CREDITS UNDER CLOSE SURVEILLANCE

The New Year began with something unexpected for the banking sector of Azerbaijan - the Central Bank made a controversial decision to tighten control over consumer loans. The regulator sent a letter to banks operating in the country to stop lending to individual borrowers without an income certificate.

The arguments of the Central Bank are undeniable - in the recent period, the banking sector or rather some of its participants have really begun to abuse the loan portfolio. Products with great names and flawless marketing support - loans for all people without collateral and certificates - sucked more and more people into debt. But on the other hand, the popularity of these products among the population indicates the degree of demand for them - unfortunately, despite the struggle of all the entities involved, the amount of revenues flowing through the "white" till is still markedly behind the "black" revenues. Consequently, an income statement is a big problem that sidelines a certain proportion of the creditworthy population from banking services.

In addition to this, banks suddenly suspended car loans - although CBA says that there have been no instructions on that score, automobile sales centre confirm this information and are already trumpeting future losses...

The decision on the recovery

Despite the fact that information on the CBA letter began to leak to the press in the initial days of 2014, it was officially confirmed by the regulator itself only on 22 January.

"According to the requirements of the Central Bank for the issue of loans in banks, unsecured loans must be given if there are long-term financial reports and credit histories of borrowers. A statement about wages or income from other sources acts as the required financial statement for individuals. It is worth noting that unsecured loans in international practice are considered credit products that require serious evaluation and underwriting," the CBA said in a press release.

In addition, it is noted that the Central Bank continues to protect the rights and improve the financial literacy of consumers, which is why it tightened the requirements for banks to provide consumers with reliable and complete information on the conditions of loan products.

Moreover, in order to improve the field of consumer credits, the classification of consumer loans will be introduced for the first time in Azerbaijan from 1 February 2014.

For example, loans, the principal and interest rates on which are repaid in accordance with the loan agreement or with a delay of up to 30 days, will belong to satisfactory assets, from 31 to 60 days - to controlled ones, from 61 to 90 days - to unsatisfactory ones, from 91 to 120 days - to dangerous ones and with a delay of over 120 days - to bad assets.

Justified "pluses" and objective "minuses"

How did this letter affect banking market participants?

As we noted above, the situation with the mass growth in consumer credits in the country had long aroused fears among experts and they even call the CBA decision "belated", although official statistics do not demand "the sounding of the alarm": the country's banks increased lending to the economy by 24.51 % in January-November 2013, while overdue loans and subsidies accounted for 5.21 % of the total portfolio.

Not everything seems to be so bad, especially as the most popular products in the field of consumer credits fall to fairly well-established, leading commercial banks in the country, which have a sound financial standing today, comply with the standards and requirements of the regulator, etc.

But there is one "but" - do not forget that the roots of the global financial crisis that began in 2008 and is still shaking the economy of the planet also stem from the problem of unaccounted risks in lending operations. It must be remembered that at that time, quite "famous" names in the global banking community turned out to be in the centre of a financial scandal. "This is a preventive measure aimed at averting possible risks in the future. There is an approved procedure for issuing public loans, which notes the necessity to bring a statement from the employer. This point was not violated, but control over its implementation was, according to the regulator, insufficient and banks are prescribed to enforce the rules," a source in the country's banking sector said.

However, some banks indicate that before this decision, the CBA worked with retail borrowers on the basis of certificates of income. Thus, according to the chairman of VTB Bank (Azerbaijan), Aleksander Yeremin, the CBA has not put forward any new requirements, but only further pointed to the need for banks to comply with the current requirement of the banking legislation. Motives are also clear and relate to the abuse of this requirement by some banks, in which the share of such loans in the loan portfolio has grown significantly, increasing the risks of the quality of the portfolio deteriorating." This requirement of the regulator practically had no effect on the activities of our bank, since the submission of documents confirming a customer's income is a prerequisite for obtaining a loan at our bank and virtually all unsecured lending products," Yeremin said.

Meanwhile, other sources in banking circles also named the negative aspects of the decision. According to them, it will definitely hit the client base of banks, and they have already started to lose customers. Another question is that this decision is a blow to the business image of banks and trust in them because it quite clearly indicates that risk management on their part was performed poorly. This means that potential customers will have questions on other products. "In the past, for example, loans were given to customers with a favourable credit history without a problem, and now they are not. If a customer appeals to the bank even for the 10th time, he is still required to bring an income statement. For many people working in the private sector, it is a problem - we know that not everyone's salary is specified in documents in full. Consequently, people earn enough to cover the loan but cannot prove it with documents. Frankly, there is little hope that it will somehow encourage employees to demand that their employer "whiten" their wages," one of the country's banks said.

According to another market participant, the general banking practice is that such loans without certificate are invalid if the bank has sufficiently large statistics about the quality of the customer base and is able to segment its portfolio so as to define the category of customers with the lowest level of arrears. "In accordance with the level of quality of a customer segment, the bank may offer a higher or lower cost of credit resources covering the correctly calculated cost of risk for each customer segment. However, Azerbaijani banks have little or no such statistics today," he said. Meanwhile, the Central Bank noted that retail lending is far ahead of the market in terms of growth. "If in 2013 the total loan portfolio of the market grew by 30%, its retail part grew by more than 40%. Thus, the retail lending market in the country is growing faster than the market for corporate lending. There is no doubt that the Central Bank, which has its own ideas of a reasonable growth in lending, seeks to limit the rapid development of the retail segment," the market participant said. He added that the prescription of the regulator reminded market participants again of the need to ensure proper control and prevent violations.

We must say that retail banks and potential borrowers who do not need to bring a certificate are not the only "victim" of the CBA decision. It will also be difficult for shops that earn by selling goods on credit - they have already suspended the "Credit without certificates" campaign and are counting expected losses. This is the second blow to their business by the CBA after the decision to terminate the activities of banks' remote points - i.e. representatives of banks working directly in the shopping facility to facilitate the allocation of the loan. But rules are rules - now they will have to find other ways to attract customers.

Cars flood the streets...

In any case, the same fate has befallen automobile sales centres - along with consumer loans, banks have restricted the allocation of auto loans, although in this case, the CBA flatly denies its "participation" in the decision of banks. "There have been no official CBA orders for banks to suspend the allocation of car loans. This question is related to the credit policy that commercial banks pursue in the country," the CBA said.

However, banks still admit the existence of restrictions, saying at the same time that it is a temporary measure and is aimed at the introduction of innovations in terms of car loans. However, it is not known when the restriction will be lifted. The purpose is the same - to strengthen supervision over the lending of loans.

Experts point out that the introduction of such a restriction could have a negative impact on both the banking sector (due to the popularity of car loans in the country) and insurance and automotive retail markets. Against the background of the fact that most of the vehicles sold in the country are purchased on credit, insurance companies may face losses in CASCO insurance policies, the amount of which will decrease following the decline in sales.

According to market researchers, today 60 % of cars are sold in the country on credit. Many potential customers are unable to buy such an expensive product in cash. Consequently, the seller has one way to somehow straighten rapidly falling sales - to lower the prices. "A number of businesses are already facing serious problems. Studies show that there is already a noticeable decline in sales, which should also affect the import. Official representatives of the automobile companies and entrepreneurs are interested in selling imported cars. A long-term restriction on car loans will have a negative impact on the car market," the expert of the Property Market Participants public organization, Ramil Osmanli, believes.

The restriction on car loans has another nuance - it happened literally against the background of the decision to switch to the Euro-4 environmental standard, which shook the car market anyway.

According to R. Osmanli, the introduction of new environmental standards will primarily affect the secondary market and the import of old cars, and within three or four months we can expect a small increase in prices for cars that meet the Euro-4 standards, but the process will not take long.

In short, the latest situation on the market of popular bank loans is twofold - they seem to have started on a merry note, but finished on a sad one. However, it is normal when making any "sensitive" decisions affecting many sectors of the population and entrepreneurs. The main thing now is to accept what happened and try to adjust to the new rules.