INNOCENT CULPRITS

The problem of uninsured deposits in three local banks declared bankrupt this spring was resolved in favour of the depositors, as ruled out by the Constitutional Court (CC) of Azerbaijan. On August 14, the Azerbaijan Deposit Insurance Fund (ADIF) initiated the provision of compensations for deposits blocked in AGBank, NBC Bank and AtaBank, which currently go through the process of liquidation. But does this mean that similar problems will not arise in the future?

Problem solved

In April-May 2020, the Central Bank of Azerbaijan (CBA) cancelled the licenses of four banks - AtaBank, Amrahbank, AGBank and NBC Bank due to problems with equity capital and low solvency. All four banks were declared bankrupt, followed by the process of their liquidation and the return of the insured individual deposits by the Azerbaijan Deposit Insurance Fund. During the last trial, it suddenly turned out that AtaBank, AGBank and NBC Bank continued to accept customer deposits, despite the ban of the regulator, which imposed restrictions on their licenses.

Earlier, commenting on the current situation, ADIF Executive Director Tural Piriyev noted that they receive most of the complaints against AGBank and NBC Bank. On October 10, 2017, AGBank was banned from accepting term deposits from individuals. “Since the bank failed to comply with this restriction, we now face many problems and complaints from depositors,” T. Piriyev said.

According to Mr. Piriyev, a similar decision was adopted on NBC Bank on January 27, 2020. The amount of deposits blocked since 2017 by 800 clients in AGBank is ₼49.2 million, in NBC Bank – ₼12.8 million, and in AtaBank – very small. Only the clients of Amrah Bank, another bank closed this year, did not make any requests. At the same time, it turned out that the insured deposits of 283 clients of AtaBank, their deposits have been mistakenly registered as uninsured. This took place during the migration of bank’s branches, when the dates of migration were indicated instead of the dates included deposit agreements.

“The Central Bank has notified banks about the ban on accepting deposits. However, banks ignored this and continued to accept deposits from individuals. As a result, these deposits are considered uninsured and they do not qualify for compensation,” Mr. Piriyev said.

Incidentally, the depositors of Demirbank, whose license was revoked in 2017, faced a similar problem. Then ADIF sent a letter to the Cabinet of Ministers and applied to the Constitutional Court, which then decreed on the compensation of depositors.

And this time ADIF promised to resolve the issue in favour of the depositors, "because they are innocent, as they did not know about the existing restriction." In this regard, the Cabinet of Ministers again applied to the Constitutional Court, and the latter, guided by Article 12 of the Constitution of the Republic of Azerbaijan, as well as Articles 47 and 48 of the Law of the Republic of Azerbaijan "On Banks" and Article 2.1.2.6 of the Law of the Republic of Azerbaijan "On Deposit Insurance", made a decision to consider deposits as insured.

Ignorance is an excuse from responsibility?

According to financial expert Vugar Mirzazade, the insured deposit is the deposit accepted by the branches and representative offices of Azerbaijani banks under certain interest conditions. Deposits exceeding certain limits are generally considered insured. If there are restrictions on accepting deposits, but the relevant information has not been published, then the depositor should not suffer being held responsible. The main actors in this case are the supervising body, the Deposit Insurance Fund and banks.

If a bank is prohibited from accepting deposits, it may not attract them. Yet they do commit such fraudulent actions. How do they do that?

The point is that ADIF should receive information from banks about their deposit policy and other issues. Also, banks regularly submit a report to the regulator, the Central Bank, which includes information about the deposit portfolio. Information about deposits can be reflected in the general portfolio, and not specifically for each client. Sometimes, if there are important changes due to the requirements of the regulator, information can be provided for ten main clients of the bank. But since not all clients are represented in the list, and the information provides general data about the number of retired clients and the reduction in the portfolio volume, it is possible not to mention the “new arrivals”, and no one will hardly notice this without a thorough check. Thus, in order to track the attracted deposits, the supervisor should request information from the bank about the client's code or the date of raising the deposit. Because banks do not have this special reporting form, the supervisor may not be aware that the banned bank is accepting a deposit. True, it has the right, after imposing a ban, to request a special report and receive information from the bank.

The head of ADIF Tural Piriyev admits that the deposit insurance system in Azerbaijani banks as a whole needs to be changed and improved. “We are currently considering the period of risk-based deposit insurance. In addition, there is a problem that the fund is not provided with a register on the names of depositors, but only a quarterly register, which indicates the total amount of deposits with respect to each individual bank,” T. Piriyev said.

According to the head of ADIF, if banks send full information, ADIF, in case of a possible bankruptcy of the bank, will be able to determine the amount of compensation based on verified data. T. Piriyev noted that the legislation does not yet provide such an opportunity yet, but the fund will work in this direction.

As for the disclosure of information about the real situation in the bank, opinions differ. Thus, expert V. Mirzazade believes that this may undermine confidence in banks. After all, the bank in which the depositor places a deposit is listed on all information resources as a bank and a member of ADIF. “If the bank has any financial difficulties, information should be made public that the deposits placed are not insured, provided that this does not cause discontent among market participants. If such information is not provided, then the deposit should be considered insured,” Mirzazade said.

CBA believes that disclosing information about the bans may harm financial stability: "The disclosure of such data causes serious damage to both the bank and financial stability," the first deputy chairman of CBA, Alim Guliyev, said. According to Guliyev, there are forms provided by law for bringing to the public the prohibitions imposed on banks. “The ban on accepting deposits must not be made public. If this information is made public, then the tense situation in the bank will worsen even more, clients, naturally, will begin to massively withdraw their deposits,” A. Guliyev noted.

Law will be revised

Meanwhile, a number of experts argue that, in general, a ban on accepting deposits is inappropriate. “Imagine that you go to the bank to place a deposit, but you are refused to do so. Looks like a situation when you come to a store but it refuses to sell you products. The bank’s refusal to accept deposits will instantly become known to the public, and everyone will understand that the situation is indeed difficult,” expert Akber Hasanov said.

As A. Guliyev said, both the regulator and other interested structures review this issue, and the legislation will be revised. “Relevant measures are taken in this direction. CBA is developing a set of proposals to improve the deposit insurance mechanism. They will probably be adopted by the end of the year. "

About four months passed since the revocation of licenses. As of August 24, ADIF has paid compensations to 20,360 depositors of AtaBank, Amrahbank, NBC Bank and AGBank on insured deposits (₼480 million). In total, it is planned to pay ₼670.7 million, including compensations for blocked deposits. In other words, most of the deposits have already been compensated.

Thus, by revising some important points of the legislation and eliminating the gaps that facilitate and allow the management of banks to cheat customers, CBA and ADIF can seriously help the banking sector in a difficult time of the pandemic to restore customer confidence and keep the business afloat.