SOLVING PROBLEM LOANS

At the end of February, President Ilham Aliyev signed a historic decree to address the issue of problem loans to individuals. According to the decree, the victims of the two devaluations of Azerbaijani manat in 2015 will be paid compensation and the major share of problem loans will be restructured.

This measure will help solve the issue of problem loans, which impose a financial burden at microeconomic level and make life difficult for the entire banking system of Azerbaijan at macroeconomic level.

Return mechanism

According to preliminary forecasts, the unprecedented measure of a global scale will affect nearly 900 thousand citizens of Azerbaijan and can be divided in two areas: payment of compensations and restructuring of problem loans.

Compensation will be paid to those who suffered from two devaluations of manat in 2015 and whose principal debt on all loans does not exceed $10,000. This category of population includes over 90% of all debtors.

How will the compensation be calculated? For every dollar of principal debt ₼0.25 ($0.15) and ₼0.60 ($0.35) will be compensated on loans issued until February 21, 2015 and on February 22—December 21, 2015, respectively. Compensation will also be paid to those who have already paid their debts to the bank at a new rate or converted the debts to manat after the first or second devaluation. Compensation will be paid also to the heirs of deceased debtors. The size of compensation to each individual should not exceed $5,000 (₼8,500).

The major share of the compensation will be used to pay off the debts of individuals to banks, including the closed ones, while the remaining share will be given to the individuals. It is estimated that nearly 450 thousand people will be able to take advantage of this benefit, including those who, despite all the difficulties, still managed to repay loans.

By the way, one can find a special online calculator to know the amount of compensation on websites of a number of government agencies. Ministry of Finance is developing a special hotline to answer questions on problem loans. In addition, everyone can apply to the ministry through a special section published on their official website to get answers to questions.

The second part of the decree concerns restructuring of problem loans. This will affect problem loans up to $10,000 and up to ₼17,000, respectively. At the same time, the government recommended to banks to withdraw all credit cases in courts or on execution. There are about 311,000 such court cases on problem loans, as specified in the decree.

Thanks to restructuring, loans in dollars will also be converted to manats. Individuals and banks will be offered loans for a period of five years with a grace period of one year. The annual interest rate on loans issued by banks will be 1%. It also implies a complete write-off of interest on loans, fines and penalties. Over 400 thousand debtors will be able to take advantage of the restructuring.

First goal is to ensure the welfare of citizens

Who is not a subject of the decree? Firstly, the individuals, whose debt exceeds $10,000 and ₼17,000. According to Finance Minister Samir Sharifov, most likely this category will also include those who were the guarantors on loans and who had to pay loans to banks instead of direct borrowers. According to Sharifov, a separate compensation program can be adopted for this category of citizens.

In addition, individuals engaged in business activities, as well as legal entities, will not be able to receive compensation and restructuring. But they need not to worry. Mr. Sharifov announced that the government is preparing a new program for problem loans, which will focus on overdue loans of businesses and individual entrepreneurs. This measure will contribute to improving the banking sector of Azerbaijan.

In general, if one considers the direct and indirect effects of presidential decree, it will greatly facilitate the material situation of the population. As President Aliyev recently noted at the meeting on economic and social issues, governments in a number of countries have promised the population to solve the issue of problem loans, but these promises  have not come true. "We believe that the main goal is to improve the welfare of the population and reduce the financial burden on citizens. This step should be regarded as a serious social initiative. Good intentions is not the main condition. It is important to competently analyse and select the most optimal option for the population. Of course, it is also important to have sufficient financial resources to solve the issue," Aliyev said.

Thus, the decree will significantly improve the financial condition of nearly 900 thousand people and will improve their credit history through payment of debts. In addition, part of the population will be able to return overpaid funds for loan servicing, which they can reinvest in banks, if so they wish.

Complete recovery

Banks will also benefit from the government measure. After all, following the devaluation of the manat in 2015, banks have faced big financial problems due to increased overdue loans, court proceedings with debtors, increased losses, etc. In addition, the population started to view the banks as a negative element, a kind of "hungry wolves" ready to take the last penny. Therefore, the implementation of the decree will help improve the reputation of banks, as well as their financial situation.

For each loan issued, a bank is obliged to create a reserve account in the Central Bank transferring funds from its own capital to this account. It is these toxic loans that decrease the equity capital of commercial banks, which ultimately leads to their bankruptcy. The decree will make it possible for banks to release considerable funds from collateral and use them for raising capital and strengthening financial position.

Moreover, the banks will not pay anything to implement the provisions of the decree. Thus, after receiving the request of the Financial Markets Supervision Chamber, the Central Bank will allocate ₼682 million for the restructuring of problem currency loans reaching $10,000 and ₼17,000, respectively. To avoid negative effect on the national currency and the banks, the Central Bank was recommended to provide banks with securities in the amount not exceeding $215 million denominated in foreign currency with an annual interest rate of 0.5% based on their request.

According to the Chairman of the Central Bank, Elman Rustamov, this decision should greatly contribute to the recovery of banks.

However, it is still difficult to determine the exact amount of funds required for the implementation of the presidential decree because the list of compensation recipients and the amount of funds that will be paid to them is still to be clarified. Nevertheless, according to preliminary estimates, the state budget will provide over ₼700 million for the implementation of this part of the decree. This is going to be the direct effect of the measures.

However, there is an indirect effect. Assistant to the First Vice-President of Azerbaijan, Khalid Ahadov, stated that the restructuring process includes loans, whose principal amount exceeds ₼900 million. Meanwhile, fines and penalties for such loans are estimated at ₼700 million, which should be written off.

In other words, the direct and indirect financial effects of the implementation of the presidential decree can be estimated at $1-2 billion, given that banks will receive funds from the Central Bank for restructuring of the loans.

The decision of the government will help restore confidence in the banking sector, and the government will be able to request credit agencies to restore Azerbaijan's investment rating, improve positions in the Doing Business rating, which will increase the interest of foreign investors in the country.