MAKING BANKS FRIENDS WITH BUSINESS

There was a lot of discussion regarding the situation in the banking sector of Azerbaijan last month. At the last meeting on economic issues, President Ilham Aliyev expressed his discontent about the weak participation of banks in the development of the real sector of the national economy, hence triggering numerous discussions and attempts to solve the existing problems of local banks. Why, in the absence of any signs of crisis, even the banks with super liquid assets do not want to do what they are essentially created for—to issue loans for business projects? Each side has own answers and excuses, apparently. But most importantly, will it be possible to find a way out of the situation?

The banking sector needs recovery. The new Minister of Economy, Mikayil Jabbarov, also confirms this. During the discussions of the draft state budget in the Milli Majlis of Azerbaijan, Mr. Jabbarov stated the importance of funding the business, which requires reforms in the banking sector. "The population of Azerbaijan has long traditions of private entrepreneurship and trade. We must use this factor in full. Any shadow schemes in this area should be prevented. It is also necessary to reduce the level of state regulation of business," M. Jabbarov said.

However, how "unhealthy" is the banking sector? As of September 30, the situation looks pretty decent: the total assets of banks reached ₼31.4 billion and their liabilities ₼26.7 billion. Meanwhile, 44.2% of bank assets were used as a loan portfolio with a growth indicator of almost 10% (₼1.2 billion). 61.6% of the loan portfolio comprised of business loans, while 38.4% were consumer loans. This clearly shows that there is no "crisis" in banks. Moreover, by the end of 2019, the sector should have noticeably revived, given that one of the most serious issues hindering its development—the issue of problem loans—was solved by the relevant decree of President Ilham Aliyev, which compensated the difference in the principal debt of individuals in foreign currency loans (up to $10,000) as a result of two devaluations of the national currency. The Financial Markets Supervision Chamber of Azerbaijan (FMSC) has recently reported that in in line with the presidential decree, 98% of applicants were compensated using ₼633.2 million from the state budget. As part of the decree, the government also cancelled the interest and penalty debts of over 126,000 borrowers (₼204.9 million. In addition, 42,000 citizens completely paid their debt, ₼153.8 million of loans (more than 76,300 borrowers) was restructured (this process will continue until the end of 2019). Thus, the volume of problem loans in Azerbaijan decreased by 9% compared to the beginning of the year, and compared to the same period last year - by 17.5%.

However, there are other indicators that characterise the essence of the insufficient participation of banks in lending to the real sector more specifically. Only 6.1% of credit investments go to industry and the manufacturing sector, 3.6% - to agriculture and processing, 2.7% - to construction and real estate. But the share of trade and services reached 16.7% and the largest share of loans (44.2%) was given to households (including consumer loans). In fact, the most important segments of the non-oil sector of the national economy are ignored by credit institutions.

What is the problem? Bankers claim that they are ready to lend to production and agriculture projects but... the number of such projects is few. "A bank sells money. If a credible client comes to my bank for a loan with collateral, a business plan, transparent activities, why should I reject his request for a loan? After all, money is a product that I have to sell to make a profit. Those entrepreneurs who claim that it is difficult to get a loan, simply do not meet the necessary conditions," Faig Huseynov, Chairman of Board of one of the country's leading banks, said in his interview. According to Huseynov, today banks are fighting for each client; they are in search of business projects that could be funded.

At the same time, businessmen have their own arguments. They argue that the interest rates on business loans are high. Bankers claim, however, that interest rates on business loans (12-14%) are fixed relevant to deposit rates.

Interestingly, consumer loans, which are much more expensive than business loans and more risky, are still very popular with both customers and banks. Bankers say that today this is an important point of their profit, and the reduction in the number of similar products might cause decline of many credit organisations, even bankruptcy. On the other hand, the presence of a large portfolio of consumer loans is also risky for both banks and borrowers, as shown by recent experience in the devaluation of the manat.

In this sense, the administrative levers recently introduced by FMSC to limit consumer lending look quite logical. The chamber amended the rules regulating credit risks for one or a group of borrowers related to each other. For example, to limit bank risks for long-term consumer loans, the maximum amount of credit risk on a consumer loan issued for a period of more than 7 years should not exceed 0.1% of the bank's Tier I capital after deductions. This amendment will be effective from November 30, 2019.

This measure will have a twofold effect: it will limit the banks' ability to issue consumer loans to encourage them to redirect funds to the real sector.

At the same time, the government will continue fiscal measures to "whitewash" the economy and entrepreneurship, which will remove the main obstacles for businessmen in obtaining loans. Also, the simplification of the process of implementing collateral will help reduce the time spent on this process. The government will have to resolve the issue in a short time.

Another incentive will be electronic access of credit organisations to the necessary information about borrowers, which will allow both parties to reduce the time for considering the application and making right decisions.

In addition, the government has taken measures to simplify and digitalise many banking services, at the same time expanding the coverage of cashless payments. As a result of the implementation of the State Program on the expansion of digital payments in Azerbaijan, the volume of non-cash turnover will increase to ₼14 billion. First Deputy Chairman of the Central Bank of Azerbaijan, Alim Guliyev, said that as a result of the state program, CBA plans to reduce the volume of cash turnover from 74 to 40%.

Thus, the volume of the shadow economy in Azerbaijan will be significantly reduced, which will make it more convenient for entrepreneurs and banks to cooperate with each other.

In the near future, banks will announce their plans for the coming year. Obviously, the business models of many credit organisations will seriously change, and the main trend will be associated with loans for projects supporting the development of the non-oil sector in Azerbaijan.