DEBT BURDEN

Contrary to pessimistic expectations, Azerbaijani banks have multiplied the number of active customers over the past two pandemic years. In fact, these were banks that kept pace with new realities and introduced digital loan products without collateral. Quarantine restrictions only increased the value of banking products and services for customers, which make it possible to interact with banks remotely, without visiting branch offices. In addition, even those who fall short of new technologies now prefer non-cash methods of payment. This ultimately had a significant impact on the credit market through making the danger of growth in consumer lending relevant again.

When customers and banks are happy

Indeed, the pandemic accelerated digital transformation, including in the banking sector. Until now, thanks to mobile applications of banks and other payment terminals, it was possible to pay for utilities, the Internet, cable TV, loans, and insurance services. But now this list also includes payment services for parking, taxis, education, hotel and travel services.

Azerbaijan’s Ministry of Justice presented its new application Mobile Notary, which is integrated with the online banking platform, can significantly expand the range of remote banking products and increase the reliability of these operations. This innovation will ensure faster operations between the bank and its clients. Now citizens do not have to go to the bank to perform any banking operations, including to obtain loans.

However, there are several nuances here. According to the official statistics published by the Central Bank of Azerbaijan, last year the volume of non-cash payments with cards reached ₼11.2 billion (+83% over the year). At the same time, the number of debit cards increased by 81.5% and reached 37 million (against credit cards - +41.1%, or up to 5 million). The overall turnover using these cards amounted to ₼4 million (37.8% more year-on-year) and ₼278 million (37.6% more), respectively. So, it turns out that citizens seem to get debit cards for but prefer using credit cards in practice. Why?

Probably, any client of any bank in Azerbaijan periodically receives text messages on their mobile phones about the readiness of his bank to provide additional loans that can sometimes reach ₼20,000-40,000 without collateral and insurance (!). In addition, almost every month, banks introduce new card products in the market with ‘super cashbacks’ and unimaginable credit limits, many times higher than the client's real income.

As already mentioned, almost everything is processed online. Completing an application for an online business loan takes about 20-30 minutes, and in the next few hours clients receive a notification about the decision made on their applications. In general, clients can get up to ₼250,000 within a single day. The procedure is even simpler with ordinary credit cards. You just need to fill out an application, answer a few questions, pass an interview (on- or offline) and… that’s it!. Thanks to the digital document flow in Azerbaijan, a bank can check all the necessary information in a matter of minutes and immediately adopt a decision on the amount of the credit line.

Rest assured, people happily apply for such loans, because they help them solve a lot of problems, such as buying necessary goods, making repairs, and surviving until the next salary. But banks do not lose their profit either: rates on consumer loans issued through credit cards in national currency increased by 1% last year, up to 25%. In the same year, the average rates on loans through credit cards in foreign currency reached 7% against 3% a year earlier, while for other types of consumer loans the average rate for loans in national and foreign currencies was 21% (23%) and 4% (5%), respectively.

In other words, both customers and banks are happy. But does this situation threaten the future of the loan market in Azerbaijan. Do we risk seeing another round of unpleasant events of the recent past, which eventually led to the bankruptcy of several banks in the country?

Why is it dangerous?

Experts explain this move of banks only by the surplus of funds accumulated even before the pandemic. The head of the Central Bank of Azerbaijan Elman Rustamov mentioned the same factor too, noting that the current liquidity potential of Azerbaijani banks is ₼7 billion.

This is a huge amount, and banks are happy to spend it profitable areas, in particular for consumer loans. But both experts and the regulator warn that extreme caution must be exercised in this matter to avoid the risk of non-performing loans.

Moody's also expressed concern: "In the short term, the downward trend in dollarisation will continue in Azerbaijan, but banks are most vulnerable due to the presence of uninsured borrowers with no income in foreign currency."

Currently the situation is not dangerous. On the contrary, the volume of overdue loans at the beginning of 2022 was ₼719.4 million (decreased by 19.5% in 2021).But we should note when the volume of overdue loans peaked by the end of July 2018 at ₼1.8 billion, the share of consumer loans was 40.1% (₼4.9 billion). At the end of 2021, the share of consumer loans in the total loan portfolio of banks reached 50.3% (₼8.6 billion). The consumer lending portfolio of banks increased by 28.3% over the year.

It is clear that credit activity contributes to the growth of the economy, and limiting it too much can complicate the recovery from the pandemic crisis.

The danger of growing consumer lending is that it heats up demand, imports and inflation, and in response the Central Bank is forced to raise the discount rate, which negatively affects mortgages and corporate lending, but not consumer lending.

The volume of non-performing loans will continue to grow, but at a limited pace, as many banks prudently tightened their lending policies during the crisis.

In financial reality, not in theory, the measures of the Central Bank will have no effect on reducing the thickness of banks’ new loan portfolios. Banks will eventually issue loans to everyone they consider necessary, based on their own understanding of movements in client accounts, the average monthly expenses of a particular client and his credit history.

In general, although the level of credit burden in Azerbaijan is high, it is still far from the indicators of foreign countries with a developed lending market. The ratio of credit debt to GDP in Azerbaijan is tens of percentage points (by the end of 2021 it was 18.4%), lower than in the US and China, where the level of 50-60% is considered normal.

According to experts, the best way to deal with debt burden is to encourage employers to increase salaries paid to employees. To do this, they propose, among other things, the introduction of some tax breaks that could affect the payroll.

Redirecting to business

Meanwhile, Mr. Elman Rustamov believes that the banking sector should mainly focus on increasing business lending, especially to small and medium-sized businesses, and strengthening the potential of micro-crediting. “There is much to be done in this direction. This applies to both the banking sector and the whole area of regulation. Today the sector has a liquidity potential of ₼7 billion. This is a clear sign of problems existing in our ecosystem, and they must be solved so that banks can lend to the economy,” Mr. Rustamov said.

Economist Emin Garibli notes that the situation in Azerbaijan will be solved very soon, since the restoration of liberated territories will require a lot of resources, including loans from local banks. “In Azerbaijan, as in all Eastern European countries, there was a problem of redirecting resources to the real economy. We faced this problem back in 2014-2015, when the lion's share of bank resources was directed to the purchase of imported consumer goods, which in turn affected the exchange rate of the manat, etc. In recent years, development institutions have been created in the country, which use targeted loans contributing to the development of the non-oil sector,” Mr. Garibli said. He is confident that by creating conditions for the inclusion of the private sector in projects implemented in the liberated territories, the state is stimulating the development of the loan market focused on business lending.

As we can see, the loan market in Azerbaijan still needs reforms. According to bankers, digital loan products will gradually replace traditional banking products, especially in the micro and small business financing segment. This is a global trend. Let's hope that they will leave behind consumer lending as well.