order to be able to open branch in Kazakhstan, insurance (reinsurance) company shall, inter alia, have not less than USD 5 billion total assets, not less than 10 years of insurance experience in all sectors and classes of insurance, provide confirmation from financial regulator of the country of its residence that such non-resident insurance (reinsurance) company holds a valid insurance license, confirmation that there is an agreement between Kazakhstan and country of its residence on exchange of information etc.
Branches of non-resident banks, non-resident insurance (reinsurance) companies will be regulated by the National Bank, including by the way of establishment of mandatory prudential requirements and requirements to the management of such branches.
Management of the branches of non-resident banks, non-resident insurance (reinsurance) companies will be subject to criminal and administrative liability for breaches of banking and insurance legislation.
“Reliable” Shareholder Requirement. The National Bank is now generally entitled to freeze/withdraw the license: (i) of the bank that is entitled to take deposits and keep accounts of individuals if such bank does not have parent bank or bank holding (Legal entity holding 25% or more of the shares) with minimal rating established by the National Bank, or does not have major participant (Person holding 10% or more of the shares) – individual and (b) of the insurance (reinsurance) company that conducts mandatory insurance if such insurance (reinsurance) company does not have major participant – individual or insurance holding.
(B) Amendments Aimed on Further Financial Services’ Consumers Protection
Limitation of Penalties.Under the Law, the penalty for undue repayment of principal or interest of a bank loan cannot exceed 0.5% per day in case the overdue period is less than 90 days and 0.03% per day in case the overdue period is more than 90 days (previously, it was 0.5% per day irrespective of overdue period). In any case, the total amount of penalty shall still not exceed 10% of the bank loan amount per one year.
Notification on Overdue Amounts. Under the Law, the banks are now obliged to notify the borrowers on overdue amounts under the bank loans not later than 30 business days from the moment the obligation has become overdue. This measure presumably aims to address the situation where the borrower for some reason is not aware of overdue obligation that leads to accrual of huge amount of penalties.
Limitation of Bank Account Debit. Under the Law, the amount that the banks can debit from any bank accounts of individual borrower without his/her consent in case of overdue payments under the loan agreement concluded with such bank is now limited to 50% of the funds placed on debited borrower’s accounts (except the deposit account from which the bank is still entitled to debit the full amount).
Prohibition to Claim Payments under Residential Mortgage After180 Days Payment Delay. The banks are now prohibited to claim from individual borrowers payment of interest and penalties accrued under residential mortgage after 180 days of payment delay. In case of restructuring or refinancing of residential mortgage by an individual borrower, capitalisation of overdue interests and penalties to the amount of principal is prohibited. These amendments presumably try to protect individual borrowers from the risk to be deprived of their housings.
Prohibition to Unilaterally Amend the Terms of Bank Loan and Microcredit Agreement. Under Kazakh law, banks are prohibited to unilaterally amend the provisions of loan agreement, except cases where such amendments improve the borrower’s position. Prior to the Law, it was not clear which conditions do “improve the borrower’s position” and how these shall be determined.
The Law clarifies which amendments can be considered as “improving the borrower’s position”, namely: decrease and cancelation of commissions, penalties and other payments under the loan, decrease of interest rate, introduction of delayed payments. Other conditions “improving the borrower’s position” may be determined in the loan agreement itself. The borrower shall be notified on unilateral change of loan agreement provisions and has a right to refuse from improved conditions within 14 calendar days.
The Law introduced similar general prohibition for microfinance organisations to unilaterally amend ANY provision of microcredit agreement, though for some reason the Law did not allow microfinance organisations to unilaterally introduce the amendments that improve the borrower’s position (like in case of the banks). The only provisions that a microfinance organisation can amend unilaterally are decrease of the interest rate and commissions’ amount.
Limitation on Microcredit Acceleration.The Law provides that a microfinance organisation may now accelerate the microcredit only after 40 days of either principal or interest overdue (previously, such limitation applied to the banks only, and microfinance organisations were able to accelerate microcredit from the first day of overdue).
Obligation to Offer to the Borrower Two Types of Loan/Microcredit Conditions.The Law obliges a bank/microfinance organisation to offer an individual non-businessman borrower two types of loan/microcredit conditions: (i) “no commissions” type whereby the bank/microfinance organisation is entitled to charge only interests and no commissions and (ii) “interest and commissions” regular type. It is not clear whether such measure is indeed helpful since the banks/microfinance organisations are not prohibited to apply the higher interest rate to the first type, including all commission in the interest rate.
Mandatory Provisions of Microcredit Agreement. The Law updated the list of mandatory provisions that shall be contained in each microcredit agreement as a condition to its validity. A microcredit agreement shall now mandatorily contain, inter alia, full list and amounts of all commissions and other payments related to issuance and service of microcredit by a microfinance organisation, microcredit repayment order, penalties accrual order and penalties’ amounts, rights and obligations of the parties to microcredit agreement. Certain mandatory provisions of microcredit agreement shall be listed in a certain order starting from the first page of the microcredit agreement and cannot be contained in general terms and conditions of a microfinance organisation (i.e. shall be contained in the microcredit agreement actually signed by the borrower and not in general terms and conditions placed on the website of microfinance organisation).
The Law allows the microfinance organisation to offer to its clients, in addition to annuity and differentiated repayment schedules (that shall be mandatorily offered to the borrower by microfinance organisation), any other repayment schedules prepared in accordance with microcredit rules.
Protection of the Borrowers under Microcredits Secured by Residence Mortgage. Under the new Law, if microcredit is secured by a land plot or immovable property that constitutes the housing of an individual borrower, capitalisation of overdue interest and penalties to the principal amount is prohibited.
Microcredit organisation is not entitled to claim payment of interest and penalties under the loan with individual borrower secured by the housing/land plot with housing located on it if such interest and penalties have been accrued after the payments under the loan became overdue for 180 days.
Microcredit Secrecy. The consent for the disclosure of microcredit secrecy shall now be given by the borrower at the moment of his/her personal presence in the premises of microfinance organisation (previously, such consent could have been signed by the borrower in any place other than premises of microfinance organisation). Disclosure of microcredit secrecy to the representatives of individual borrowers can be done only based on notarised Power of Attorney (previously, plain Power of Attorney was sufficient).
Termination of Principal Obligation upon Realisation of the Pledged Property. Kazakh law provides that, in out-of-court procedure for realisation of the pledged property, the principal obligation shall terminate upon realisation of the pledged property (even if sold for the amount less than principal obligation), provided that the pledge fully secured the principal obligation at the moment of pledge agreement execution.
The Law has extended this provision to in court realisation procedure in relation to residential mortgage of individual borrower provided that such individual borrower does not have any other property to be enforced.
(C) Amendments Aimed on Development of Islamic Finance
Conversion to Islamic Bank. The Law introduced the possibility for conventional banks to perform voluntary reorganisation and convert to Islamic bank upon decision of the general meeting of its shareholders and subject to permission from the National Bank. The term of conversion is 5 years and can be extended by the National Bank by not more than 1 year.
State Special Islamic Financial Company. The Law introduced the concept of so called “state special Islamic financial company” (the “SSIFC”) that can be established upon resolution of the Government of Kazakhstan by the Committee for State Property and Privatisation of the Ministry of Finance in the form of limited liability partnership. Under the Law, SSIFC has been provided with certain tax exemptions.
SSIFC is established for the purposes of issuing state Islamic securities (Islamic lease certificates). Islamic lease certificates provide to investors the right to receive lease payments under the lease entered into by SSIFC as owner of the leased designated assets (acquired with the funds raised through Islamic lease certificates) and the lessee.
The Law introduced amendments that will allow SSIFC to acquire automobile roads (as designated assets) from the state (with the right of repurchase). SSIFC will then lease the automobile roads to the relevant state body and use the proceeds from the lease to make payments to the investors under Islamic lease certificates. Any state property (other than automobile roads) may be used as designated assets by SSIFC subject to relevant resolution of the Kazakhstan Government. Under the Law pledge, levy of execution and freeze of such designated assets is prohibited and such designated assets are excluded from liquidation estate upon insolvency.
(D) Amendments Related to Securities Market Regulation
Additional Requirement for Issuance of Securities in the Territory of a Foreign State. Under the Kazakh Securities Market Law (The Law of the Republic of Kazakhstan “On Securities Market” dated 2 July 2003 no. 461-II), issuance and placement of securities by a Kazakh resident in the territory of a foreign state is subject to permission of the National Bank and certain other mandatory conditions (the “Article 22-1 Requirements”). Notably, “Kazakh resident” in the context of the Kazakh Securities Market Law covers non-resident company if not less than 2/3 of its assets is located in Kazakhstan or issued under Kazakh law or if effective management of such company is executed abroad. Previously one of the mentioned mandatory conditions of issuance and placement of securities in the territory of a foreign state by a “Kazakh resident” was KASE listing of the existing securities of such “Kazakh resident”.
The Law introduced the additional requirement. In addition to KASE listing, the existing securities of the “Kazakh resident” shall be “in circulation”. By “circulation”, Kazakh Securities Market Law means that the security shall be traded in the secondary market. It seems that if previously the “Kazakh resident” could issue a nominal number of securities and list these on KASE to formally satisfy Article 22-1 Requirements, now the “Kazakh resident” shall prove that such securities are not only listed on KASE but also are “in circulation”, i.e. are traded on the secondary market. The Law has not clarified what evidence shall be presented to prove the securities are “in circulation”.
Exclusion of State Securities from Article 22-1 Requirements. The Law also excluded state emission securities from Article 22-1 Requirements.
Reports and Mandatory Audit Requirements for Major Participant of Investment Portfolio Managers. The Law introduced reporting obligations (financial statements, information on affiliated parties etc) to resident and non-resident individuals and non-residents who are considered as major participants (holding 10% or more of shares) in investment portfolio managing companies.
Establishment of Information System of OTC Securities Market. The Law provides for the establishment of information system of OTC securities market (“OTC IS”). OTC IS will be maintained by JSC “Integrated Securities Registrar” and will provide to investors “real time” access to information on the bids of other investors for certain securities OTC and information on executed transactions with securities OTC. Establishment of OTC IS will provide transparency of OTC transactions with securities and will allow to improve supervision over such transactions by financial regulator.
Exemption for Financial Securities from Freeze of Assets in Enforcement Proceedings and Liquidation Estate. The Law provided that the following property cannot be arrested in the course of enforcement proceedings: securities and financial instruments contributed to the guarantee and reserve funds of clearing organisations, securities that constitute margin contributions or securing obligations under transactions executed through the stock exchange by “open trade” method; property that is subject of repo transactions executed through the stock exchange by “open trade” method (Open trade method means the trades method where unlimited number of participants can participate and satisfaction of the bid does not depend on identity of the trades participant). Mentioned financial securities are also excluded by the Law from liquidation estate upon insolvency.
The Law clarified that arrest on securities does not prevent execution of the transactions with such securities through the stock exchange until the moment the stock exchange has received the relevant court order on arrest of such securities.
In addition, under the Law the transactions executed through the stock exchange by “open trade” method have been exempted from insolvency claw back.
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