Overestimation of Risks Cuts Lending in Azerbaijan

Business Materials 25 September 2008 15:44 (UTC +04:00)

Azerbaijan, Baku, 25 September / Trend corr. I.Khalilova, N.Ismayilova/ Mortgage lending rate fell in Azerbaijan and several banks suspended lending. However, the National Bank of Azerbaijan (NBA) did not officially order Azerbaijani banks to suspend mortgage lending, representatives of local banks said to Trend on 24 September.

The banks cut lending first of all due to the crisis in the world financial markets. The situation makes the banks be more prudent and apply strict selection during client lending, which is a part of the corporate governance.

"Therefore, many clients get surprised when a bank refuses to lend a credit. The global tendency makes us be more attentive with clients," a large commercial bank in Azerbaijan said on 24 September.

Azerbaijan's banking sector is not tightly connected with foreign financial markets. But this field needs foreign investments. Therefore, foreign banks will also change their requirements depending on situation.

Banks believe deceleration of lending rate is a good moment to 'clean' the portfolio, to create new procedures, to assess risks, which is required for further growth of the sector.

Besides global situation, domestic situation in the banks, namely suspension of lending by many of them, impacts on lending rate in Azerbaijan.

"In this situation, the banks continuing lending should be careful and select clients more thoroughly, as borrowers rejected by other banks may apply to us. So, the reasons why they were rejected must be found out," a large commercial bank said.

President of the Azerbaijan Banks Association (ABA) Eldar Ismayilov confirmed that NBA had not ordered to suspend consumer lending in the country.

"The decision if taken can affect and practically restrict activities of the banking system, which will result in decrease in activity of Azerbaijani economy's real sector," said Ismayilov.

At present Azerbaijan is actively integrating into the world economy as a transit country, he said. Wave of consequences of the world financial crisis covering the Russian market, as well as fluctuation of the US dollar exchange justify the actions of the Azerbaijani banks, which regulate these developments through reduction of lending rates, the head of the ABA said. Together with it, great risk of losses could occur in issuing loans to the trans-national projects, whilst risks are insignificant in consumer loaning. Consumer loans increase competitiveness of small and medium business.

"Henceforth banks selectively treat client base and reasonably approach increasing the loan portfolios," Ismayilov said.

Consumer lending has been suspended for a month at the hugest banks, such as Kapital Bank, Azerdemiryolbank, Mugan Bank, Zamin Bank, UniBank and Parabank (suspended by February 2009). Rate of consumer loaning was reduced at Bank Respublika.

Meanwhile, the Azerbaijani Government examines measures to expand loaning of a real field of economy, Elman Rustamov, the head NBA, said in September. The NBA and Ministry of Finance have developed a proposal to stimulate bank loaning of real field of economy, he said.

"The government will examine proposals soon. Particularly, we assume to raise capitalization of bank field and strengthen loaning of real field on this base," Rustamov said.

According to the head of the NBA, bank loaning of economy rose more than by 30% in 2008. Bank lending of economy rose 10 times within last five years, which increased financial and other markets.

"We are prepared to render technical aid to banks on risk planning and transfer to long-term strategic planning, Rustamov said. We do not have any problem bank."

Loan portfolio of 45 Azerbaijani banks totaled AZN 7bln.

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