HOW TO BUY GOODS ON CREDIT?

The credit market for the Azerbaijani public is young and promising. Specialists predict that in the next few years consumer credit will come to form one of the main areas of competition among the banks. But the majority of people still take a cautious view of the new service: to them, taking out credit amounts to placing their lives "in hock". 

Azerbaijani society has not yet fully woken up to the idea that opening and developing a business, acquiring a house or a car, or gaining an education can be done even without having all the necessary funds. Unlike the developed countries, for whose people credit is an integral part of everyday life, in our country this is hampered by the imperfections of the credit system itself. Firstly, this means high interest rates relative to Western countries, secondly, the inaccessibility of credit for people living in the regions, thirdly, the short-term nature of the loans on offer, and fourthly, a disadvantageous system of guarantees. Also, people often come up against obstacles of a mainly social nature, such as low wages and social benefits, lack of work, the high cost of living etc.

But it is still worth taking advantage of the benefits of this kind of banking service. The simplest example with which we are all familiar: at the height of summer, even lacking the ready cash, you can get an air conditioner on credit and feel comfortable throughout the period and pay it off within a couple of months without feeling even a tinge of regret at the purchase.

Better for the shops

The alluring TV ads urge all sorts of people to buy on credit household appliances, air-conditioning units, television sets, computers etc. This is undoubtedly increasing the popularity of so-called "consumer credits", that is, credits offered by the banks to individuals to buy goods and services. Also, the public's interest in this sort of credit is affected by the relative economic stability in the country and the growth in purchasing power, when people's real incomes are rising along with a desire on their part to live well and in step with the times.

Of course, we are still a long way from the Western level of credit consumption. But, according to National Bank figures for 1 June 2007, the volume of credits granted by the banking sector to the trade and services sector totalled 781.6m mantas, which is 75.2 per cent higher than in the corresponding period last year. Credits totalling 1,025.5m mantas were granted to households, showing a growth factor of 2.1.

Consumer credits, that is, credits for ordinary people, do not as yet make up the bulk of the credit base of the country's banks, but the figure is rising steadily. Banking experts believe that it is possible to make a good profit from this type of credit, which is granted on the basis of an assessment of an individual's purchasing power, and that it is much simpler to grant a credit to the average citizen than to a corporate client.

Meanwhile, one of the factors affecting the number of applications to the bank is the offer of goods on hire-purchase by the trading outlets themselves. Here, all you need to do is provide information on your income, while a bank credit would cost you at least 16-18 per cent, sometimes as much as 24 and 30 per cent interest. Although, to be frank, most shops offer goods on hire-purchase at much higher rates than if you were to pay cash or even buy through a bank. That is, that same interest is incorporated into the selling price. In any case, people willingly agree to such a mark-up because clients believe that they can acquire the appliance or furniture they need in a matter of minutes and without any bureaucracy at the bank or interest payment commitments.

But just recently, and this is already becoming very widespread, disputes have been arising between the creditor shops and the clients. This is caused by delays in the delivery of the goods after the deal has been struck. Clients sometimes have to wait for the delivery of, say, an air-conditioning unit, for up to three months, the item in question being most in demand during the summer season. But when trading outlets work with banks things are more reliable as shops bear greater liability to their clients under the terms of the contracts between them and such cases are reduced to a minimum.

Risky for the banks

Also known in world practice are direct links between the client and the shop. In a number of cases this even points up the refusal of the banks to grant credit. But it would be na?ve to suppose that it is only a matter of competition between the banks and creditor shops. The banks' interest in consumer credit can be influenced, rather, by the situation on the credit market in general. Let's say, following a decision by the National Bank of Azerbaijan to raise the bank rate to 13 per cent, the commercial banks are also forced to raise interest rates on credits. But expensive loans tend, of course, not to be taken up. On the other hand, caution on the part of the banks in granting consumer credits is linked with processes taking place on the world markets.

For example, in neighbouring Russia this category of banking services has failed to justify itself. Chairman of the Russian Central Bank Sergey Ignatyev has already expressed concern at the increase in overdue debt on consumer credits.

If on 1 January 2006 the proportion of overdue debt in relation to overall debt on individual credits made up 1.9 per cent, then by 1 January 2007 the figure was already 2.6 per cent, he told a congress of the Association of Russian Banks on 6 April. According to the RusRating agency, in some banks the proportion of overdue debts exceeds 15 per cent, while the ceiling is 10 per cent.

This ceiling was not chosen by chance. Three years ago there was a crisis in South Korea involving defaults on consumer credits when the proportion of arrears exceeded this figure. On reaching this threshold, the banks sharply step up their demands on borrowers. Many people are deprived of the opportunity of taking out new credits in order to refinance old ones. As a result, the proportion of allocated credit falls, while the proportion of overdue credit quickly rises. Then you get a crisis. A reduction in credit leads to a fall in consumer expenditure, and this has already led to a slowing down in the rate of growth of South Korean GDP from 7 per cent to 3.1 per cent. A slowdown in the growth of the economy, in turn, leads to a decline in the growth of people's incomes, which increases the number of defaults still further.

But the consumers need it

The possibilities of borrowers, just like those of the banks, are restricted by objective economic conditions. Volumes are too small, interest rates are too high, terms are too short. Without some kind of collateral (a flat, a cottage, securities, a car), a borrower can rarely count on obtaining credit. Low purchasing power on the part of the public forces the banks to incorporate risk of default into the interest rate, which makes credit expensive and hampers the broad development of the credit market.

Another problem is "double accounting". Everyone knows that many employers evade taxation by artificially reducing the wages of employees as they appear in the accounts. As a result, a person with quite good purchasing power is unable to obtain credit at the bank because he cannot officially provide the credit agency with proof of the level of his income. But even if a consumer can prove his purchasing power to the bank, in order to obtain a relatively large credit, say, to buy a car, he also has to provide a guarantor from among his relatives, friends or acquaintances. Here, "double accounting" again makes itself felt - the official income of the guarantor has to enable him to guarantee the return of the credit to the bank. As a rule, 25 per cent of the official income has to be enough to pay off the credit.

Meanwhile, the government is trying to support the banks in managing credit risk. It has proved possible to reduce these risks with the creation of a Centralized Credit Registry in the country. The registry stores the credit histories of every borrower who has applied to one bank or another, including data on income, property, investments etc.

All banks licensed by the country's National Bank are obliged to provide information from their credit files to the credit registry. Meanwhile, compared with 2005, the number of applications for information from the registry has risen sharply. In 2005 there were 319 applications, of which 248 concerned individuals and 71 concerned corporate bodies. But you have to bear in mind that the Centralized Credit Registry only started working from March the year before last. In 2006 the overall number of applications for information already totalled 5,302, and most of the information (4,928) was sought with regard to individuals. But over the first two months of this year 1,500 applications had already been made, which is more than for the whole of 2005. In 2006 virtually all banks, with the exception of three or four, sought information from the registry at least once during the year. Officials at the National Bank believe this is a good indication that the banks are modernizing the way they manage credit risk. And the lower the risks, the better the credit market will develop.