Does Azerbaijan need a bad assets bank?

Business Materials 18 August 2016 20:55 (UTC +04:00)

Baku, Azerbaijan, Aug. 18

By Azad Hasanli – Trend:

Experts believe it is an appropriate step to create a separate structure in Azerbaijan that could buy out troubled assets of other banks.

In particular, the Head of Azerbaijan Banks Association (ABA), Chairman of the Supervisory Board of Rabitabank Zakir Nuriyev believes that such an organization could help to reduce the volume of troubled assets in the country’s banking sector and to optimize the management of such resources.

Such a structure can act both as a Bank of bad assets or in a different format, Nuriyev told Trend.

The non-bank credit organization Agrarkredit has a fairly good experience in problem assets management, he said adding that at various times, “toxic assets” of banks were transferred to Agrarkredit and the latest such case was related to the International Bank of Azerbaijan (IBA).

“In this context, the development of existing experience is acceptable, including the introduction of the new format,” said Nuriyev. “This measure can be realized within the program on financial recovery.”

The country’s biggest non-bank credit organization Agrarkredit operates since 2001. In early 2000, it was instructed to manage bad assets for the first time. In particular, problem loans and liabilities of three banks were transferred to the management of Agrarkredit and the United Universal Joint-Stock Bank [currently, Kapital Bank] was created on the basis of their recovered assets.

Subsequently, in 2015, within the IBA recovery and its preparation for privatization, the bank’s problem assets were also placed under Agrarkredit’s management. Instead of it, bonds in the amount of three billion manats were issued under the state guarantee in order to provide the IBA with liquid assets.

However, the government does not see the need to turn Agrarkredit into an agency on the management of debts or problem assets.

Earlier, Azerbaijan’s Finance Minister Samir Sharifov said that the non-bank credit organization is involved in such issues only in accordance with presidential decrees. Therefore, if Azerbaijan creates a structure involved in the management of problem assets, it won’t be created on the basis of Agrarkredit.

Such a structure can also be created under Azerbaijan Deposit Insurance Fund (ADIF). Similar practice is used in many countries of the world. Especially, ADIF has sufficient experience in problem assets management.

ADIF Executive Director Azad Javadov told Trend that the fund has a separate division that deals with bad assets of banks, where it acts as a liquidator.

“Deposit Insurance Funds act as liquidators in many countries of the world and Azerbaijan has the same practice,” said Javadov. “When ADIF adopts funds of a closed bank, it receives bad assets along with good assets.”

Over the recent times, the fund has acted as a liquidator of eight banks [Texnikabank, Bank of Azerbaijan, Dekabank, Parabank, Kredobank, Zaminbank, AtraBank and Caucasus Development Bank], licenses of which were revoked since early 2016.

Dmitry Vasilyev, director for financial institutions at Fitch Ratings international ratings agency, also agrees with the expediency of establishing the bad assets bank.

“Banks are not able to independently produce sufficient quantity of capital to absorb the losses from impairment of assets,” Vasilyev told Trend Aug. 18. “They need support from their shareholders or from the state in a certain form.”

The expert thinks that one of the ways to solve the problem is the redemption of problem assets by the bad assets bank. Meanwhile, he added that another way is the capital support.

The bad assets bank is just a mechanism of support, which can be provided through a simple infusion of new capital into the system, added Vasilyev.

As of July 1, 2016, the share of overdue loans was 8.35 percent (1.5 billion manats), according to the Central Bank of Azerbaijan (CBA). In 2015, Azerbaijan faced two devaluations, as a result of which, manat’s rate against the US dollar decreased by almost 100 percent compared to early 2015. As a result, the devaluation led to an increase in problem loans. The volume of overdue loans increased by 33 percent by July 2016 compared to January 2015.

Thirty-three banks operate in Azerbaijan, including two with state participation.

The official exchange rate for Aug. 18 is 1.6164 AZN/USD.