EMERGENCY AID

Despite all the efforts of market actors and regulators, the crisis in the banking sector of Azerbaijan continues, each time revealing the depth of the problems in this sector. Thus, the International Bank of Azerbaijan (IBA) became the first victim, after which the weak links of the system fell down one by one. Last week the bank had to declare a technical default and apply to the New York court for support.

Meanwhile, the international financial institutions and experts once again report about the inevitability of reducing the number of banks in Azerbaijan, which is logical and expedient for the speedy stabilization of the market. But, on the other hand, the closure of banks is also accompanied by a number of problems and dissatisfaction on the part of former clients. However, experts hope that at least it will be possible to achieve positive changes after the measures taken to improve the process of liquidation of banks. 

Unfortunately, the billions of dollars poured into IBA and the repeated changes of management, could not completely neutralize the damage inflicted on the bank by its former management. The government has already purchased ₼9.93 billion toxic assets of IBA. The bank also received liquid funds for $1.3 billion and ₼70 million. In addition, last January, the government as the main shareholder of the bank, transferred ₼600 million from its deposits to raise the bank's capitalization. "Although these measures strengthened the capital and liquid positions of the IBA, the devaluation of manat and the failure to complete the transfer of toxic assets to the government led to additional losses. By the end of 2016, the loss of the International Bank Group (including its subsidiaries) is expected to be ₼1.9 billion, including the loss of the bank - ₼1.74 billion," says the bank’s statement.

As a result, IBA made an announcement about a voluntary restructuring of its obligations as part of the recovery program. The bank's debts in foreign currency attracted from financial institutions will be transferred directly to the state budget. Before the completion of this procedure, the implementation of foreign currency obligations of foreign creditors (with the exception of payment of interest on transactions for trade financing) is suspended.

As the Minister of Finance Samir Sharifov noted, the weakening of the capital and financial position of the bank caused concern. "The restoration of IBA’s financial stability is important in terms of rendering meaningful financial services for the economy. The steps that the bank is currently taking to ensure its financial stability are very important and fully supported by the Ministry of Finance," said the minister.

In turn, the Chairman of the Board of the Financial Markets Supervision Chamber, Rufat Aslanli, noted that the restructuring plan would not affect the fulfillment of IBA obligations to legal entities and individuals. "The Chamber will monitor that the rights of the bank's creditors and depositors are not violated in this process, and they could freely use their funds," he said. Khalid Ahadov, Chairman of the IBA Board, made a similar promise adding that "all retail and corporate clients of IBA should be sure that the restructuring plan will not have any effect on them, while this will not affect other processes in the bank."

According to The Wall Street Journal, IBA also appealed to the New York court for support in the process of restructuring the external liabilities of the bank ($3.34 billion).

Incidentally, according to the bank, the court took the side of IBA and took a positive decision in this regard, which, according to Ahadov, "shows that we are taking the right steps to successfully complete the restructuring process." Thus, foreign creditors will not be able to make demands on the bank's assets in the process of voluntary restructuring of its foreign obligations.

Meanwhile, the Ministry of Finance has disclosed the mechanism for repaying debts from the state budget, saying that Azerbaijan will issue government bonds in foreign currency to replace the IBA's obligations to creditors.

Despite some nervous public perception of the recent events around IBA, we can objectively say that for today this is the only solution to the huge problems of the largest system bank. Not saving it means giving an opportunity to collapse the country's banking system, lowering the rating of all market participants to the preliminaries, negating all their attempts to obtain external loans. Similar examples are in the practice of the most advanced economies of the world, and everywhere in difficult times, the state extends a helping hand to suffering banks.

Following the repayment of debts, the IBA will be privatized as soon as possible. Earlier, Aslanli said that the bank would be ready for this procedure in the first half of 2017. According to the estimates of the International Monetary Fund (IMF), the ultimate goal of the IBA rehabilitation is the privatization of the bank within five years.

Sinking cannot be, saving

Meanwhile, IMF predicts that the banking sector of Azerbaijan is on the threshold of even more narrowing of the number of market participants. "Azerbaijan continued to the capital injection and repurchasing of bad loans by the state, but after the completion of the development of new capitalization plans, it may be necessary to close several more banks," reports the Foundation for Regional Economic Development: Caucasus and Central Asia (CCA). By the way, IMF confirms that such a situation has developed not only in Azerbaijan but also in other countries of the region. "With a few exceptions, there has been an increase in the volume of restructured and overdue loans amidst significant dollarization and insufficient capitalization of banks, which are a hindrance to future economic activity, given the continuing slowdown in lending growth in a number of countries in the region," says the IMF.

In general, the CCA countries have much to do to contain risks and expand financial intermediation. First, it is necessary to properly identify and eliminate all weaknesses in the balance sheets of banks. Secondly, timely intervention in the work of weak banks is of fundamental importance for the prevention of systemic risks, which is being done in the case of the IBA.

By the way, Azerbaijan has already taken clear measures to prevent such risks in the future. Thus, the President of Azerbaijan, Ilham Aliyev, signed an order to amend the decree "On measures to improve the activities of the Ministry of Finance of Azerbaijan." According to it, the Ministry of Finance receives new powers to establish the upper limit of internal and external debts of state legal entities, agrees to all their internal and external borrowings, or takes a decision to refuse them.

In 2016, licenses of 11 banks were revoked in Azerbaijan for various reasons. Currently, 32 banks are licensed to operate. At the same time, a number of banks announced a merger, and it is not ruled out that some other banks will also be consolidating the assets. The possibility of closing several more banks is quite logical - it is no secret that there are enough weak links in the system.

On the other hand, new liquidation processes are quite a heavy load, given that the liquidation process is far from completion in many closed banks and is accompanied by a number of problems. No, it is all right with the return of insured deposits: Deposit Insurance Fund performs its functions clearly. However, after all this amount has been paid, the procedure for selling the bank's assets must be started and the proceeds are distributed for the payment of uninsured deposits. To control this process, a committee of creditors is created in each bank from among such depositors. This is where the problems begin – people mostly complain about the lack of proper transparency in this process.

In principle, the Chamber itself does not deny the existence of contentious issues. Only in Bank Standard there were over 260 thousand investors. In other banks, the total number of investors reaches 100 thousand, and the presence of dissatisfied with such a number is quite normal. "There are times when investors say that interest on their deposits should not be 10%, but 12%, all this is considered in the court," Aslanli noted earlier.

Also, given that deposits are mainly for a period of 1 year, and loans, say, for 5 years, it turns out that assets cannot be assessed objectively. "We cannot tell the depositor to wait five years until the creditor repays the debt. Therefore, other mechanisms for assessing assets are required. One of the ways to solve this issue is to find another bank and transfer this debt to it but all of this should be justified technically and legally,"Aslanli said.

A very important step towards resolving such disputable issues and improving the banking sector as a whole may be the decree of Ilham Aliyev, according to which the procedure for selling non-performing assets was approved in the framework of measures to resolve and improve the insolvent banks. The procedure is quite simple: within 20 days, FMSC should list the bank's assets as "non-working (toxic) assets". Then, these assets will be evaluated by an independent appraiser, and sold out on the basis of an ordinary civil-law contract.

What is the benefit of this procedure? First, it is an opportunity to save the bank from closure, transferring its healthy assets to a "transition bank", and selling non-working assets on the basis of established order. The bank's management at least will have a chance and time to decide on the future of the bank, negotiating for consolidation or attracting additional support. That is, now the government and the regulator have been able to use a different principle in dealing with "problem" banks. Now they can maximally help banks survive and make a decision on liquidation only if these options do not work.

This is extremely important at this stage because the resources of the Deposit Insurance Fund are also exhausted. With the closure of each bank the banking sector loses the confidence of customers and external creditors, which ultimately affects the entire financial sector and the economy as a whole. We must use all possible means to save the banking sector as long as we have such means.