The current crisis is considered "financial", that is the crisis in the system of money circulation. Its main component is a "lack of liquidity amongst banks. Simply to say, there is no money. And where did they go?
First of all, this was caused by the fact that the banks issued too many bad hopeless loans - those that the debtors can not repay. Indeed, over recent years, the loans have been very accessible.
In the global financial system, "Credit for 1 day! Credit for 1 minute!" became the motto before the crisis. But now the lenders have begun correcting the mess that they themselves and welded shut, writing off billions of hopeless loans. Effective work with problem debt is the key to improving the financial situation at these or other banks.
As Azerbaijan was less affected by global financial crisis, one managed to maintain the level of bad assets in the country at a sufficiently low level, IFC project manager Garth Bedford said. According to Bedford, today, the main problem of the banking sector is the inefficient management of bad assets. IFC intends to support the Azerbaijani banks in the implementation of best practices in solving problems with bad loans.
According to him, today, there are three basic ways to remove bad assets from the balance sheet - a private placement, the method of auction and a limited auction. As securitization in Azerbaijan is a new concept, the removal of bad assets through placing the securities has not been applied yet.
The most commonly used method in Azerbaijan is a method of the private placement, which is fast, but not always effective, because the banks do not always sell assets at sufficiently high prices.
According to the expert of IFC, no company is able to provide such services for buying and selling bad assets.
In world practice, collection agencies are established to resolve such problems - independent organizations professionally involved in repayment of overdue debts. Signing an agreement with a creditor, such organizations may collect information about the debtor, in particular, about their welfare and whereabouts, including from official sources, contact them by phone, email, meet personally. Collector is entitled to formulate and implement schemes in favor of the creditor and the agreement on the settlement, debt restructuring.
Establishing such agencies became relevant for Azerbaijan. In Russia, Kazakhstan and Ukraine, the collection agencies have been dealing with the hopeless loans since 2008. Moreover, these organizations specialize in working with problematic debts of not only banks, but also insurance companies, credit unions, municipal enterprises, small and medium businesses and have the financial capacity to purchase debt portfolios of banks with large amounts.
Control is toughened
Today through preventive measures, analysis of banks' assets, stress-tests, the Central Bank of Azerbaijan keeps the situation under control. In 2010, the Central Bank of Azerbaijan (CBA) would further strengthen its activity in reducing problem assets, including overdue loans, CBA Managing Board First Deputy Chairman Alim Guliyev said. "The CBA has undertaken actions to improve the quality of problem assets, and the bank's preventive measures were aimed at suspending credit growth, assets and improve risk management system," Guliyev said. The CBA also conducts analysis of problem assets. "The priority of the CBA actions today is to preserve the country's financial stability in 2010, which requires strengthening actions for solving the problem with problem assets," Guliyev said.
In connection with the crisis situation, Azerbaijani banks have losses that are now estimated by banks, and to restore them, each bank has formed its own program of capitalization. The shareholders of banks are in charge of increasing the capital in view of future risks of loss. In addition, depending on the structure of loan portfolio, each of them has a different amount of losses, and the banks create reserves adequate to deteriorated credit portfolios.
Based on standard credit, the reservation makes up two percent of their amount, but depending on the degree of risk, the reserves may reach even 100 percent. Today, for non-standard loans, the banks have created reserves up to 80 percent, and reservation for overdue loans is nearly 70 percent, that is, even in the worst situation, Azerbaijani banks retain the requirement for capital adequacy, Guliyev said.
Although the norm of capital adequacy set by the Central Bank is 12 percent, and by the principles of Basel - eight percent, the country's banking sector has reached it to 19 percent.
At present, the share of overdue loans of the banking sector in the country, taking into account the compensation of the created reserves, varies in the range of 3.6-4 percent, and excluding reserves, the figure reaches 8-9 percent. In world practice, if the share of bad loans exceeds 10 percent, it is considered risky.
The deterioration of bank loan is under control, CBA President Elman Rustamov said.
"The deterioration of bank loan portfolios is an expected result on the backdrop of the global financial crisis, as there are some difficulties in the business, particularly in the area of trade," he said. "However, stress-tests held in banks show that the situation will remain under control, and we will preserve the stability of the banking sector in the country in 2010."
He said this is confirmed by the high level of capitalization and liquidity of the banking sector.
As part of CBA's anti-crisis measures, the country's banking sector was provided with direct and indirect liquidity worth about $2billion in 2009. The banking system assets increased by 13.5 percent to $ 11.66517 billion manats in 2009.
Recommendations
The International auditing company PriceWaterhouseCoopers (PWC) recommended the Azerbaijani banks to conduct a detailed analysis of overdue loans in its payments balance, PWC Representative Vugar Aliyev said at the workshop "Sale of problematic assets to encourage the issuance of new loans" held by the IFC in Central Bank of Azerbaijan (CBA).
"The CBA has applied international financial reporting standards, in connection with which roused a need to indicate the problematic loan in reporting in details," Aliyev said. "Detailed analysis of these loans allows to calculate the probability of their return in time."
According to him, it will help the bank in a timely manner, if necessary, to sell their troubled assets. "The longer the asset will remain in balance, the lower the price of its sale will be, so the banks need time to do the calculations for each overdue loan," he said.
If the loan exceeds the limit by 60 days or shorter period, it could be sold for 55 percent of the cost, and if for 150 days and above - then below 23 percent, he added.
"The bank must establish the necessary e-data base of credit operations for a timely response," he added.