BAKU, Azerbaijan, January 7. The Central Bank of Azerbaijan (CBA) has adopted a prudential regulation framework for behavior-based lending, Trend reports via the CBA.
The organization, regulation, and control of a stable and secure banking sector, along with its continuous development in line with modern trends, remain key priorities for the CBA. Specifically, the Central Bank is focused on enhancing the prudential regulatory framework for the banking sector in response to emerging trends in the financial system, particularly the rapid development of new technologies. One of these initiatives includes adopting changes to several regulatory acts to establish frameworks for credit lending based on borrower behavior models developed through financial operations.
The CBA highlighted that automating processes, increasing client orientation in the banking sector, and leveraging artificial intelligence solutions enhance the ability to offer traditional banking services through alternative channels with lower costs and greater speed. The newly adopted prudential regulatory framework for behavior models will also utilize these advancements to offer loans to individual entrepreneurs and individuals based on predicted income.
The changes specify requirements for developing behavior models, improving the bank's capabilities in this area, validation, and reporting, as well as limits, enhanced classification requirements, and capital requirements to reduce risks associated with loans issued based on these behavior models. Accordingly, banks will be allowed to provide loans based on behavior models, provided the total amount does not exceed 10 percent of the bank's loan portfolio. However, lending based on behavior models will cease if the volume of loans overdue for more than 90 days reaches 10 percent of the portfolio.
Overall, the use of behavior models in lending will increase the accessibility of bank loans for clients, thus supporting the financial empowerment and growth of small and medium-sized businesses, as well as improving resource allocation efficiency.
The ability to utilize more precise and up-to-date information through behavior models will also contribute to optimizing banking business processes, reducing operational costs, speeding up credit underwriting and scoring processes, improving accuracy, and ultimately lowering credit risks.
For more details on the relevant changes, please visit the following link: