THE CENTRAL BANK OF ARMENIA BOARD RESOLUTION

THE CENTRAL BANK OF ARMENIA BOARD RESOLUTION Approval of Regulation 14 Regulation of activities of credit organizations; Prudential standards for activities of credit organizations By virtue of Armenian law on Credit organizations, Articles 8 and 12, Armenian Law on The Central Bank, Article 20, the Board of the Central Bank of Armenia enacts: 1. To approve Regulation 14 Regulation of activities of credit organizations; Prudential standards for activities of credit organizations according to Annex 1 (attached). 2. To CBA Chairman, Deputy Chairman and Board Administration to arrange and publish official English and Russian translations of Regulation 14 within three months upon adoption of this Resolution. T. Sargsyan Chairman of the Central Bank of Armenia November 7, 2002, no. 347 S 3

Annex 1 Approved by: CBA Board Resolution no. 347 S November 5, 2002 R E G U L A T I O N 14 * Regulation of Activities of Credit Organizations; Prudential Standards for Activities of Credit Organizations CHAPTER 1. SUBJECT OF REGULATION 1. This Regulation shall determine the scope, prudential standards, limits, calculation, and components for calculation for the activities of credit organizations operating in the Republic of Armenia. CHAPTER 2. FINANCIAL OPERATIONS ADMISSIBLE FOR GROUPS OF CREDIT ORGANIZATIONS 2. Credit organizations operating in Armenia may implement operations provided for in Armenian Law on Credit Organizations, Article 8, as follows: * Includes also amendments and a supplement approved by the CBA Board Resolution no. 10S, 13.01.2003. 4

a. borrow resources from legal entities, the Republic of Armenia and communities, and enter into similar contracts; b. provide loans, borrowings; c. issue guarantees; d. render service to their participants, legal entities and business individuals as a financial agent (representative); e. carry out specialized activities (dealer, agent) in Armenian T-bills market; f. buy/sell foreign currency, including signing of dram and FX futures and similar contracts; g. accept precious metals, stones, jewelry, securities, documents and other valuables from their participants, legal entities and business individuals for safe custody; h. provide financial consultation; i. create and run an information system on creditworthy customer; j. collect debt. 3. Saving unions operating in Armenia may implement operations provided for in Armenian Law on Credit Organizations, Article 8, as follows: a. borrow resources from their participants; b. provide loans and borrowings to their participants; c. issue guarantees to their participants; d. render service to their participants as a financial agent (representative); e. carry out specialized activities (dealer, agent) in Armenian T-bills market only on behalf, and at the expense, of their participants; f. buy/sell foreign currency, including signing of dram and FX futures and similar contracts; g. accept precious metals, stones, jewelry, securities, documents and other valuables from their participants for safe custody; h. provide financial consultation; 5

i. create and run an information system on creditworthy customer; j. collect debt. 4. Lease firms operating in Armenia may implement operations provided for in Armenian Law on Credit Organizations, Article 8, as follows: a. borrow resources from legal entities, the Republic of Armenia and communities, and/or enter into similar contracts with them; b. provide loans, borrowings; c. issue guarantees; d. render service to their participants, legal entities and business individuals as a financial agent (representative); e. carry out specialized activities (dealer, agent) in Armenian T-bills market; f. buy/sell foreign currency, including signing of dram and FX futures and similar contracts; g. carry out financial lease; h. accept precious metals, stones, jewelry, securities, documents and other valuables from their participants, legal entities and business individuals for safe custody; i. provide financial consultation; j. create and run an information system on creditworthy customer, k. collect debt. 5. Factoring companies operating in Armenia may implement operations provided for in Armenian Law on Credit Organizations, Article 8, as follows: a. borrow resources from legal entities, the Republic of Armenia and communities, and/or enter into similar contracts with them; b. carry out debt or commercial financing; carry out factoring; c. provide loans, borrowings; d. issue guarantees; e. carry out financial lease; 6

f. render service to their participants, legal entities and business individuals as a financial agent (representative); g. carry out specialized activities (dealer, agent) in Armenian T-bills market; h. buy/sell foreign currency, including signing of dram and FX futures and similar contracts; i. accept precious metals, stones, jewelry, securities, documents and other valuables from their participants for safe custody; j. provide financial consultation; k. create and run an informational system on creditworthy customer; l. collect their debt. 6. Credit organizations established under Armenian Law on Credit organizations, Article 3, part 6, (e), (hereinafter universal credit organizations) may implement all operations provided for in Armenian Law on Credit organizations, Article 8, excluding point (f) and part of operations specified in point (d) thereunder. In particular, among operations specified in Armenian Law on Credit Organizations, Article 8 (d), credit organizations may, only on their own behalf, issue traveler s checks, buy/sell traveler s checks, issue credit cards and serve such credit cards. Universal credit organizations may borrow resources from legal entities, the Republic of Armenia and communities, and enter into similar contracts. 7. Account holder credit organizations shall, within ten business days, notify in writing the Central Bank of opening accounts with resident and non-resident banks. 8. Credit organizations shall not open and handle banking accounts for their customers and participants. Credit organizations shall implement non-cash settlements through the bank that services the credit organization. 9. The Central Bank may open and handle special accounts for credit organizations to ensure performance of closing entries in payment and 7

settlement systems provided that the credit organization is a participant in the payment and settlement system and that these closing entries are made through the Central Bank. 10. Minimum ratio of the credit organization s assets (including demand assets) to liabilities (including demand liabilities), both with maturity up to one month, shall be at least 120%. CHAPTER 3. PRUDENTAL STANDARDS AND LIMITS 11. The Central Bank shall hereby define prudential standards for credit organizations, as follows: 11.1. minimum statutory capital and minimum total (own) capital (hereinafter total capital) of credit organization; 11.2. minimum ratio of total capital to risk weighted assets, i.e. the capital adequacy standard (S1 1 ); 11.3. maximum risk on single borrower (S3); 11.4. maximum ratio of gross FX position to total capital of credit organization, i.e. the foreign currency disposition standard. 12. Limits of prudential standards for credit organizations are: Saving unions Credit organizatio ns Lease firms Factoring companies Universal credit organizatio ns Minimum statutory capital (million Drams) 50 50 100 150 150 Minimum total capital (million Drams) 50 100 200 250 300 Minimum ratio of total it l t i k 2 6 8 10 10 8

capital to risk weighted assets (S1 1 ) (%) Maximum risk on single borrower (S3) (%) 10 20 20 20 20 Maximum ratio of gross FX position to total capital of credit organization (%) 30 30 30 30 30 13. Lease firms, factor companies and universal credit organizations being established and banks reorganizing into credit organizations shall have total capital equal to the size of statutory fund, except for the credit organizations-lenders being reregistered, which shall replenish minimum statutory capital and total capital within six month upon registration and licensing. Starting January 3, 2005, minimum total capital shall be Dram 200 million for lease firms; Dram 250 million, for factoring companies; and Dram 300 million, for universal organizations. 14. Statutory capital of credit organization shall be paid up solely in Armenian dram and foreign currency. The accounting of the statutory capital shall have double entries in Armenian dram and foreign currency, at a Central Bank exchange rate as of the day of investment. CHAPTRER 4. CALCULATION OF PRUDENTIAL STANDARDS 15. Minimum total capital, prudential standards S1 1, S3 for credit organization shall be calculated on a monthly basis. Foreign currency disposition standard shall be calculated on a daily basis. 16. Total capital of credit organization is grand total of its core and additional capitals. In calculating the magnitude of prudential standards the additional capital shall be included into calculation of total capital at maximum 50% of core capital (with 9

account of the deductions made in compliance with this Regulation). 16.1. Core capital shall consist of: 16.1.1. statutory capital, including share s premium; 16.1.2. general reserve; 16.1.3. undistributed profit (revenue reserves). 16.2. Core capital shall be reduced by: 16.2.1. amount of long-term subordinated loans provided by credit organization; 16.2.2. amount of own shares repurchased by credit organization; 16.2.3. book value of intangible assets (except for software programs and the right to use such in the business of credit organization); 16.2.4. amount of investments in statutory capital of other banks and credit organizations; 16.2.5. book value of tangible assets (fixed and other tangible assets, including assets generated through collateral enforcement or other claims, assets not in use and other fixed assets), being property of, and not used by, credit organization, six months after issue of the document verifying that such assets are the property of credit organization; 16.2.6. book value of tangible assets being property of, and used by, credit organization (fixed assets, including buildings and premises, other fixed assets), by the amount exceeding the book value of core capital. 16.3. Additional capital shall consist of: 16.3.1. revaluation reserve for fixed assets; it is included in the calculation of additional capital only for a cost of revaluation of own buildings and premises of credit organization. For the context of this Regulation, own buildings and premises of credit organization 10

are deemed those locations wherein the credit organization and its subdivisions operate; 16.3.2. exchange difference reserve generated through a balance sheet consolidation; 16.3.3. other reserves; 16.3.4. long-term subordinated borrowings. 16.4. Long-term subordinated borrowings shall be deducted from calculation of additional capital upon the 5-th day preceding the date of maturity, and the 1-st of January of each next year, at 20 per cent of initial total amount of such borrowings. 16.5. Borrowing received by credit organization shall be deemed long-term subordinated borrowing, if it complies to all below points at the same time: 16.5.1. such borrowing has been received following an open or closed allocation of unsecured securities of credit organization. Unsecured are the securities that do not comply to specifications set forth in Armenian Law on Joint-Stock Companies, Article 40, part 2 (5), a and b; 16.5.2. such borrowing: a. has been provided for five years or more, b. shall not be repaid earlier the date, c. is subordinate to all other liabilities of credit organization if in liquidation or reorganization, except for liabilities to its shareholders, d. has not been extended to cover certain liabilities to credit organization, or to secure such liabilities; 16.5.3. credit organization shall reimburse the borrowing only if the net undistributed profit of credit organization exceeds losses (damage and expenditures) at a moment of such reimbursement, within limits of the amount not exceeding such difference; 16.5.4. credit organization is released from obligation to reimburse the borrowing if such 11

reimbursement would lead to violation of a capital adequacy standard set by the Central Bank; 16.5.5. credit organization has not been charged to early repayment or has not actually repaid any part of the borrowing prior to the date of maturity of the borrowing (securities); 16.5.6. lender or any holder of securities (upon presentation, in case of securities), owner (in case of nominal securities) or an authorized person neither acquires right for, nor actually participates in, direct or indirect management of credit organization. 17. Credit organization must provide the magnitude of minimum total capital as of the 1-st of January of each year as well as with an average daily calculation of each month (the sum of daily total capital for a month divided by the number of days of the month). 18. Ratio of total capital to risk weighted assets shall be determined by the formula: C tot S1 1 = -------------------- AR where C tot is total capital (average daily calculation), AR is risk weighted assets, off-balance sheet liabilities and term operations in process (average daily calculation). 19. For the days (including the days off) when the balance sheet remains unchanged, the calculation of average daily data shall include the data of the previous day. 20. For calculation of total capital adequacy standards of credit organization, the sum of risk weighted assets shall be reduced by the amount of reserve funds on loans generated on account of expenditures, receivables and investment securities loss. 12

21. For calculation of total capital adequacy standards of credit organization, the sum of risk weighted assets shall be deducted from core capital by amount specified in point 16.2 of this Regulation. 22. Average daily calculation of core capital and risk weighted assets shall be determined by the formulas: (C core 1 + C core2 +...+C core n) C core = ----------------------------------- -------------------------, n (AR 1 + RA 2 +...+ARn) AR = ------------------------------------ -------------- n where C core is core capital, and AR is risk weighted assets of credit organization by days, n is number of days of the reporting month. 23. Calculation of risk weighted assets of credit organization shall include assets account balances, by weights, as follows: Types of Assets Weights by risk, % 1. Cash in Armenian dram and cash-equivalent payment documents in foreign currency which are included in SDR baskets, if agreed with the Board of the Central Bank 0 2. Deposits with the Central Bank, cumulative account balances for the statutory capital paid-up of credit organization, with interest accrued 0 3. Claims on Armenian Government on prepayment of tax liabilities, calculated as required by tax legislation 0 4. Claims held with the credit organization in SDR basket currencies, other currencies (if these stand as security for the assets expressed in the same foreign currency), Armenian dram, off-balance sheet contingent liabilities, term operations in process, with interest accrued 0 13

5. Claims on the securities of the Central Bank, claims secured by such securities and guarantees of the Central Bank, off-balance sheet contingent liabilities, term operations in process, with interest accrued 0 6. Claims secured by guarantees of the WB, IMF, EU and European Central Bank, offbalance sheet contingent liabilities, with interest accrued 0 7. T-bills (including securities acquired through repo contracts and excluding securities sold through repo contracts) and the claims secured by these (except for repo contracts), off-balance sheet contingent liabilities, term operations in process, with interest accrued 10 8. Claims on Armenian Government (or claims secured by Armenian Government, with interest accrued), which are considered monetary obligations due to charge without acceptance in compliance with the procedure on Central Bank accounting of monetary obligations due to charge without acceptance from bank accounts opened with the Central Bank 10 9. Government bills of exchange (with claims secured by these) against funds subject to confiscation from Government budget through legal proceedings, off-balance sheet contingent liabilities, term operations in process, with interest accrued 20 10. Cash in process of collection, the SDR basket-included foreign currency monetary resources, and cash-equivalent payment documents, if agreed with the Board of the Central Bank 20 11. Claims by guarantees of foreign or international financial institutions (if agreed with the Board of the Central Bank), off-balance sheet contingent liabilities, with interest accrued 20 12. Balances of cumulative account for the statutory capital paid-up of credit organization, opened with banks operating in Armenia and foreign bank branches operating in Armenia, with interest accrued, bank accounts in Armenian dram and the SDR basket-included foreign currencies, with interest accrued 20 13. Claims on governments and central banks of foreign countries 14 AAA(Aaa1) - A-(A3) 0 BBB+(Bbb1)-BBB-(Baa3)

14. Bank accounts balances and other claims with foreign banks, with interest accrued 20 BB+(Ba1) - B-(B3) 50 below B-(B3) 100 non-rated 100 AAA(Aaa1) - AA-(Aa3) 0 A+(A1) - A-(A3) 20 BBB+(Baa1) - B-(B3) 50 below B-(B3) 100 non-rated 100 15. Total sum of unused part of credit lines and credit cards 50 16. Own buildings and premises of credit organization, at book value 50 17. Other claims (including accounts frozen) on Armenian banks, credit organizations and foreign bank branches operating in Armenia, with interest accrued 100 18. Claims on Armenian Government on extra payment of tax obligations calculated as required by tax legislation 100 19. Claims on Armenian Government (or claims secured by Armenian Government, with interest accrued), which are not considered monetary obligations due to charge without acceptance in compliance with the procedure on Central Bank accounting of monetary obligations due to charge without acceptance from bank accounts opened with the Central Bank 100 20. Fixed assets and intangible assets, except for those specified in item 16, at book value 100 21. All balance sheet assets, off-balance sheet contingent liabilities and term operations in process not included in items 100 1-20 24. The off-balance sheet contingent liabilities of the table include guarantees, total sum of unused part of credit lines and credit cards. 25. The term operations in process include the derivatives as follows: forward, futures, swap, option. The calculation of the risk weight of these operations shall rely on the total amount of their 15

full book value in assets and 1% of value of these operations reflected in off-balance sheet. 26. Repo contracts and securities sold through repo contracts shall be included in the calculation of risk weighted assets with 0% weight. 27. For the context of this Regulation, the claims, off-balance sheet contingent liabilities, term operations in process and interest accrued shall be deemed secured if there is a document verifying such security (collateral contract, guarantee, surety, etc.) for their full contractual period. 28. The items 13 and 14 of the table hereinabove used the rates and the rating method set by the rating agencies Standard & Poor s and Moody s (in brackets). 29. Within one month upon registration and licensing and, henceforth once a year, credit organizations shall choose one of these rating agencies and report their decision to the Central Bank by January 31 of the next year. 30. Credit organizations must review ratings once a month, on the first business day of the month. 31. For determination of the weight of account balances with, and other claims on, foreign banks, with interest accrued, credit organizations shall use the ratings provided by a rating agency for long-term deposits. 32. For determination of the weight of claims on governments of foreign countries, credit organizations shall use the ratings for claims on governments depending on timeliness of claims, type of instruments and currency. 33. The SDR basket includes US dollar, euro, Japanese yen and British pound sterling. Swiss franc, Canadian dollar, Swedish krona, Danish krone and Australian dollar are made equivalent to SDR basket currencies. 34. Maximum risk on single borrower (S3) shall be determined by the formula: R S3 = ------------------------ 16

C tot where R is the amount of: i) loans to single borrower, ii) all other borrowings, factoring and leasing operations, advances, prepayments, investments in securities issued by the borrower, iii) other receivables in relation to credit organization, iv) guarantees and sureties issued against the liabilities of credit organization, v) borrowings and/or guarantees provided by banks on account of, and secured by, monetary assets of the credit organization, provided that it assumed the risk to collect such borrowings. Loans and other liabilities (including sureties and guarantees) shall be included in calculation of risk as per weight specified in the table hereinabove. C tot is the average total capital in the reporting period. 35. Upon lending (or upon occurrence of a liability), the standard shall be calculated also with respect to total capital of the given day. 36. Foreign currency position stands as difference between foreign currency assets and foreign currency liabilities of credit organization, taking into account claims and liabilities on off-balance sheet term transactions in process (swap, futures, forward, option) in appropriate currency. Calculation of the standard includes the off-balance sheet contingent transactions in process, which comply with the Central Bank criteria, or the contracts signed conform to a standard format set by the Central Bank. 37. Closed foreign currency position is quantitative equality between foreign currency assets and foreign currency liabilities of credit organization. 38. Open foreign currency position is quantitative inequality between foreign currency assets and foreign currency liabilities of credit organization. 39. Net foreign currency position shall be calculated as total amount of various foreign currency positions, with the mark of the given position (short or long). 17

40. Gross foreign currency position shall be calculated as total amount of absolute magnitude of positions of various groups of foreign currencies. 41. Long foreign currency position shall occur when balances of foreign currency asset accounts of credit organization are in excess of balances of foreign currency liability accounts. 42. Short foreign currency position shall occur when balances of foreign currency liability accounts of credit organization are in excess of balances of foreign currency asset accounts. 43. Foreign currency position shall be calculated by different foreign currencies, and the standard shall be determined by two groups, for: 43.1. SDR basket currencies, and Swiss franc, Canadian dollar, Swedish krona, Danish krone, Australian dollar as Group I; and 43.2. other foreign currencies as Group II. 44. Open foreign currency position shall be calculated for each day and translated into Armenian dram. Difference in liabilities shall be traced in negative mark indicating short foreign currency position. Difference in assets shall be traced in positive mark indicating long foreign currency position. Net foreign currency position shall be calculated for each group, while gross foreign currency position shall be calculated for both groups together. Gross foreign currency position shall represent total amount of absolute magnitude of foreign currency positions for Group I and Group II. CHAPTER 5. RESPONSIBILITY 45. In the event of non-compliance with the requirements established by this Regulation, credit organizations operating in Armenia and their managers will bear responsibility pursuant to Armenian Law on Credit Organizations and Armenian Law on Central Bank. 18

CHAPTER 6. FINAL PROVISIONS 46. Short title of this Regulation shall be CBA Regulation 14. Central Bank of the Republic of Armenia, 2003 19