AVOIDING BANKRUPTCY

Each month of the passing year would not be complete without regular sensations presented by the national banks. The banking sector was shaken thoroughly, though seemingly able to withstand the problems, after the devaluation of the Manat last December.

However, as stated by Rufat Aslanli, the Chairman of Financial Markets Supervision Chamber (FMSC), at the forum “The development of banking system in the post-oil period: Challenges and Prospects”, the volume of public bank deposits in Azerbaijan fell again in October. The Chamber is identifying the reasons of this decline. We are trying to find out if it is connected with reduced confidence in the banks or the public consumption versus accumulation of funds as a result of declining revenues.” 

The banking sector has experienced a few negative trends over the past year. Firstly, the volume of problem loans in total loan portfolio has increased, which was the result of both a reduction in the solvency of borrowers, and the growth of bank interest rates in Manats due to devaluation. The increased dollarization led to currency shortage in banks, which in turn resulted directly in bank losses. The volume of dollar deposits reached 80% of the deposit pool, which has narrowed significantly. According to the Central Bank of Azerbaijan, the bank deposits of the population totaled ₼7.8 billion, as of 1 October 2016, which is 17.5% less than at the beginning of the year.

According to Rufat Aslanli, if the Central Bank failed ordering banks to increase capital to ₼50 million in due time, which allowed them to create sort of “a safety airbag”, we would observed a much worse picture today. However, the banks still has shown high sensitivity to macroeconomic shocks coupled with a lack of efficient mechanisms for regulation of troubled assets and the possibility of generating profit from operations to increase capital. These negative factors, according to Aslanli, led to the current situation. Therefore, the regulators are working to create a sustainable financial sector with effective risk management.

The first signs of recovery of confidence in the banking sector began to appear in June 2016. “The growth of deposits in June-August to some extent offset the decline that has been observed since the beginning of the year”, said Aslanli.

In addition, the Chamber is working on problem loans management mechanisms. It also has prepared a set of proposals to discuss with the government's economic bloc. “As to the ​​problem loans management, a platform for private initiatives and investments will be established to have such loans out of the system,” said Aslanli.

The Chamber also intends to increase the reserve requirements for lending to compensate for potential losses in credit operations of commercial banks. However, in order to avoid bankruptcy, a more robust “safety airbag” for the credit market is clearly needed.

Regarding the latter, the Chamber conducted a stress test for systemic banks, which revealed that they were resistant to shocks. “We hope these banks do not create additional burden for the fiscal and monetary policy of the country in 2017. At the same time, we have identified special regulatory oversight framework for such banks”, said Aslanli.

Incidentally, the privatization of the International Bank of Azerbaijan (IBA) is scheduled to complete next year. “Thanks” to the huge volume of low-quality assets of the bank, the whole financial sector was affected. Recently, it became known that IBA had provided almost ₼10 billion of toxic assets to Agrarkredit CJSC. The second phase of the transfer of assets will be completed in the first half of 2017. These transfers are implemented under the decree “On measures to restore the financial position of IBA as part of preparations for the privatization of the bank”, signed by President Ilham Aliyev on July 15, 2015.

According to Aslanli, both local and foreign investors will be able to participate in the privatization of IBA. “Our objective is to reduce the size of the bank in the first half of 2017. IBA holds about 40% of total assets, which is a serious threat to the banking system. Therefore, it is necessary to bring the size of the bank to a level that will not threaten the banking system,” says Aslanli.

By the way, according to the new decision, the bankers will be held legally responsible for their incompetent actions. A special legal platform has been developed for this purpose.

Rufat Aslanli said that the whole banking sector will be restructured until late 2016 - early 2017. The Chamber aims not only at revoking licenses or their elimination, but also the use of other tools. “Some non-systemically significant banks have pledged to complete capitalization by the end of 2016. A number of banks have already completed the process of capitalization. Those banks that were not able to increase their capital, were deprived of licenses,” stated Aslanli.

However, not only the banks require a capital increase. As it turned out, the Chamber seeks opportunities to replenish the capital of the Azerbaijan Deposit Insurance Fund (ADIF). It was ADIF that compensated funds to depositors of liquidated Dekabank, Kredobank, Zaminbank, Parabank, Caucasus Development Bank, Atrabank, Bank of Azerbaijan, Ganjabank, Texnikabank and Bank Standard. Such a large load was virtually unaffordable for the fund, and it was granted a loan from the Central Bank under state guarantees. However, as the saying goes, one good turn deserves another: eventually the Fund will have to return the loan. But then, to collect such amount and, at the same time, to ensure the availability of own reserves, the Fund will need more than one year. Especially when the number of actors in the market reduced and they have no “extra” money to “pay the bill”. Over the past ten years, ADIF has managed to accumulate only ₼140 million, which is less than 10% of insured deposits. According to the law “On the full deposit insurance”, public deposits with maximum annual interest rate equal to the level set by the ADIF Board of Trustees,  will be insured during the next three years regardless of the deposit amount. Will the Fund be capable of solving this challenge in case of another bankruptcy in the market? Will it request yet another loan from the Central Bank? How will it return this loan? The investors are interested to know answers to these questions. Without a clear answer, achieving greater confidence in the sector is not possible.

That's why the new sources are required to replenish ADIF’s capital. As Aslanli admitted, it is necessary to give a clear signal to the restructured banking sector and the public that the deposit insurance system has sufficient funds to meet its obligations. “On the other hand, we want to implement a risk-based model for fundraising contributions. We are working on the legal side of this issue for the introduction of this model.” he said, adding that the state can withdraw from these processes after that.

The last statement of Rufat Aslanli was not properly interpreted by some media and therefore, caused a real stir among bank customers. They have mistakenly referred this statement to short-term plans. Meanwhile, the ADIF recapitalization process and finding stable sources for this will likely take some time. It has been known since the beginning of ADIF’s existence that it had to be a self-sufficient and a commercial structure similar to the Mortgage Fund, etc. But this will happen only after the Fund has real and strong guarantees for replenishing its reserves.

Today, as seen from the above, the regulator and the banks should strive to re-gain the confidence of depositors and increase the customer base, which in the current environment is not an easy task.