FSA described Kazakhstan banking sector as of January 1, 2005

/IRBIS, Assel Omarova, January 25, 05/ - The Agency of the Republic of Kazakhstan for financial market and financial organizations regulation and supervision (Financial Supervision Agency -FSA) in its report dedicated to the financial market of the republic, described the banking sector of the country as of January 1, 2005. Banking sector is largest and most rapidly developing segment of the financial system of the Republic of Kazakhstan. According to FSA in recent years the Kazakh banking system grew at fastest pace compared to that of other CIS country members. According to the FSA as of mentioned date in Kazakhstan there were 35 second tier banks including 1 under conservation regime, 15 with foreign capital (including 9 nonresident banks of the Republic of Kazakhstan) and Kazakhstan Development Bank JSC. As of January 1, 2005 twenty six commercial banks had branch network, total branches across republic totaled 385 (in 2004 10 permissions to open a branch were given), including the largest number of branches were that of Halyk Savings Bank of Kazakhstan JSC - 148, Bank CASPIAN JSC - 34, Kazkommertsbank JSC - 23. Total number of cash offices reached 1,105 (in 2004 permissions to open cash offices of 17 banks were given, permission to open cash offices were withdrawn from 11 banks). As of January 1, 2005 11 second tier banks had 28 representative offices, 20 of the - out of the Republic of Kazakhstan. In 2004 the authority gave 14 permissions to open representatives offices. Moreover, 18 rliason offices of foreign banks was operating in the Republic of Kazkhstna. In 204 a license to open a liaison office of NATEXIS BANQUES POPULARIES (France) was given. As of January 2005 start 26 aduint companies and 53 auditors had a license that prmits conducting an audit of banks. In 2004 a banking audit licnse was given to NAK ADAL AUDIT LLP and 6 authorized auditors. Moreover, a license from Arhtur Andersen ZAO has been returned as this company no longer operates. Total equity capital of banking system equaled to KZT347.6 bn, up by KZT114.0 bn from previous year. As of December 1, 2004 this was equal to KZT324.7 bn. Aggregated assets of banks increased by 60.5% to KZT 2,689.7 bn (as of December 1, 2004 assets were equal KZT2,550.5 bn). Adequacy ratios were as follows: k1 - 0.083; k2 - 0.159 (as of January 1, 2004: k1 - 0.089, k2 - 0.169). Loan portfolio of banks including interbank loans rose 66.9% within a month up to KZT726.8 bn. Stake of standard credits was 56.3%, doubtful - 40.8%, bad - 2.9%. As of January 1, 2004 stake of standard credits was at 60.8%, doubtful - 37.1%, bad - 2.1%. Total sum of deposits of legal entities and individuals (excluding banks and international financial organizations) by the beginning of January was KZT1,607.8 bn having increased within the month by 65.4% (including legal entities deposits - KZT1,159.8 bn, growth of 84.5%, deposits of individuals - KZT448.0 bn, growth of 30.5%). Total sum of second tier banks' revenues equaled KZT321.8 bn having increased in comparison with similar period of last year by 38.5%. Total expenses were KZT290.4 bn having increased in comparison with similar period of last year by 42.7%. Undistributed net profit (uncovered loss) of banks equaled KZT31.5 bn and increased during the year by KZT2.7 or 9.4%. Besides, FSA reported on its activities in 2004. Regulation and supervision With the purpose of establishment of standards for financial organizations activities, creation of stimuli for better corporate governance and concentration of the supervision resources at financial market, subject to greater risks, FSA on January 1, 2004 introduced the Instruction on requirements about the presence of risk management system and internal audit in banks (the Instruction), that sets forth strict requirements for second tier banks with respect to risk management systems and internal audit. The Instruction describes requirements to banks that have to have an adequate rsik management system and the system of internal audit, which allows for usage of methods for risk control by banks and banking organizations, that provides effective description, estimations and risk limiting on banks and banking group taking into account the type and the volume of operations. The mission of the Asian Development Bank on risk management system sent the questionnaire the main purpose of which was to evaluate the quality of the risk estimations and completeness of risk management practices, used in second tier banks, as well as to identify weak fields that require improvement from the side of banks to bring it in compliance with international risk management standards. Results of analysis of answers showed that in many banks the role of the Board of Directors and the Management are not entirely understood, and credit risk are poorly managed. This touches only organizational issues. At the same time the Instruction also lists practical procedures for risk management, including those with systematic characteristics, the evaluations of which are only possible if on-site due diligence is held. As a result of analysis it was concluded that second tier banks don't fully comply with requirements of the Instruction, and this is why within limits of distance supervision the monitoring and punishments are needed. FSA developed recommendations to internal auditors with respect to check of system for compliance of risk management system of second tier banks with requirements of the Instruction, which will help auditors to gave a more detailed report on compliance of the risk management system of banks with requirements of the Instruction. Moreover, with the purpose of further improvement of prudential regulation of activities of a banking group the FSA improved the calculation of a shareholders' capital of a banking group and the mandatory submission of consolidated financial statements on a quarterly basis is provided for (Resolution of FSA Management dated November 27, 2004 #325 "On setting normative values and methodic of calculation of prudential norms for banking groups, as well as forms and timing of submission"). A the same time, taking into account outlined negative trend the asset growth prevailing over growth of capital, that carries additional risks and potential opportunities for banks and lowering potential opportunities for bank to boost its capitalization, the FSA lowered the limits of foreign currency positions and set the monitoring of currency liquidity. Moreover the banks becoming active at external markets made it more vulnerable to country risks. FSA made certain amendments to prudential regulation of banks that prescribe capital adequacy ratios calculation, including taking into account country risks. (Resolution of the FSA dated December 27, 2004 #390 "On amendments and additions to the resolution of the Management of the National bank of the Republic of Kazakhstan) dated June 3, 2002 #213 "On approval of Rules of prudential norms for second-tier banks". Given amendments will take effect from July 1, 2005. For making monitoring of the financial market and financial organizations with the purposes of keeping the stability of the financial system the FSA held works on development of preventive measures against cresses at market. Last episodes with cresses at international financial markets underscored the need in more effective risk monitoring instruments, as well as procedures of operative usage o measures with purpose of prevention of the crisis within financial system. The FSA approved the Scheme of immediate actions in case of increasing systematic risks (FSA resolution dated December 27, 2004 #397 "On approval of the Scheme of immediate actions in case of increasing systematic risks at financial market), which is aimed at revealing crisis points and mitigating systematic risks. In this connection, the scheme allows for indicators of stability of all sectors (banking, insurance, pension and securities market, as well factors of vulnerability and the complex of measures, which may be used the regulator in case of increasing risks in any of segments of a financial market. According to IMF and Wordlbank reports under the Program of financial sector evaluation, the financial sector of the republic, where banks dominate is one of the fast growing sectors of the economy. This is favored by better economic conditions, fueled by sound fiscal policy, oil profits and government's commitment to sound reforms of financial sector. Though starting in 2000 reforms of legislative grounds of a financial market were initiated, the realization of some of them lags behind, including consolidated supervision. In mission's opinion prudential indicators of liquidity risk show that in general the liquidity of the system is at normal level, but liquidity coefficients do not fully demonstrate the dependence of banks on risk arising from wholesale financing. Bank are still subject to indirect risks, though such risk are decreasing at the moment thanks to expected appreciation of tenge. In accordance with President's address, the FSA developed and approved the Concept of consolidated supervision that outlines further development of supervising and regulating of financial organizations in Kazakhstan. (FSA resolution dated 15 March, 2004 #79 "On approval of the Concept of consolidated supervision that outlines further development of supervising and regulating of financial organizations in Kazakhstan"). In order to stimulate the implementation of modern technologies, full disclosure and availability of information to end users about the activities of financial organizations and offered services and with the purpose of realization of a State program for development and support of entrepreneurship in Kazakhstan for 2004-2006, approved by the decree of the President of the Republic of Kazakhstan on December 29, 2003 #128, the FSA adopted a normative legislative act that allows cash offices of banks to conduct borrowing activities, issue banking guarantees in favor of SMEs and private persons (FSA resolution dated 12 July, 2004 #197 "On approval of Rules of giving a permission to open a bank, permission to open a branch of a bank and closure and opening of cash offices of the bank and Rules of giving, suspension and withdrawing permission for conducting banking activities"). Currently, one of the most dynamic directions of bank development is consumer finance, which carries high level of risks and implies significant operating costs, which as a general rule and in accordance with international practice are lowered thanks to credit bureaus and application of risk scoring models. The FSA prescribes the usage of a scoring models by banks (FSA resolution dated 25 Sep, 2004 #269 "On amendments and additions to the resolution of the Management of the National bank of the Republic of Kazakhstan "On approval of Rules of maintaining documentation on crediting by second tier bank in Kazakhstan", registered by the Ministry of Justice under #904). In 2004 the Agency received 460 requests from civilians and 217 from legal entitles, including 234 request relating to banking. Main subject of complaints are the following: procedure for compensation payments made by Halyk Savings Bank of Kazakhstan on deposits of Kazakhstan citizens, repurchase of certificates of Savings bank of the USSR and treasury bonds, bonds of specific purposes non interest loan and other. Moreover, requesters were interested in banks holding transfer operations, granting loans and realization of a pledged property, preparing banking agreements and making amendments to them etc. The FSA suggested that the Government of the Republic of Kazakhstan made some amendments and additions to the Law of the Republic of Kazakhstan "On natural monopolies" (payments acceptance via own network of cash offices, via agent on competitive grounds with the condition of full identification of expenses), which are provided for and included into the Law of RK "On amendments and additions to certain legislative acts of RK on issues of activities of natural monopolies, introduced from January 15, 2005. Such need was caused by significant number of request relating to unjustified charging of commissions and fees by banks while accepting bill payments for utilities. The FSA initiated 11 inspection checks of 11 banks including 9 planned and 2 prescheduled. On the basis of the Code of the Republic of Kazakhstan "On administrative law violations one bank was found guilty of violating administrative law. Moreover, within elapsed year FSA specialists were attracted for 9 planned inspections by authorized bodies. As a result of holding a distance control, the FSA forwarded notes to 6 banks recommending them to improve the activities of the bank. Information on realization of tasks in field of liquidation procedures In compliance with the Law of the Republic of Kazakhstan "On state regulation and supervision of financial market and financial organizations", with the purpose of realization of main goals of the FSA on realization of measures on preventing violations of rights and interest of financial services consumers, conceptual changes to banking legislation were adopted that promotes the role of the regulator in process of liquidation. Thus, the institute of special manager was simplified so that authorized body could carry perpetual control over the activities of the temporary administration (from the moment of withdrawing a license from the bank) and liquidation committee (from the date of its appointment), thereby preserving the property. Realization of FSA functions on coordination of list of expenditures of liquidating committees helped to economize on expenses. In last period liquidating committees repaid the obligations for a total amount of KZT290 m, including repayments to private individuals for KZT72 m. Beginning from 2004 the FSA has approved normative legislative acts aimed at improvement of existing order of leading the process of banks liquidation, regulating the specifics of liquidation of accumulative pension funds, as well as procedures of temporary administration and liquidating committees appointment. According to results of analysis of the role of Kazakhstan fund of guaranteeing deposits from private individuals in the process of bank liquidation, amendments to legislation were made aimed at enhancement of the effectiveness of the return of funds from liquidating amount of forcedly liquidating bank - member of the Fund. Based on function controlling the conformity with requirements of an existing legislation in course of liquidation: - a help was rendered to 6 liquidating committees of banks in realization of measures on completing liquidation manufacturing; - the activity of liquidating committees of 2 banks was checked, enabling to reveal and eliminate such violations made by chairmen of liquidating committees appointed by the court. As of beginning of 2004 15 banks were in process of liquidation, on 5 banks liquidation process is over: on one of them justice bodies registered its liquidation on 4 of them liquidation reports are being filled out. In field of control over liquidation of banks the FSA sees higher priority in the development of the conceptual approach to the improvement of liquidation procedures aimed at minimization of risks of not returning of funds to the Fund and discriminating claims of creditors of liquidating banks. [2005-01-25]