On Banks and Banking Activity in the Republic of Kazakhstan (стр. 7 )

  Article 40. Prohibition to Grant Preferential Terms to the Entities, Bound to Banks through the Special Relations

 
  1. Banks shall be prohibited to grant preferential terms to the persons, bound to a bank through the special relations.
  2. The following shall refer to granting of the preferential terms:
 a transaction with a person, connected with a bank through the special relations or in its interests, which the bank would not conclude with the persons, who are not bound with it through special relations, due to the transaction's nature, objectives, specific features and risk;
 levying of interest rate and payment for the performance of a bank transaction or acceptance of the security, which is lower than those required from other customers.
 A bank shall not grant loans without security (blank loans) to the persons, who are connected with it through the special relations.
  3. The following persons shall be recognised as the persons, bound to a bank through the special relations:
  а) any official or executive officer, chief executive officer and chief accountant of a bank’s branch, as well as their spouses and close relatives;
  b) an individual or a legal entity, which is a large participant in a bank, or an official of the large participant in the bank, as well as their spouses and close relatives;
  c) a legal entity, where the persons, indicated in sub-paragraphs a) and b) of this paragraph are large participants;
  d) a legal entity, where a bank is a large participant, officials of this legal entity, their spouses and close relatives;
  e) affiliates of a bank.
  For the purposes of this Article the persons, bound to a bank through the special relations, shall not refer to the national management holding, which is the bank’s shareholder, and to the legal entities, where ten or more percent of shares (participation share) belong to the national management holding.
  3-1. A bank may not enter into a transaction with a person for the purposes of providing the following opportunity to such a person:
 to pay for an obligation to the entity, connected with a bank through the special relations;
 to purchase any assets from the entity, connected with a bank through the special relations;
 to purchase the securities issued by the entity connected with a bank through the special relations.
  4. (Excluded by the Law dated 23rd of December 2005 N 107 (enactment procedure, see art.2 of the Law N 107).
  5. An entity, bound through the special relations to one of the group of interrelated legal entities, shall be recognised as an entity bound through the special relations with each of them.
  6. Two and more legal entities shall be recognised as a group of interrelated legal entities, if at least one of them is a large participant in another.
  6-1. The national management holding, which is a bank’s shareholder, and the legal entities, where ten or more percent of shares (participation shares) belong to the national management holding, shall not refer to a group of interrelated legal entities.
  7. A transaction with an entity, bound to a bank through the special relations, may be carried out only under the decision of the Board of Directors of the bank, subject to the requirements of paragraph 1 of this Article. Exemption from the rights of claim to the assets, provided (placed) to an entity (entities), bound to the bank through the special relations, shall be made upon the notification, delivered to the general meeting.
 An executive officer, a chief executive officer and a chief accountant of a bank’s branch shall not participate in the consideration and adoption of decisions on any transaction between the bank and:
  the same person;
 any of his/her close relatives;
 any legal entity, where such a person or any one of his/her close relatives is an official or a large participant.
 A decision of the Board of Directors on any transaction between a bank and a person, connected with the bank through the special relations may be adopted only after consideration of all its conditions by the Board of Directors.
  8. A bank shall be obliged to submit to the authorized body information on all transactions with the persons, connected with it through the special relations in accordance with the forms, established by the normative legal acts of the authorized body.
  Reference. Article 40 with amendments, inserted y the RK Laws dated 11.07.1977 N 154; dated 16.07.1999 N 436; dated 02.03.2001 N 162 (see art. 2); dated 16.05.2003 N 416; dated 10.07.2003 N 483 (effective since 01.01.2004); dated 23.12.2005 N 107 (enactment procedure, see art. 2 of the Law N 107); dated 13.02.2009 N 135-IV (enactment procedure, see art. 3).

Chapter 4. Regulation of Banking Activities and Protection of Depositors’ Interests

  Article 41. Measures Applicable to Banks and Bank’s Officials. Methods of Banking Regulation
 
 To ensure the financial stability of banks, protection of the interests of their depositors and also in order to support the stability of the monetary and credit system of the Republic of Kazakhstan, the authorized body shall carry out regulation of banking activities, in particular as follows:
 by establishing the prudential requirements and other standards and limits, which are subject to observance by banks, including the provisions against doubtful and loss assets;
 by issuing of normative legal acts, which are obligatory for observance by banks;
 by inspection of banking activities;
 by application of the early response measures;
 by application of the restrictive measures to banks;
 by application of sanctions to banks or their officials.
 Regulation of banking activities shall be carried out both with regard to an individual bank, and also on the consolidated basis, i. e. with regard to a bank conglomerate. The rules of the consolidated supervision shall be established by the authorized body.
  Reference. Article 41 is amended by the RK Laws dated 11th of July 1997 N 154; dated 16th of July 1999 N 436; dated 2nd of March 2001 N 162 (see art. 2); dated 10th of July 2003 N 483 (effective since 1st of January 2004); dated 8th of July 2005 N 69; dated 23rd of December 2005 N 107 (enactment procedure, see art.2 of the Law N 107); by the Law of the Republic of Kazakhstan dated 31st of January 2006 N 125; with amendments, inserted by the RK Law dated 23.10.2008 N 72-IV (enactment procedure, see art.2).

  Article 42. Prudential Standards and Other Standards and Limits Obligatory for Compliance

  1. The following shall be included in the prudential requirements, established by the authorized body and obligatory for observance by banks:
 minimum amount of a bank’s charter capital;
 capital adequacy ratio;
 maximum amount of risk per borrower;
  liquidity ratio;
 limits of open currency position.
 The following shall be included in the prudential standards, established by the authorized body for obligatory observance by bank conglomerates:
 minimum amount of the charter capital;
 capital adequacy ratio;
 maximum amount of risk per borrower.
 The authorized body shall have a right to establish additional prudential standards and other standards and limits subject to observance and used in the international banking practice.
 The authorized body in accordance with the banking legislation shall take measures for bringing banks and (or) bank holdings, and (or) their officials, and (or) large participants in banks (individuals), which hold twenty five percent and more of a bank’s shares, to the responsibility for violation of the prudential standards and (or) other standards and limits subject to compliance by such a bank. 
 The authorized body shall have a right to establish for banks and bank conglomerates, which do not have a bank holding, separate prudential standards and rates at the level, sufficient for coverage of significant potential losses, arising at maximum possible changes in the risk factors typical for such banks and bank conglomerates.
  1-1. The prudential standards and other standards and limits subject to observance by Islamic banks, their rates and calculation methods, forms of relevant accounting and submission timeline shall be established by the authorized body, taking into account the particular features of banking activities of Islamic banks defined by this Law.
  2. For the purposes of taking a decision on the issue of compliance of a bank’s financial status with the established requirements, the authorized body shall have a right to determine the amount of the bank’s capital at a definite date.
  3. The standard values and the methods of calculation of the prudential requirements and other limits and standards obligatory for compliance, associated with capital of a bank and a bank conglomerate at a definite date, the settlement procedure and the limits of open currency positions, the forms of accounting and submission timeline shall be established by the authorized body.
  3-1. If a bank or participant in a bank conglomerate fails to fulfil the requirements of the authorized body, specified in the written order on adjustment of financial and/or other statements, calculation of the prudential standards and other obligatory standards and limits shall be made by the authorized body on the basis of the adjusted statements.
  4. In the case of violation of the capital adequacy ratio, established by the normative legal acts of the authorized body, by a bank, the bank shall provide the authorized body with the recapitalization plan. The plan shall be submitted within one month from the date of violation of the capital adequacy ratio, with detailed description of measures and timeline for elimination of such violations.
  5. Bank holdings and large participants, being individuals, who own directly or indirectly twenty five percent and more of voting and (or) placed shares (except for preference and repurchased shares), shall take measures, established by the normative legal acts of the authorized body, for sustainability of the capital adequacy ratio of the bank and the bank conglomerate.
 In the case of deterioration of the financial condition of a bank, a bank holding, a large participant in the bank, being an individual, who owns directly or indirectly twenty five percent and more of voting and (or) placed shares (except for preference and repurchased shares), shall take measures for improvement of the financial condition of the bank, including increase in the bank’s own capital by the amount, sufficient for provision of the financial stability of this bank.
Reference. Article 42 with amendments, inserted by the RK Laws dated 07.12.1996 N 50; dated 11.07.1997 N 154; dated 16.07.1999 N 436; dated 02.03.2001 N 162 (see art. 2); dated 10.07.2003 N 483 (effective since 01.01.2004); dated 08.07.2005 N 69; dated 23.12.2005 N 107 (enactment procedure, see art. 2 of the Law N 107); dated 19.02.2007 N 230 (enactment procedure, see art. 2); dated 12.02.2009 N 133-IV (enactment procedure, see art. 2).

  Article 43. Reserve Capital and Provisions (Reserves) for Doubtful and Bad Assets
 
  1. For the purposes of covering losses, associated with the performance of banking activities, banks shall be obliged to form a reserve capital. The reserve capital shall be formed at the expense of the banks' net income before payment of dividends on ordinary shares. The minimum amount of the reserve capital of a bank shall be established by the authorized body.
  2. For the purposes of ensuring the due level of control and safety of the activities, in accordance with the nature and scope of transactions, banks shall be obliged to carry out classification of the issued loans, categorising doubtful and bad claims and creating provisions (reserves) in accordance with the procedure and on the terms, established by the authorized body in accordance with the legislation of the Republic of Kazakhstan.
  Reference. Article 43 is amended by the RK Law dated 11th of July 1997 N 154; dated 8th of December 1997 N 200 and dated 29th of July 1998 N 236; dated 10th of July 1998 N 282; dated 16th of July 1999 N 436;

  Article 44. Inspection of Banking Activities
 
  1. Inspection of banking activities shall be carried out by the authorized body independently or through engagement of other organisations.
 When conducting inspection of banking activities, the authorized body shall have a right to inspect activities of the bank affiliates only for the purposes of determining the degree and the nature of their influence on the activities of such banks.
  2. Banks and their affiliates shall be obliged to render assistance to the inspecting agency in respect to the issues, indicated by the authorized body in the inspection task, as well as to provide the possibility of inquiring any officials and employees, and also the access to any sources of information, required for execution of the information proof.
  3. It shall be prohibited for employees of the authorized body to disclose or transfer information, obtained in the course of inspection of banking activities to third parties.
  4. Persons, carrying out inspection, shall bear the responsibility for disclosure of information, obtained in the course of inspection of banking activities and which constitute a banking or a commercial secret.
  Reference. Article 44 is amended by the RK Law dated 2nd of March 2001 N 62 (see art. 2); dated 10th of July 2003 N 483 (effective since 1st of January 2004); Law of the Republic of Kazakhstan dated 31st of January 2006 N 125.

  Article 45. Early Response Measures

   1. For the purposes of protection of the legal interests of depositors and creditors of banks, provision of a bank’s financial stability, prevention of deterioration of its financial status and mitigation of risks, associated with banking activities, the authorized body shall carry out analysis of the banks’ activities for identification of the factors, influencing on deterioration of the bank’s financial status:
  1) decrease in the capital adequacy ratios;
  2) decrease in the liquidity ratios;
  3) decrease in the amount of raised deposits of individuals and legal entities compared to total bank obligations;
  4) increase in total amount of credits in a bank’s loan portfolio, when the period of principal debt overdue payment and interest rate payment under such credits exceed ninety days;
  5) other factors, influencing a bank’s financial status, established by the normative legal act of the authorized body.
  2. In the case of discovery of the factors, mentioned in paragraph 1 of this Article, in the result of the analysis of a bank’s financial status and (or) upon the results of its inspection, the authorized body shall forward to the bank and (or) its shareholders a written request for representation of the action plan, containing the early response measures for improvement of the bank’s financial stability, prevention of deterioration of its financial status and mitigation of risks, associated with banking activity.
  A bank and (or) its shareholders shall be obliged within the period, not exceeding five working days since receipt of such request, to develop and represent the action plan to the authorized body, with indication of timelines for each item, and also the responsible executive officers.
  Upon approval of the action plan by the authorized body, a bank and (or) its shareholders shall initiate its realization, notifying the authorized body on the results of its execution in the scheduled terms.
   At non-approval of the action plan, the authorized body shall apply one or several early response measures to the bank and (or) its shareholders through representation of the following requests:
  1) change in the organizational structure and (or) staff list of the bank;
  2) limitation of deposit acceptance;
  3) termination of accrual and (or) payment of dividends for a period, established by the authorized body;
  4) increase in the bank’s provision;
  5) dismissal of executive officers and other employees of the bank;
  6) suspension or limitation of certain types of bank operations with high extent of risk;
  7) increase in the own capital of the bank in the amount, sufficient for provision of the bank’s financial stability, including through increase in its charter capital;
  8) restructuring of the bank’s assets;
  9) reduction of the administrative expenses, including through termination or limitation of additional recruitment of staff, closure of some of its branches and representative offices, subsidiaries, as well as decrease in the amount of participation share in the subordinated organizations, either in the territory of the Republic of Kazakhstan, or outside its boundaries.
  3. In case of non-submission of the action plan, aimed at the improvement of a bank’s financial stability in the timeline, set out in paragraph 2, or untimely execution of the measures of such a plan, as well as non-fulfillment or untimely fulfillment of the early response measures in accordance with the requirement of the authorized body, the bank and (or) its shareholders are subject to imposition of the restricted enforcement measures and (or) sanctions, established by this Law.
  4. Procedure for application of the early response measures and the methodology of identification of the factors, influencing on the deterioration of a bank’s financial status, shall be established by the normative legal act of the authorized body.
  Reference. Article 45 is stated in the wording of the RK Law dated 23.10.2008 N 72-IV (enactment procedure, see art.2).

  Article 46. Restricted Enforcement Measures
 
  1. In the cases when the authorized body identifies violations of the prudential requirements and other standards and limits, which are obligatory for compliance, violations of the normative legal acts of the authorized body, or disclosure of unlawful acts or failure to act by officials and employees of a bank, which may threaten its financial safety and stability, and also the interests of its depositors, clients and correspondents, as well as non-fulfilment of any other requirements of the authorized body, established by this Law, the authorized body shall have a right to apply to the bank one of the following restricted enforcement measures:
  а) to require a letter of commitment;
  b) to compile a written agreement with the bank;
  c) to issue a warning;
  d) to issue a written prescription, obligatory for execution.
  2. A letter of commitment of a bank shall contain the fact of recognition of existing defects and guarantee of the bank's management to eliminate such defects within the strictly stipulated terms, with listing of the scheduled actions.
  3. A written agreement shall refer to an agreement between a bank and the authorized body concerning the necessity to eliminate the identified defects immediately and to approve the priority measures in relation thereto.
  4. A written prescription of the authorized body shall refer to an ordinance to adopt the correction measures for elimination of the identified defects by a bank within the established timeline.
 The appeal against a written prescription of the authorized body in the court shall not suspend its execution.
  5. A bank shall be obliged to notify the authorized body on execution of a letter of commitment, a written agreement or a written prescription within the timeline, indicated in that document.
  6. A written warning shall be a notice issued by the authorized body on a possibility of applying the sanctions, stipulated in Article 47 of this Law, to a bank, if the authorized body discovers violations of the legislation of the Republic of Kazakhstan by such a bank, or if the existing violations are not eliminated within the timeline, established by the authorized body.
  7. The procedure for application of the restricted enforcement measures shall be established by the normative legal acts of the authorized body.
  8. The measures, described in this Article, may also apply to a bank holding, organizations of a bank conglomerate, large participants of a bank in the case of violation of the requirements of this Law and in the case if the authorized body establishes that violations, unlawful acts or omission of acts of the said entities, their officials or employees have deteriorated the financial status of the bank.
  9. The National bank shall have a right to impose the enforcement measures, indicated in subparagraphs a), c), d) paragraph 1 of this Article to a bank or an organization, which carries out certain types of bank operations, if it discovers violation of the requirements of the legislation of the Republic of Kazakhstan on the issues within its authorities.
  Reference. Article 46 is added with subparagraph 7 – the RK Presidential Decree, having a legal force of the Law, dated 27th of January 1996 N 2830. Inserted amendments by the RK Laws dated 11th of July 1997 N 154; dated 2nd of March 2001 N 162 (see art. 2); dated 10th of July 2003 N 483 (effective since 1st of January 2004); dated 8th of July 2005 N 69; dated 23rd of December 2005 N 107 (enactment procedure, see art.2 of the Law N 107); dated 19th of February 2007 N 230 (enactment procedure, see art.2); dated 23.10.2008 N 72-IV (enactment procedure, see art.2).