CREDITOMANIA

Living on credit - a trend that has gripped the developed world in the last decade - has become fashionable in Azerbaijan. Stable incomes which, however, often do not allow you to make major purchases, but provide an opportunity to pay for them in instalments, have created demand for consumer loans. And some of the local commercial banks quickly seized the opportunity and began to offer a variety of conditions for getting them. The result is that consumer credits are considered the most popular form of bank loans in Azerbaijan today.

Easy conditions - high risks

To tell you the truth, it is difficult not to fall ill with "creditomania" in Azerbaijan today, given that the conditions for granting loans are becoming more loyal and banks' requirements for potential borrowers easier. For example, in order to get a rapid credit in a commercial network, many banks require you to show your ID and fill in a form - you do not need to pledge anything or bring a certificate of income from your employer.

This liberalism stimulates a growth in loan portfolios, but also affects their quality, because bad loans have become a serious issue for some banks, given that they often account for more than 10 per cent in the total portfolio.

But even against this background, banks are not going to give up on the democratization of the conditions of retail lending. On the contrary, they are adjusting the traditional line of credit products towards easing the requirements for the borrower and the package of documents he must submit. This is explained by the fact that today the prospects of consumer lending in Azerbaijan are largely determined by the saturation of the market, which has led to increased competition for customers.

However, such circumstances do not have a significant impact on the cost of products. But some banks have cut interest rates to 2-3 per cent, and this is insignificant against the background of high rates on consumer loans.

The thing is that short-term lending is a high-risk segment of unsecured lending, and the price of the loan product is a way for banks to cover these risks. How does competition manifest itself? First of all, banks are trying to attract customers with such advantages as rapid decision-making on the loan, elimination of red tape, expansion of sales channels, development of Internet banking, card products, including shopping cards.

According to the CBA, the growth rate of loans granted by banks to households last year is almost twice as higher as the pace of lending to the corporate sector. In 2012, loans granted to households increased by 30.1 per cent and exceeded 4 billion manats.

Certainly, increasing consumer lending has a positive impact on the economy, says the head of the press service of the International Bank of Azerbaijan, Rauf Agayev. With the growth in consumption, money circulation and, consequently, the gross domestic product of the country increase. For banks, retail lending has become the most attractive sector because of the very high yield and large market opportunities. On the other hand, if you cannot repay the loan, a situation arises between the borrower and the guarantor where the loan should be paid off by the bank. For this purpose, as you know, banks have set up reserve funds to cover credit risks. The riskier the credit policy of a bank, the greater insurance reserve it must create, using money from its own profits. In frequent cases, the bank remains at a loss.

"Banks are trying to attract the attention of borrowers with vivid advertising campaigns and various preferences and discounts. And then, in broad daylight they are looking with a lantern in their hand for the borrower who fell into arrears. Any reputable bank seeks to complicate the conditions for obtaining consumer loans and introduces modern scoring systems to eliminate insolvent borrowers at the stage when a loan application is submitted," Agayev said.

Central Bank tightens control

However, it is well known that the development of the European debt crisis became possible because of the simultaneous effect of a number of complex factors, including easy access to credits, which led to the issuance of a significant number of high-risk loans.

Given all this, to prevent the growing activity in the sphere of consumer loans, the IMF recommended that the Central Bank of Azerbaijan continue prudential measures. In addition, the Fund advised the CBA to play a role in direct lending to the real sector of the economy, Advisor to the IMF Department for the Middle East and Central Asia (MCD), Raja Al Marzouqi, said at a news conference after a two-week visit to Baku.

In turn, the Azerbaijani parliamentary committee on economic policy is going to demand that banks lower interest rates on consumer loans. The head of the committee, Ziyad Samadzada, recently said that the issue will be submitted to MPs and the country's leading economists for debate for the first time. "It is essential to analyze the situation on the market of consumer loans: how they affect the real possibilities of consumers and whether they are risky for the country's economy. As you know, the global financial crisis began because of problems with bank loans," Samadzada said.

MPs are going to hold a meeting with the leadership of local banks and the Central Bank of Azerbaijan to discuss problems on the consumer credit market. According to Samadzada, monthly loan servicing considerably exceeds banks' revenues from them. It is therefore proposed to investigate why with the average return of 6-8 per cent or less, banks impose such high interest rates on consumer credits. "Bank should definitely be informed that this situation could lead to a serious threat to the country's economy," the head of the parliamentary committee says.

Market participants also confirm the increased risk. According to the Director of Retail Business at Bank Standard, Elcin Abdullayev, a number of banks in the country have been conducting quite an aggressive credit policy recently by issuing loans at rates far above the average and in places not suitable for this activity. "This increases the risk to the whole banking sector in Azerbaijan, because often there is no way banks can check the creditworthiness of a borrower well enough," said Abdullayev, adding that potential customers of banks should fully receive all the necessary information about loans and rates in order to soberly assess their ability to return them.

Meanwhile, the Central Bank, seeing the desire of banks to build up the portfolio of retail services and a large number of appeals from clients in this regard, has begun to take action. To eliminate the threat to the stability of banks, the CBA initially warned them to stop providing banking services outside their branches and offices.

The next step was to notify the banks that they should disclose their actual annual interest rates on loans (FIFD) on the Internet and in advertising campaigns. In accordance with the methodology provided by the Central Bank, while calculating FIFD it is necessary to take into account: payments for the main sum of the loan, the interest on the loan, the loan fees, the costs of servicing the loan related to the opening and maintenance of a credit account, including costs related to the servicing of the collateral, expenses on cashing the loan, the assessment of the collateral, insurance, administrative and other expenses.

The need for this is related to the fact that the actual lending rates were much higher than claimed. Now some banks have already started announcing FIFD. And as it became clear, they reach 30-40 per cent, and sometimes even 50 per cent!

However, not all market participants agree with such conclusions. The chairman of the Unibank Supervisory Board, Eldar Qaribov, for example, stated that "the average rate on consumer loans in the country ranges from 28 to 32 per cent (like microcredits, but no one remembers that). The effective rate reaches 40 per cent per annum. But! If you want to take a short-term loan in the amount of $ 100 to $ 2,000 on any market, whether it is in the UK, the US or Russia, the effective rate will definitely be over 60 per cent. And this is justified, since doing this business and its effective management requires a huge investment in marketing and advertising, sales channels, information technology, risk management, and more. The difference in the monthly payment for a client with a debt of, say, 1,000 manats, which is taken for one year, between the rates of 25 and 40 per cent of the annual amount will be only 150 manats per year, or 12.5 manats a month. If anyone thinks that this can drive someone into unpayable debt, then let it be on their conscience." According to the banker, the rising income of Azerbaijani citizens in absolute terms over the past one year alone is almost comparable today with the total volume of the consumer credit market in the country. "The increase in income in absolute terms is 3.5 times higher than the growth in household debts. Where are macroeconomic risks in the short-term here?" asks Qaribov.

In any case, according to the requirements of the CBA, the country's banks also stopped providing banking services outside their branches and offices. According to CBA General Director Rasad Orucov, the share of loans issued outside banks and branches was small, but the trend was getting stronger, so the Central Bank stopped it. "Following our decision, banks completely stopped this activity, and there was no need for sanctions," said Orucov. In fact, it was a banking activity carried out outside the place where the bank was physically located, i.e. outside the places allowed by law. According to the law, credits may be granted in head offices and branches, and units may not engage in the issuance of credits. "Issuing loans through mobile units could lead to additional operational risks, because they are remote service points that are actually connected to the operating system, but cannot meet the security requirements. The quality of underwriting carried out there was also questioned," Orucov said.

Thus, after the recent decisions of the CBA, we can expect tighter control over the issuance of consumer credits. And accordingly, "creditomania" will become a more civilized and safer "disease".