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Ministry of Justice

Azerbaijan Republic

On July 7, 2003 No. 2985

Approved by the resolution of Board of National Bank of the Azerbaijan Republic of June 17, 2003 No. 8

Rules of classification of assets and creation of reserves for covering of possible losses

(as of April 30, 2008)

1. General provisions

1.1. These rules are developed according to requirements of the laws of the Azerbaijan Republic "About National Bank of the Azerbaijan Republic", "About banks" and the Tax code of the Azerbaijan Republic and establish rules of classification of assets and creation of special reserve funds (further - "reserves") for covering of possible losses on assets in all commercial banks irrespective of pattern of ownership and legal form and in local branches of foreign banks (further - "banks").

1.2. These rules are provided for classification of all types of loan (overdrafts, overnights, etc.), leasing, factorings, interbank deposits, including remaining balance of correspondent account "nostro", securities (for debt, investment and dealing transactions) and investments of capital in share in the capital of the legal entities who are not used in banking (for example, the property entered in books for non-payments), including debit debts and off-balance obligations.

1.3. To have clear and objective idea of the financial position and results of the transactions made by it, the bank estimates the assets and creates on them the corresponding reserves. In case of overestimate of net assets value and profit of bank respectively are overestimated both result of its balance and retained earnings. And it is consequence, first of all, not of creation of real reserves for covering of possible losses or not suspension of charge of percent on non-working assets.

1.4. These rules and the related technique of financial accounting whether i.e. deduction deduction of debts on the main amounts and percent or other receivable payments, do not influence termination or change of the terms of the contract approved between banks and clients.

2. Concepts

2.1. The concepts used in these rules and in internal regulations of banks on classification have the following values:

Assets - all this the credits, investments, money and property of bank (including the property which is not used in banking). Assets are divided into groups standard and non-standard. To group of standard assets "satisfactory assets" and "controlled assets", to group of non-standard assets "unsatisfactory assets", "the menacing assets" and "bad assets" concern.

The credit - the money of the determined sum provided according to the signed agreement on credit for certain term (with the right of prolongation of term) with providing or without providing on condition of their return and interest payment (commission charges). Any obligation about provision of money on the same conditions, the guarantee, providing, sale of debt securities with discount or with receipt of percent and other right to require return of the means provided in any form based on the agreement also belong to concept of the credit.

The overdue loan is the credit on which repayment of the main amount (or its parts) or the percent added on it or outstanding part of that and another is late for the term of over 30 calendar days from the date specified in the agreement.

Completely secured loan is such credit which timely and complete return is provided with the deposits placed in the same bank, either pledge or other providing which market value is equal to the outstanding amount of this credit or above it (pledge in these rules is meant also as mortgage).

Partially secured loan is the credit provided with pledge or other providing which market value is lower than outstanding credit amount.

The unsecured loan is the credit which does not have providing or, in the presence of that which providing has no market value, is not issued by reliable person or, irrespective of its cost, is not drawn up according to the legislation.

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