Currently, the demand for credit resources in Azerbaijan seriously exceeds suggestion, as a result, a unique situation appeared: lending rates of banks are increasing due to deflation.
The average interest rate on loans issued by commercial banks in Azerbaijan is currently 20-24 percent. Even the decline in the rate of the Central Bank does not affect this imbalance, since the share of its loans does not exceed three percent of the loan portfolio of banks. Taking into account deflationary process, the Central Bank of Azerbaijan decreased the rate to two percent from May 25 in order to maintain macroeconomic balance, fiscal stability and preserve economic activity in the country.
According to the Central Bank, the average rate on credits equals 17 percent today. However, the statistics take into account the credits provided according to standards of Azerbaijan Mortgage Fund (not exceeding 8 percent) and the National Fund for Entrepreneurship Development (not more than 7 percent). Without taking them into account, the real credit rate is 20-24 percent.
According to the Central Bank statistics, as of May 1, the average rate on bank lending to the economy in national currency amounted to 16.25 percent compared to 17.42 percent as of April 1, 17.45 percent as of January 1, 2009 and 17.89 percent as of May 1, 2008 year.
With regards to the average rate on bank lending in hard currency, as of the beginning of May, it was 16.98 percent compared to 18.51 percent as of April 1, 14.52 percent as of January 1 and 16.61 percent as of May 1, 2008. It is 0.37 percent more compared to January-April 2008.
As seen from the statistics, the average rate on credits in manat falls, and there is an increase on loans in foreign currency. Meanwhile, according to the theory and practice of foreign countries, interest rates on loans in both dollars and local currency in the context of the global financial crisis should be lowered. Moreover, since April last year, official issuing rate of the USD deliberately reduces the amount of a credit rate in the USD (credit rate in USD is 1.5 percent per annum).
Since June, some domestic banks began to support Azerbaijani Central Bank's trend to lower interest rates and the trend to lower inflation by reducing their rates on loans. For example, Azerbaijani Mugan Bank reacted to Central Bank's reducing the average rate on loans. After Central Bank reduced rate, the average rate on loans in the bank was reduced to 24-26 percent. Formerly the average interest rate on loans issued in the bank was 26-28 percent.
Another Azerbaijani bank revised its tariff policy. Thus, after forming a new board, Azerbaijani Amrahbank revised its tariff policy in order to expand its customer base. The board of the bank revised interest rates for loans issued in various spheres, softening its lending policies. The average rate on loans granted is now 25-26 percent, while earlier it was 26-27 per cent. Bank's car credit is provided at a rate of 25-26 percent, business and consumer loans at rates of 27-30 percent.
Even after the decline, the lending rates of commercial banks remain at 24-26 percent. One of the reasons for such amount of bets is the high rates on deposits attracted by banks. Many Azerbaijani banks conduct various deposit campaign and offer products at different rates, and due to the fact that the funds of population are attracted in high rates, interest rates on loans are also at a high enough level.
As of May 1, 2009 the average rate on deposits in manat was 11.59 percent compared to 11.46 percent as of April 1, 11.61 percent as of January 1, 2009 and 11.6 percent as of the beginning of May 2008. Average rate on deposits in foreign currencies amounted to 10.84 percent compared to 11.28 percent, 7.96 percent and 9.51 percent respectively.
Currently, demand for loans is growing, but the volume of issuance of their shrinking, because banks back their loans and do not attract new, and the deposit is also low. The limited capacity of issuing credit is another subsidiary reason for the high rates. But these rates increase the risk of late payments on loans.
Since October last year, the amount of problem loans has increased, and this will continue until the completion of the crisis, which according to IMF estimates, will continue by the end of 2009. Whereas last year, the percentage of overdue loans in the overall portfolio of the country was two percent, this year the figure has already exceeded three percent that already means more than 200 million manat problem loans.
The risk of problem loans is large in sectors such as construction, building materials production, market of household appliances, furniture, automobile market. As a result, the total loan portfolio of banks decreased by 1.5 billion manat. Conservative policies of banks in lending to the real sector led to a significant decline in investment, resulting in an increase in credit risk and this will continue until the end of the year.
According to Central Bank statistics, of the total amount of credit in the economy, 20.1 percent fell on trade and services (1263.8 million manat), 5.5 percent - energy (344.2 million manat), 5.6 percent - agriculture (353.5 million manat), 10.1 percent - construction (646 milllion manat), 8 percent - industrial production (499.7 million manat), 6.8 percent - transport and communications (424.3 million manat), 35.9 percent - households (2251.5 million manat). The remaining share of lending accounted for community organizations, state and other sectors.
In order to prevent problems on the credit market, a decision was made to place part of strategic currency reserves of the country in local commercial banks. Still the Central Bank gives loans to commercial banks for a period of six months, with possibility of prolongation for another six months, which in the conditions of continuing crisis, is very short. The Central Bank will itself identify the conditions for granting such loans on the basis of appeal and each bank will be approached individually. The amendments will give an opportunity to increase flexibility of the Central Bank of Azerbaijan and use tools for rapid response in the context of the ongoing global crisis and address liquidity problems of the banking system. Thus, to maintain the current liquidity, the Central Bank provided over 200 million manat for the country's banking sector.
Meanwhile, in other countries, 30-50 percent of bank loans are financed by the Central Bank, and therefore, Central Bank's reducing rates reflects the credit market. As indicated above, in Azerbaijan, the share of money of the Central Bank is less than three percent, and so, lowering the rate slightly affected the whole market.
Last year in order to maintain liquidity in the banking system, the Central Bank provided the first assistance to commercial Unibank in amount of $50 million manat, which was necessary for the short-term obligations. Credit resources were allocated on half a year with the possibility to prolong for other six months at a rate of seven percent per annum.
Yet, despite the costs of the global financial crisis in Azerbaijan, Azerbaijani banks have created the necessary level of redundancy for the timely re-payment of their obligations on external borrowing. As of the beginning of June, Azerbaijani banks paid all their obligations according to schedule, and no bank has left debt or delays in payments.
According to the Central Bank, this year, banks will re-pay $1.3-1.4 billion. However, noteworthy is the fact that over recent months, the process of attracting new lines of credit from abroad was resumed.