NON-PAYMENT RISKS

The stabilization measures, accelerated development of the non-oil sector, as well as the economic reforms already have an effect on the real sector of economy. Yet the situation in the seemingly silent banking market remains quite tense. The external debts of banks, weakening of public confidence to the banks and non-performing loans fail to contribute to overall stability in the banking sector.

In Azerbaijan, The total amount of overdue loans as of March 1, 2017 was almost ₼1.6 billion. At the same time, the share of distressed loans in the total loan portfolio reached 9.8% versus 8.96% at the beginning of 2017.

These and other factors contributed to the development of new amendments for the Law on Banks by the Financial Markets Supervisory Chamber, which determine the order for resolving the insolvent banks and regulate the voluntary restructuring of bank liabilities.

The Problem

In fact, the situation existing in the banking sector is not surprising. The local banks have long been issuing loans, especially the consumer loans, irresponsibly. Quite often the only document required for issuing a loan was an identity card of the borrower, which obviously could not provide any useful information about his or her solvency. Moreover, the banks have been offering separate products that promised favourable lending terms to housewives, students, pensioners, and other segments of the population with unstable income levels. Only the big loans, say, for the purchase of a car, would require collateral, which was often the subject of the loan itself. But a movable property cannot ensure reliable return of the loan .

As a result, 280,000 out of 700,000 civil cases in courts are related to relationships between banks and customers. Who is the culprit of existing problems – the clients who have overestimated their financial capabilities, or the banks that have excessively distributed various credit cards and failed to properly forecast all the risks? According to experts, it would be fairer to blame the latter for most of the existing problems, as it was their responsibility to make ultimate decisions on individual clients. The situation is so awkward that even the members of parliament and state officials actively join the discussions on resolving these conflicts. At various parliamentary sessions, MPs have actually demanded to hold the bankers accountable for their gross mistakes in choosing the loan policy and even to impute administrative and criminal responsibility to them.

In fact, the Centralised Credit Register has been actively maintained for more than 10 years under the Central Bank of Azerbaijan, but it seems not all the banks have checked against the available data upon making lending decisions. This would definitely help to avoid situations when the borrowers with several outstanding debts were given new loans. It was only the last couple of years that the financial institutions have begun tightening the lending terms.

However, these measures do not solve the situation with existing debtors. And worst of all is the situation with borrowers of loans in foreign currencies: after the devaluation of manat, their cost has increased while the solvency of most debtors, on the contrary, has decreased. Meanwhile, the banks have tried to restructure the loans increasing the payment term and lowering the monthly payment but refusing to write off part of the debts. Now the experts suggest considering the options for state support of banks to solve the issue of distressed loans, to help the banks to attract cheap loans for this purpose, and to share the debt burden between the client and the bank. Moreover, experts of the World Bank announced the possibility of writing off the distressed loans to improve the quality of loan portfolio, which, most likely, also implies the provision of certain financial assistance to banks from the state.

Avoid standing indebted

It is also necessary to ensure a balanced approach when tightening the lending process to avoid possible risks and not to lose the customers. Thus, it is necessary to improve the issue of collateral. According to the International Finance Corporation (IFC), about 30% of the banks' loan portfolio is issued without collateral, about 30% are granted on pledge of movable property only, about 10% are issued on pledge of both movable and immovable property, and the rest – on pledge of immovable property. According to financial expert, Vasif Badalsoy, the banks often take as collateral automobiles and various equipment, as well as residual materials in warehouses and storages of companies. The least likely collateral type taken by the banks are intellectual property and accounts receivable.

Based on the results of a survey conducted in 14 banks, it seems the banks do not consider movable property as a source of credit reimbursement. In such cases, they additionally require the presence of a guarantor, while the average interest rate on movable property loans varies within 20-30%.

The situation can be considerably facilitated by the register of movable property planned for the near future. It will allow optimising interest rates on bank loans. According to the executive director of the Center for Analysis of Economic Reforms and Communications, Vusal Gasimli, the register can ensure the development of financial services in all directions, as well as help to simplify the entrepreneurs' access to loans, especially in the regions of Azerbaijan.

In addition, the first private credit bureau will soon start operating, which will be dealing with the organization of the collection and analysis of lending records and the provision of credit reports. This structure can also significantly facilitate the work of banks with borrowers. In fact, the registry covers an entire range of information on banks, non-bank credit institutions, borrowers, owners of large interest packages in the capital of borrowers, loans and collaterals. The credit bureau will be able to collect credit information from other financial institutions, such as leasing, insurance, reinsurance, factoring companies, microcredit organisations, non-financial organisations, including utilities providers, mobile operators, retail facilities that sell goods on credit, etc. This indicates that the bureau will have information about all the obligations of the future borrower (utility and telephone bills, etc.) in order to protect the creditors from the risk of non-payment.

Causal solution

At the same time, non-performing loans, as toxic assets of banks, have already created a lot of problems for them. Experts and international organisations forecast the closure of at least a dozen more banks in Azerbaijan, which continues to keep the financial sector in suspense. Thanks to the appeal of FMSC, new instruments have been introduced at the legislative level to support banks facing a shortage of capital. So, the Law on Banks was amended and such concepts as "resolution", "transition bank", "system bank" and so on were introduced. In addition, the law also includes a new section explaining the process of resolution of banks that have lost their solvency.

According to the Speaker of Parliament, Ogtay Asadov, all these measures are required to regulate the negative situation in the banking market. "There are banks that lose ₼5 million daily, and this amount is growing. These banks need to be improved," said O. Asadov.

One of the most important things is the process of voluntary restructuring of banking obligations. "This procedure is widely used all over the world, as one of the possible solutions for the insolvent banks facing problems. The banks will be able to apply to the court for restructuring their obligations," said Rufat Aslanli, Chairman of the Financial Markets Supervisory Chamber.

In addition, the conditions for appointing a temporary administrator to insolvent banks were slightly revised.

Explaining the introduction of "transition banks" to the market, Aslanli noted that they would help to keep the healthy assets of troubled banks. "Last year, we appointed an interim administrator to Bank Standard. This bank had healthy assets, and the investors were interested in them. However, due to the lack of appropriate legal framework, we were unable to withdraw these assets from the bank, and as a result, the state was forced to pay compensation in the amount of ₼435 million. Although these healthy assets could well be redirected to investors with a normal reputation, create a "transition bank", enable the depositors of the bank, state and business structures to freely use their funds," said Aslanli.

And, finally, according to the amendments to legislation, if the management and shareholders of the bank are responsible for the occurrence of problems in a particular bank, they will have to compensate for the losses incurred. Thus, the property of management and shareholders of bankrupt banks will be confiscated and sold. Well, quite a fair decision, given the scandalous events around the International Bank of Azerbaijan, because of the criminal actions of the former leadership, which has shaken not only the banking system but the entire financial system of Azerbaijan. Consequently, the new amendments will force bankers to be more responsible in relation to the entrusted finances and retaining other people's money not without losing their own funds.