A REGULATORY BAN

It is no secret that the double devaluation of the manat last year hit the country's banking sector worst because it was not prepared either for a leap in the exchange rate or for the subsequent tough measures by the regulatory bodies. "Regulation is very important in the financial and banking sectors. As we have seen in the recent past, the lack of proper regulation in this sector has created numerous problems for our financial system," President Ilham Aliyev noted recently at a meeting with representatives of the American Chamber of Commerce in Azerbaijan.

Unfortunately, however, by no means all the urgent measures taken have proved effective. This being the case, the new structure regulating the market - the Financial Market Supervisory Chamber - in taking a very important decision to ban the issue and restructuring of consumer loans in foreign currency, established a temporary limit of one month. This was a timely, not to say overdue, decision. Generally speaking, the consumer loans situation in Azerbaijan has virtually gone out of control in Azerbaijan in recent years. Sometimes just about all retail outlets, car showrooms, and so on, have got involved in this, sometimes the market has been saturated by all kinds of thematic credit cards with an approved credit balance, specifically for consumer purposes, issued without a careful study of the customer's credit history. It should be pointed out that consumer loans account for the major portion of the overall credit portfolio of the banks - 38.1 per cent. As of January 2016 their volume was 8.07bn manats (an increase over the year of 4.5 per cent).

Devaluation and a reduction in the level of personal incomes obviously affected credit portfolios and reports filtered through the press from time to time about crisis situations at various banks. It all ended with many banks virtually suspending or drastically reducing the issue of consumer loans in the national currency and the circle of potential borrowers was fully constricted. As a consequence, all the banks' customers could do was to agree to a loan in foreign currency in the context of fluctuating exchange rates. Although, the chairman of the Supreme Court, Ramiz Rzayev, claimed, by offering only loans in dollars banks in Azerbaijan are infringing citizens' rights. "I believe that if a citizen has taken out a loan in dollars, it should be returned to him in dollars. If the loan was issued in manats, it should then be redeemed in manats. It is a rule," Rzayev said. He said that by offering loans exclusively in dollars the banks were infringing citizens' rights. "But the courts cannot interfere in the internal affairs of banks," Rzayev pointed out.

In other words, this decision by the chamber, which took up office literally the other day, benefits, first and foremost, potential borrowers who henceforth will be able to contest in the courts their right to receive a loan in manats. However, the banks are not particularly impressed by this innovation, because now "insuring" a credit portfolio against fluctuations in the exchange rate has been placed totally "on the shoulders" of the banks. In the opinion of economics expert Farhad Amirbayov, this decision by the chamber will only put more pressure on bank balances and the banks' currency risks will increase.

"The banks' assets will be drawn up in manats because loans will be issued in the national currency, but exchange commitments will remain and, consequently, risks on them will increase. It turns out that people's risks will be reduced, but the banks' will increase. The question arises: when will they start to help the banks? The chamber doesn't possess the finances to help the banks, and at the end of the day the Central Bank is their creditor," Amirbayov said.

However, according to a number of banking experts, it is dollar loans that are today a "heavy load" in the portfolio of problem loans. "Whereas clients try, albeit with delay, to repay their manat debts, dollars are frequently simply refused on the pretext that their share in the national currency has increased, but the recipients' income hasn't," one expert said.

According to estimates of the Fitch Ratings agency, which were published in a report entitled "Azerbaijan's banking sector after devaluation", the ratio of non-performing loans with an expiry period of 90 days in Azerbaijani banks at the end of 2015 was 9.5 per cent, compared with 8.3 per cent in 2014. Furthermore, there are risks that this figure will increase by the end of this year. So Fitch believes that the quality of assets of Azerbaijan's banks is deteriorating because of the high proportion of restructured loans (about 15 per cent at the end of 2015). All this justifies the decision of the Financial Market Supervisory Chamber.

Be that as it may, the chamber has said that it has already started monitoring the market in order to determine the impact of this decision, and any further action will be taken as a result of this analysis. However, the chamber also recognizes a continuation of the trend towards a weakening of the positions of liquidity and capital of the country's banks. In order to improve the situation the banks have begun to carry out the restructuring of loans and other preventive measures. "However, despite this, the negative trends continue," the chamber emphasizes.

Incidentally, a second, but nonetheless important reason for the ban on consumer loans in foreign currency, Amirbayov said, is the inordinate dollarization of the money supply in Azerbaijan. "About 80 per cent of deposits are in dollars and over 70 per cent of (active) loans. That's not very good news. Even if this decision does not have a strong impact on dollarization in numerical terms, then it will give a signal to the market that the regulator has switched from promises to specific action," Amirbayov said.

Dmitriy Vasilyev, Fitch Ratings' director for financial organizations, has the same view. "Among other things, the dollarization of loans affects the quality of assets because many borrowers don't have incomes in foreign currency. Dollarization of the sector is quite high and it will continue to grow. The dollarization of the liabilities of banks is higher than that of their assets. Therefore banks will have to increase the share of dollar-denominated loans in their portfolios. That's what we can expect over the next few years," he believes. 

However, with all this dollarization of the market there has been a reduction in the volume of purchase of foreign currency by Azerbaijani banks via Central Bank auctions. Whereas in January the banks acquired on average 144.56 million dollars at each auction, the figure for March was 48.23 million dollars (a reduction of almost double). According to Zakir Nuriyev, head of the Azerbaijan Banks Association, this is linked with the reduction in demand for the dollar by the banks and the public. So, in the main the banks are purchasing foreign currency based on their customers' demands. "In order to satisfy their own requirements in inter-bank operations, the banks are not buying foreign currency at auction. This requirement is manifesting itself when undertaking commitments in foreign loans or restoring the bank's foreign currency positions. In all other cases the banks are purchasing foreign currency based on requests from businesses and their clients," Nuriyev said.

The fact that at the beginning of April the CBA, for the first time since May-June 2015, resumed purchasing dollars at a foreign currency auction and acquired 400,000 dollars may be regarded as another positive signal. Furthermore, in March foreign currency reserves at the disposal of the Central Bank increased by 0.98 per cent compared with February to 4.06 billion dollars. Whether the ban on the issue of consumer loans in dollars will help to activate these positive trends is at the moment an open question. In any event, today's circumstances are such that it is not only potential borrowers who need support, but actually also the loan institutions. After all, a significant reduction in the credit portfolio could lead to a collapse of business for some of them, and this, despite all the objectivity of this process, is by no means a positive signal for the market in general and from the point of view of increasing confidence in it in particular.