LOANS FOR PRODUCTION

Summing up the results of the development of the monetary sector in the past year, the Central Bank of Azerbaijan (CBA) confirmed the steady growth of basic indicators and the resilience of banks to various risks. At the same time, the long-term strategy of the Central Bank is aimed at increasing the volume of lending to the real sector of the economy and a sizeable cut in the price of borrowed funds. The need for such changes was recently mentioned by Azerbaijani President Ilham Aliyev.

According to statistics from the Central Bank, last year was very productive for local banks. Despite the two-fold drop in world oil prices and the decline in foreign trade, indirectly affecting the investment activity in the country, as well as the collapse of the currency market in neighbouring Russia, Azerbaijani banks have been able to significantly increase their assets and capitalization, as well as increase the volume of lending and deposit portfolio.

Thus, according to the Central Bank, in 2014 the total assets of local banks reached 25.182 billion manats, an increase of more than 23 per cent. In general, over the past decade, the rate of asset growth exceeded 2.4 times and is currently equivalent to 78 per cent of non-oil GDP. The policies of the Central Bank to increase the capitalization of the banking system also turned out to be productive. Leading banks of the country, which provide 99 per cent of the assets of the credit sector, fully met the minimum requirements in terms of capitalization, while the amount of capital in the top ten banks now exceeds 100m manats. Accordingly, the capital adequacy ratio of local banks now stands at 19 per cent with the internationally accepted norm of about 8 per cent.

The statistics on attracting deposits from the population and increasing the volume of lending are also positive. The deposit portfolio of banks last year reached 16.5bn manats, providing a 24-per-cent growth. It is noteworthy that in 2013 the deposit base of banks increased by 16.6 per cent. The key driver in the expansion of the deposit base is growing income levels and increasing savings. Over the past decade, the rate of income growth averaged 8.3 per cent per year with 18.2 per cent of household incomes after taxes and other deductions directed at replenishing bank accounts and other forms of capital increase. On the other hand, the growth of deposits testifies to confidence in the banking system as a whole, i.e. depositors are not deterred by the fact that domestic banks, which feel no need for "expensive" money in recent years, are consistently lowering the bar of the interest rate on deposits. If five or six years ago they stayed at 16-18 per cent in the national currency, by the end of last year, this trend brought the average rate on deposits to 8-10 per cent. Nevertheless, depositors still gain. Given the practical immutability of the rate of the manat against foreign currencies, the average annual income on deposits is five times more than the current rate of inflation.

According to the CBA, the situation looks quite positive in lending to the economy: in January-December 2014, banks granted loans to the tune of 18.542bn manats, which is 20 per cent more than the previous year. However, the monetary system of the country still sees a steady tendency towards the noticeable prevalence of the retail lending segment. In recent years, the market for corporate lending, which is close to saturation, has largely lost its attractiveness for banks - partly because of the lack of borrowers with high quality characteristics. This trend is very clearly reflected by last year's statistics: in 2014, a little over 2.027bn manats or about 11 per cent of bank loans were channelled into the development of the industry and the manufacturing sector, while the share of trade and services, as well as the retail segment was nearly two-thirds (58.5 per cent) of all loans issued by banks.

"We believe that having sufficient resources, local banks should first invest in the economy of their country, giving preference to the real sector rather than consumer lending. The activities of banks should mainly be aimed at the creation of industrial enterprises and new jobs," Azerbaijani President Ilham Aliyev said at the conference dedicated to the results of the first year of the state programme on the socioeconomic development of regions in 2014-2018.

The fact is that in recent years the main function of the main investor that finances major infrastructure and industrial projects has been undertaken by a variety of public funds and organizations. And if oil prices remain low for a long period and the overall situation on the global market is negative, it will probably be impossible to keep public investment at the same level.

Therefore, the expansion of lending to the real sector will help implement another important task - support the non-oil sector.

Also, based on the presidential decree on the execution of the state budget for 2015, the Central Bank was instructed to take effective measures to bring down the lending rates of commercial banks, as well as to reduce the interest rate gap between high bank loans and the relatively low discount rate of the CBA.

It must be noted that since December 2012, the Central Bank has lowered the refinancing rate four times to its current level of 3.5 per cent. "Around the world, interest rates are one of the central issues of macroeconomics, which is closely linked with the problems of economic activity, growth, employment and inflation," the chairman of the Central Bank of Azerbaijan, Elman Rustamov, said. "At the same time, the CBA continues its consistent efforts to reduce bank interest rates on loans, particularly by encouraging the involvement of long-term resources in the banking sector."

Thus, thanks to measures taken in recent years, the average rate on business loans, which account for about 75 per cent of the total loan portfolio of banks, decreased to 10.8 per cent, while the average rate on consumer loans, which forms about 25 per cent of the portfolio, is now 18 per cent.

As a result of the regulatory activities of the Central Bank, the rate of growth of consumer lending in the past year decreased by 1.9 times in comparison with the previous year, while the volume of car loans dropped by 31 per cent. However, the average interest rate on loans in Azerbaijan is still 14.3 per cent, which is 4 times higher than the rate of refinancing.

Representatives of the banking sector are also looking for ways to overcome this imbalance. In particular, these issues were put on the agenda of the Azerbaijan Banking and Finance Forum, which brought together hundreds of local and foreign experts in Baku. "A long overdue task is the need to reduce the so-called risk margin (the share of the lending rate set by the bank for the loan default risk can be high for unsecured loans - editor)," the chairman of the financial institutions working committee of the Confederation of Entrepreneurs of Azerbaijan, Zakir Nuriyev, said. "The large share of credit rates is proportional to the risk margin. Therefore, to effectively reduce the lending rate in nominal terms, we need to ensure a cut in risk margins. Theoretically, this will reduce the loan interest even with less significant cuts in deposit rates."

In any case, it is clear that a relatively high interest rate and the short period of repayment of loans issued by local banks are not very useful for the development of the industrial sector. And to overcome this negative aspect, the Central Bank and the government have yet to make serious changes in the domestic banking sector.