Kyrgyz Republic’s Debt Resolution Agency, DEBRA

Policymakers created the AMC DEBRA to liquidate two dominant and insolvent state-owned banks and to restructure two others, while taking on their nonperforming loans where necessary. These banks, the so-called “Big Four,” accounted for 80% of the banking system’s assets and were a priority for officials looking to stabilize the financial system (World Bank 1996). Policymakers believed that the “strategy for these big banks [would] address the largest part of the bad asset problem in the banking sector” (World Bank 1996).

Two of the four, Agroprom Bank and Elbank, had nonperforming-to-gross-loan ratios of 98% and were slated for liquidation. AKB Kyrgyzstan Bank, with an 85% ratio, and Promstroi Bank, which had a 60% ratio, were downsized and restructured through private and government recapitalization. “The survival of the Big Four banks [had] been possible only because of specially negotiated terms for the NBK debt and because of exemption from prudential regulations” (World Bank 1996).

Lawmakers organized DEBRA into two main units to facilitate this strategy. Its Bank Restructuring Unit (BRU) performed a receivership function on behalf of the NBK, while its Debt Recovery Unit (DRU) managed and resolved the nonperforming loans transferred to it. The BRU assisted in the “intervention, receivership, conservatorship, deposit payout, and liquidation activities” of the banks and transferred nonperforming loans to the DRU (World Bank 1996). The DRU was set up to “act as the vehicle through which all recoveries [were] made by the Government” (World Bank 1996).

The resolution spelled out DEBRA’s restructuring, liquidating, and debt resolution functions in accordance with the Law of the Kyrgyz Republic “On bankruptcy (insolvency)” (World Bank 2000). The classification and restructuring processes for DEBRA were approved by the Resolution of the Government of the Kyrgyz Republic No. 412, dated August 28, 1996 (World Bank 2000). The FINSAC Review Committee, which approved the assets slated for transfer to DEBRA, was established on May 3, 1996, by a presidential decree (World Bank 1996).

The extent to which DEBRA officials have utilized this special power is unclear.

Though the program initially targeted the Big Four, DEBRA could also take over other financial institutions and their assets, and it has done so.

DEBRA initially operated under the NBK (World Bank 2000). By 2003, the MOF owned DEBRA (IMF 2003). It had morphed into a “more independent entity reporting directly to the” country’s president by 2015 (World Bank 2015).

The director managed the day-to-day operations through two deputy directors. Though only the NBK chose which banks would be liquidated, and the NBK and MOF jointly determined assets to be transferred to DEBRA, the FINSAC Review Committee had to approve those transfers. The committee was also responsible for overseeing the implementation of government decisions stemming from the FINSAC program that the World Bank sponsored. The FINSAC Review Committee was chaired by the prime minister or his designee, while its membership was composed of DEBRA’s director; the chairmen of the NBK and the State Property Fund; and the ministers of finance, economy, agriculture, and justice (World Bank 1996).

DEBRA’s BRU comprised primarily NBK liquidation personnel. NBK and MOF employees staffed the DRU. The BRU received two foreign advisers “experienced in debt recovery methodologies, receivership procedures, and bank liquidations,” while the DRU received two foreign experts with experience in debt workouts and recovery (World Bank 1996).

DEBRA was required to submit periodic reports to the NBK’s board and the Kyrgyz government and to cooperate with any mandatory audits (World Bank 1996).

It is unclear how DEBRA’s governance and staffing structure changed as the organization’s mandate was extended and then exceeded.

World Bank documents detailing the program did not reference a size limit, and, in fact, granted that banks other than the Big Four could be liquidated and/or restructured and have their assets transferred to DEBRA (World Bank 1996). During the three years of its initial mandate, DEBRA took on debt worth Som 1,573 million (USD $42 million) (World Bank 2000).

World Bank analysts projected that resources needed for DEBRA’s first year of operation would total 300-350 million Soms (a maximum of USD $32 million) or about 1.5% of GDP. “Thereafter, the program would cost between 15–59 million Soms per annum, mainly as interest on bonds to be issued as part of the bank restructuring program” (World Bank 1996).

The World Bank’s FINSAC loan, which totaled USD $45 million, was earmarked to pay for the first year’s costs and an additional USD $13 million in budget support during the rest of DEBRA’s initial mandate (World Bank 1996). The loan was disbursed in two tranches: the first in September 1996, and the second in November 1997 after the government met certain conditions of the agreement (World Bank 2000). Other costs of the banking system restructuring were financed by the national budget, “after first imposing losses on the banks’ shareholders” (World Bank 1996). These costs included “payments to depositors, the removal of bad assets from bank balance sheets,” and severance payments, among other outlays (World Bank 1996).

Policymakers assumed at the outset that “collection and liquidation costs [would] be covered by the collections made against bad assets and the sale of assets under liquidation” (World Bank 1996). A follow-up report stated that DEBRA was eventually self-financing, funded by “an allocation of 5 percent of the debts it recovers” (World Bank 2000).

By 2003, however, DEBRA operated off of a combination of fees and transfers from the MOF and NBK (IMF 2003).

The NBK had the sole authority to choose banks other than the Big Four to liquidate, and the NBK and MOF jointly recommended assets to transfer to DEBRA. The FINSAC Review Committee was responsible for approving the asset transfers. Though the actual eligibility criteria for transferrable institutions is unclear within the available documentation, state-owned banks were a “top priority” for the country’s restructuring strategy (World Bank 1996).

The NBK and MOF jointly recommended assets to transfer to DEBRA, and the FINSAC Review Committee approved the asset transfers (World Bank 1996). It is unclear within available documentation how the assets were chosen.

The type of government security or securities used is unclear. The Kyrgyz Republic was in the process of developing its government securities market after DEBRA was created, preparing regulations in 2000 to issue government medium-term bonds with maturities from two to five years (World Bank 2000).

Available program documents do not contain information about DEBRA’s pricing methodology.

The BRU created “detailed” liquidation programs for Agroprom Bank and Elbank, which were both placed under the receivership of DEBRA to start the process (World Bank 2000). The strategy included selling or closing bank branches and paying off small depositors while transferring larger ones to a dedicated government entity. Diagnostic audits were prepared for Promstroi Bank and AKB Kyrgyzstan Bank, “and an internally managed program was implemented under a Management Letter Agreement with NBK, which provided for strong loan collection efforts, write offs and adequate loan-loss provisions, as well as downsizing and rationalization measures” (World Bank 2000).

Documents detailing DEBRA’s original design suggested that the AMC would develop automatic criteria that would streamline debt recovery actions where possible (World Bank 1996). However, DEBRA officials created individual action plans for each debtor, a strategy “that did not fully meet the initial understanding” of the World Bank, which helped fund the restructuring project (World Bank 2000). At any rate, DRU staff could use a variety of recovery methods, split into four categories detailed in Figure 1 below.

The government also introduced the leasing auction, which was then a new asset disposal method for the country. Details on how this methodology worked in practice, and whether or how often it was used, are unclear from available documentation. Additionally, in remote areas of the Kyrgyz Republic, “agricultural products were exchanged for debts” (World Bank 2000)

The NBK formed DEBRA in May 1996, and it became fully operational in October that year (World Bank 2000). DEBRA’s initial mandate was scheduled to terminate in Spring 1999. All DRU assets were “to be recovered, sold, or written off and the proceeds remitted to the central Government budget authorities by the termination date of DEBRA’s mandate” (World Bank 1996). Similarly, all receivership assets were “to be liquidated and the proceeds remitted to the proper authorities by the termination date of DEBRA's mandate” (World Bank 1996).

Policymakers extended DEBRA’s mandate to May 2002 after the AMC was appointed liquidator of another bank (World Bank 2000). DEBRA was later granted the status of “sole liquidator of failed banks” in a revised bankruptcy law that was enacted in June 2002 (IMF 2003). It “subsequently evolved into an asset management company with multiple tasks, and became a more independent entity reporting directly to the President,” with these changes formalized in August 2011 (World Bank 2015). Various attempts have been made to reform or close units of DEBRA in the past decade (World Bank 2015). For example, the country hired Deloitte to audit DEBRA with the goal of winding down DEBRA’s assets (Lavrova and Jenish 2015).

Still, Kyrgyz Republic politicians adjusted DEBRA’s functions in 2017 and 2018. DEBRA operated and was in charge of liquidating three bankrupt banks as of April 2021.