ARTICLE
22 January 2020

Reforms Of The Central Bank Of Uzbekistan's Supervisory Duties

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A new version of the Law "On the Central Bank of the Republic of Uzbekistan" (hereinafter – the "Law") has been adopted, thereby continuing the reform of the country's banking industry.
Uzbekistan Finance and Banking
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A new version of the Law "On the Central Bank of the Republic of Uzbekistan" (hereinafter – the "Law") has been adopted, thereby continuing the reform of the country's banking industry. The law widens the supervisory functions and defines new tasks and authorities of the Central Bank of the Republic of Uzbekistan (hereinafter – the "CB"). The reforms are mainly directed at ensuring the stable functioning of the banking system, as well as the protection of the rights and interests of consumers, which in turn creates rather stringent obligations on banks. Generally, the Law consolidates the rights and obligations of the CB, which were expanded by the recently adopted laws "On Banks and Banking Activity" and "On Payments and Payment Systems". Continuing the reforms of the functions of the CB, the Decree of the President of the Republic of Uzbekistan No. UP-5877 dated November 18, 2019, on "Development of Monetary Credit Policy by Gradual Transition to the Inflation Targeting Regime" (hereinafter – the "Decree") approved the gradual transition to inflation targeting to decrease and maintain the level of inflation at 5% by 2023.

Inflation targeting

The Decree instructed the CB to ensure the gradual transition of monetary credit policy to an inflation-targeting regime starting from January 1, 2020, with the purpose of decreasing the inflation level to 10% in 2021 and with the long-term goal of maintaining the inflation level at 5% in 2023. It should be noted that, according to the State Committee of the Republic of Uzbekistan on Statistics, the level of inflation in September was 9.7% (in relation to the price level of December 2018). The Decree approved the "Roadmap" of decreasing inflation and ensuring the stability of prices in 2020 and the concept of joint action by the Cabinet of Ministers and the CB directed at decreasing inflation and ensuring the stability of prices.

The Cabinet of Ministers together with the CB shall ensure the realization of the measures for the complete transition to inflation targeting, by:

  1. conducting coordinated monetary, fiscal and antimonopoly policy;
  2. continuing the realization of the structural transformation of the economy by accelerating the transition to a competitive market economy, increasing the competitiveness of local producers and forming full-fledged markets for goods and services;
  3. liberalizing regulated prices gradually, which is directed at the transition to modern methods of antitrust and pricing regulation, as well as widening production infrastructure;
  4. reforming the banking system, as well as the financial markets, with the intention of developing financial intermediation for transforming savings into investments and ensuring the possibility of long-term planning of financial flows.

The CB is instructed to take further measures to put the instruments, mechanisms and procedures of monetary credit policy in line with the standards of an inflation-targeting regime by implementing:

  1. within one month – a percentage corridor of the key (main) rate for conducting a flexible percentage policy with regular interventions by the CB in the interbank money market;
  2. within two months – a modern communication policy giving timely coverage by the CB of the current situation of the economy, the key factors in inflation processes and the measures of monetary credit policy;
  3. by January 1, 2020 – market instruments to influence the interest rates of the money markets, including the bonds of the CB, overnight deposits, regular deposit auctions, credit auctions and overnight credits with the pledge of government securities and foreign currency;
  4. by April 1, 2020 – a system of macroeconomic analysis and forecasting in compliance with leading international practice, providing for the development of econometric modeling tools with the technical assistance of international financial institutions;
  5. by the end of 2020 – derivative instruments for managing interest and currency risks (swaps, options, futures) and the gradual increase of the role of the commercial banks in the formation of the exchange rate.

The Agency for the Development of Capital Markets together with authorized bodies should provide the Cabinet of Ministers, by July 1, 2020, with recommendations on the conditions, mechanisms and terms for providing non-residents with access to the financial markets, with the development of clear mechanisms and tools to prevent possible negative consequences. The Ministry of Finance should develop and submit to the Cabinet of Ministers a schedule for the liberalization of regulated prices (tariffs) for 2020-2021, considering the impact on the inflation targets.

It is also important to note that the issuance of preferential credits is canceled from January 1, 2020, except for governmental mortgage lending programs, as well as loans to agricultural producers for growing raw cotton and cereal crops, which will be canceled from January 1, 2021. Interest rates on all loans will be set at a level not lower than the CB refinancing rate (currently 16%).

The main novelties in the new version of the Law

The Law provides for a new mechanism "Reasonable Assessment", which is defined as a professional assessment used by the CB in addition to the requirements established by legislation, prioritizing the actual or economic content over the formal content of the issue under consideration. Reasonable Assessment is based on the information received as part of the CB's supervision of the activities of credit organizations and banking groups; other information essential to the formation of a Reasonable Assessment is received from individuals and legal entities, international organizations, governmental bodies, including foreign supervisory bodies and organizations, and other available sources. The CB has the right to use Reasonable Assessment for:

  1. assessing the financial status and business reputation of the direct and indirect founders and owners of the bank's shares, including the ultimate beneficial owners, when issuing (refusing to issue) preliminary permission for establishing a bank, permissive documents, as well as during the CB's exercise of its regulatory and supervisory functions;
  2. identifying individuals who act jointly in relation to a credit organization;
  3. identifying individuals related to a credit organization, and establishing the fact of a credit organization's entering into agreements with such persons on more favorable conditions;
  4. assessing the quality of risk management and internal control systems in a credit organization for the availability and implementation of effective internal policies;
  5. assessing assets and liabilities, including their compliance with the regulatory acts of the CB on risk management in a credit organization.

We recall that the Law "On Banks and Banking Activities" stipulates that:

  1. reasonable Assessment of the CB is one of the grounds for refusing to issue a preliminary permit for the establishment of a bank (Article 19);
  2. in cases where, based on Reasonable Assessment, the CB believes there will be a possible violation by a bank or banking group of the requirements of the law on banks and banking activities over the next 12 months, the CB is given extensive rights (Article 51).

In addition, the Law gives a right to the CB to provide emergency liquidity support to commercial banks in the form of short-term loans of up to three months to ensure the maintenance of payments during a short-term liquidity deficit. In special cases, when there is a threat to the stability of the financial system of the country, it is allowed to provide a loan with a longer term and a relatively high interest rate by a decision of the Board of the CB.

The Law establishes that the CB implements supervisory functions covering among other things:

  1. the requirements to the internal control and risk management system of banks and banking groups, as well as corporate governance, including the independence of members of banks' supervisory boards;
  2. the procedure of performing interim management in banks;
  3. the procedure of assessment, the criteria of compliance with qualification requirements, as well as the procedure for the approval of members of the supervisory board, management board and key personnel of banks.

To exercise its supervisory functions, the CB has a right to:

  1. establish limits of interest rates and payments on consumer's loans and microloans provided by banks and microcredit organizations, as well as loans provided by pawnshops;
  2. establish the number of additional deductions to the calendar contributions which are transferred quarterly by banks to the Deposit Insurance Fund of Citizens in banks;
  3. determine the conditions and procedure for writing off bad assets.

The CB is entitled to carry out monitoring activities during which the employees of the CB can take action to complete transactions or operations within the framework of a credit organization, to verify compliance by a credit organization with the requirements for its activities in the course of relations with consumers of banking services. Such monitoring activities are performed without notice to credit organizations. In addition, based on the results of risk assessments, the CB has a right to conduct inspections. Also, upon the request of law enforcement agencies, appeals of individuals and legal entities concerning violations of legislation, the CB has a right to conduct investigations into specific issues. This inspection is determined by the CB independently. Inspection activities are carried out without coordination with, and notification of, state bodies and other organizations.

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