LENDING WITHOUT RISKS

It is common knowledge that in order to manage risks in the process of ensuring the most efficient allocation of credit resources, each bank must conduct a careful selection of loan projects. The assessment should be based on the purpose of lending, the availability of real sources of loan repayment, the dynamics of the borrowing entity's financial position, its credit history, the status of the economic sector and the region, as well as the availability of sufficient collateral and the level of payment for the loan. Indeed, by fixing the lending limits, banks manage to avoid critical losses, diversify their loan portfolios and ensure a stable income.

As is well known, the consumer lending boom is still going on in Azerbaijan despite the introduction of restrictions on lending in the past year. It is against this background that the new rules regulating credit risks associated with one borrower or a group of borrowers related with each other, which have been adopted by the Central Bank of Azerbaijan (CBA), acquire particular importance for enhancing confidence in the local banks, on the one hand, and in the overall efficiency of the market, on the other.

Meanwhile, according to the CBA's new requirements that officially entered into force at the end of last month, the loan size limit for one borrower or several interrelated borrowers is set at no more than 20 per cent of the bank's Tier I capital (core capital). And only in the case where the market value of the collateral for the loan is not less than 100 per cent of the loan value (if the collateral includes real estate, than 150 per cent). Otherwise, the maximum limit is set at 7 per cent of the bank's Tier I capital. For aggregate large credit exposures exceeding 10 per cent of the bank's Tier I capital, this limit should not exceed an eightfold amount of the Tier I capital.

Furthermore, the regulations also define the upper risk limit on auto loans to a single borrower. Thus, if the price of the purchased car is more than 30,000 manats, and at the time of loan formalisation not more than one year has passed since the date of manufacture of the car, the risk associated with such a credit may not exceed 60 per cent of its value. For motor vehicles that cost less than 30,000 manats, this limit is set at 50 per cent. If at the time of loan formalisation more than one year has passed since the date of manufacture of the car, the risk limit for such vehicles should be no more than 20 per cent of the cost of the acquired asset. This means that in accordance with the above criteria the initial payment on a car loan will be 40, 50 and 80 per cent of the value of the vehicle, respectively.

It should be noted that international financial institutions also pointed to the need for reforms in bank lending. Thus, the Asian Development Bank has expressed support for the decisions of the Central Bank of Azerbaijan aimed at curbing the rate of consumer crediting in the country. "The Central Bank's decisions to curb consumer crediting in favour of lending to small and medium-sized enterprises should boost lending to the real sector. Additional lending to small and medium-sized businesses should help to increase the number of companies in the oil sector and eliminate differences in the development of Baku and the regions," the Asian Development Outlook stated.

"Today, one of the obstacles to economic diversification in the country is limited access to finances. It is easy now to borrow money for one year at high interest rates, but it is not what the real sector needs," World Bank Azerbaijan Country Office head Larisa Leshchenko stated in her turn.

The International Monetary Fund (IMF) assessed the desire of the Central Bank of Azerbaijan to preserve the neutrality of monetary policy and its initiatives to limit the growth of consumer crediting as correct too. "There are very high interest rates and, as a consequence, bank margins in the consumer lending segment. The introduction of limitations to this segment does not mean that banks will immediately begin lending to businesses, but if you limit the profitability, the banking sector will begin to look for other opportunities to make profit," IMF experts said.

Nevertheless, in Azerbaijan, lending to households increased by 40.8 per cent in January-February alone, while the overall growth of bank crediting reached 28.34 per cent on an annual basis. The volume of overdue loans has also increased over the year by 9.3 per cent, amounting to 5.31 per cent of the loan portfolio.

Meanwhile, following the creation of the Centralised Credit Register Service under the CBA, the formation of credit histories of borrowers has been going on in Azerbaijan since 2005. The register covers the entire spectrum of personal information about banks, non-bank credit institutions, borrowers, owners of large blocks of shares in the borrowers' capital, loans and liens on loans. In turn, the Credit Bureau will be able to collect credit information from other financial institutions such as leasing companies, organisations engaged in micro-lending, non-financial organisations including utilities and telecommunications companies, commercial sites that sell goods on credit, and so on.

The Central Bank has confirmed the increase in the number of applications to the credit register by 29.2 per cent. In February alone, the number of applications reached 201,604, of which 198,152 requests came from the banks, while 3,452 persons applied to obtain their own credit reports. It is noteworthy that the credit register contains information about 2,015,488 borrowers, whereas the total number of credit records is 6,912,676.

According to experts of the American Chamber of Commerce (AmCham) in Azerbaijan, the Centralised Credit Register needs to be broadened to include information received from utility companies as well as detailed information on pledges. In the meantime, AmCham calls for speeding up the process of creating the country's first private credit bureau to enable the effective management of the risks involved. Its activities will lead to the reduced scope of overdue loans, hence to reduced spending of loans lending and, as the result, to lower interest rates.

In short, bank lending - which is gaining in popularity in Azerbaijan - can be made a less risky and a more profitable product for borrowers through combined efforts.