The share of bad loans in a total volume of granted loans is 6.4 percent in Azerbaijan, reaching a maximum for the last five years. The increase in the share of bad loans is connected with the consequences of the global financial crisis. It is not a secret that big banks promoted the growth of this index. They did not stop lending in 2009-2010. A negative impact of the crisis on the psychological level contributed to the citizens' saving by reducing their costs. This affected their ability to serve the loans in a timely manner.
According to the Azerbaijani Central Bank, as of early February 2012 the country's banks issued the loans amounting to 10084.6 million manat. The loans worth 643.1 million manat (6.38 percent) of this amount were overdue. It should be stressed that according to the international standards, the share of bad loans (expiration by 90 days) in a total volume of loans at seven percent is considered a critical limit.
According to Fitch Ratings, the index of bad loans in the Azerbaijani banking system hit 14 percent in late 2011. The research is based on the data of eight banks rated by the agency, which account for 66 percent of the assets of the Azerbaijani banking sector.
The growth of bad loans has a negative pressure on the banks' capital adequacy and deteriorates asset quality. Bank experts very often speak about the threatening nature of overdue loans, contributing to the widening of this segment and the formation of deeper problems in the banks. Moreover, the seriousness of this threat is often underestimated. Most banks do not announce this. They work with clients, give them amnesty, reallocate the debt for the next period, conclude a new agreement, etc.
Fitch Ratings agency explains that besides the deficiencies in the operating sphere, weak credit allocation standards in banks often adversely affect the asset quality. The increased competition for borrowers in small and medium enterprises and for physical entities also carries the risk of using less stringent underwriting standards in this segment.
There were periods in the history of Azerbaijani independent banking system when overdue loans in a total volume of bank loans exceeded 20 percent. Thus, as of 2002, loan funds amounting to 518.6 million manat were invested in Azerbaijani economy. The volume of overdue loans of this amount totaled 109.62 million manat (21.14 percent of the total credit investments).
In 2003, the country's credit market significantly perked up. The widespread allocation of loans to physical entities to buy consumer goods led to a noticeable increase in short-term loans. These short term loans have made the main contribution to the growth of total credit investments. About 10.23 percent of funds fall to overdue investments. The figure was 5.5 percent in 2004. The lowest rate of overdue loans was fixed at 1.6 percent in June 2008.
Consequently, the bad loans for Azerbaijan are not insoluble problem. It is possible to significantly reduce them at a certain stage. So, the work with such loans is an individual work of each bank. The motivational system must be based on the quality of issued loans, rather than quantity. One of the domestic banks said that the main goal of bad risk management is the transformation of a bad client into satisfactory, rather than resolving the problem by a pledge. The credit must be pre-identified, tested and analyzed. The country's central bank controls the situation by introducing preventive measures for banks.
Ellada Khankishiyeva /Trend