Regardless of the quality of loan portfolio and the methods used in the management of credit risks, all banks in one or another degree faced with non-repayment. Problematic, especially, can be the loans, the risk of which is high. An experienced employee of the bank may already at an early stage notice the signs of financial difficulties, which are emerging, and take steps to remedy the situation and protect the interests of the bank. In general, the issue of repayment of overdue loans remains an exciting topic for the banks in all times. Banks, of course, pay much attention to this problem, focusing on the repayment of exactly the loan principal and interest payments. However, this is not always happen.
According to official statistics of the Central Bank of Azerbaijan, the share of problem loans in total loan portfolio makes up about 4 percent (as of June 1 - 4.4 percent compared to 4.2 percent a month ago), and non-standard debt - 8 percent. In May the amount of overdue loans increased in the country by 18.4 million manat or five percent to 383.6 million manat. Compared with May 2009, bad loans have increased by 1.8 times, and compared with the end of last year - 1.3 times.
According to experts, the role of banks is high in the rise in the share of problem loans. In particular, in the pre-crisis period, 2006-2008, amongst the CIS countries, in Azerbaijan were offered the highest rates on loans, which complicated the mechanism of the loan repayment. As a result, since mid 2009, an increase has been recorded in the amount of problem loans. If then their share in total banking assets made up 2.3 percent, now it totals 3.7 percent. In the international practice, if the share of problem loans in total banking assets exceeds three percent, then it is unsafe for banks and credit organizations.
Today, the International Finance Corporation helps the Azerbaijani banks introduce advanced international practices to address the problem of bad loans. Discussions have already been held on the transfer of problem assets, including portfolio management, to promote new lending. According to Hart Bedford, leader of IFC project on overcoming the crisis of financial market, today the main problem of the banking sector is the inefficient management of problem assets.
Today the restructuring is the most accessible way of communicating with delinquent borrower. It has led to the development of special programs on an individual basis based on the specifics of the borrowers. Many of them took advantage of offers of banks, have drawn up restructuring and now pay as much as possible, given their current level of income.
The reasons for such growth of problem loans of banks are several:
- Fall in housing prices as a result of which a large number of loans that were taken for construction became conditional. And banks do not know what to do with this pledge and borrowers are in no hurry to decide to provide other security.
- Reduction in real income of the population
- Many business people did not calculate the forces, and when the problems started, simply faced with accumulated debts.
The risk is very high when the banks increasingly refuse to clients in restructuring loans. First, restructuring has been effective not for all borrowers, and it not with the best way affected the quality of loan portfolios. Secondly, "long", especially mortgages and monetary loans are almost impossible to be restructured without damage to the bank.
If to go back in history, it is possible to see that all the problems in the financial capital markets resulted from the mortgage crisis in the U.S. in September 2008: banks stopped lending, in particular car loans. As a result, sales of automobile giants begun to decline.
The downfall of 2007-2008 affected all countries, and resulted from events outside the stock market - the boom and then collapse in the credit and housing sectors, and later - in commodity markets. Firstly the assets of Western banks began falling, and since July 2008, when oil prices started to fall rapidly, the assets of commodity companies began falling in developing countries. In these circumstances, the growth of bank credits slowed due to several reasons, primarily a decrease in amount of borrowing for investment in the global financial system.
Unwillingness to accept risks has increased especially in the banks and caused the domino effect, which manifests itself in a number of defaults and acquisitions of banks in developed economies. This was the main cause of government intervention in an increasing number of countries. This also explains the emergence of liquidity problems at banks in some countries. Countries have used a wide range of tools to mitigate the effects of the credit crisis, most central banks have resorted to using monetary tools. Echoes of the global crisis came to Azerbaijan as well, the economy and the banking and financial system by the end of 2008 began to experience some inconvenience and difficulties.
And if the government and the Central Bank of Azerbaijan would not timely take necessary measures, the impact of the global crisis could be more pronounced. According to analysts, although the economy of Azerbaijan and its banking and credit system continued to demonstrate sustainable development, yet the first signals of the global crisis began to manifest itself. In the conditions of reduction of foreign investment, the foreign loans and petrodollars began to show problems that require deep analysis and appropriate action. The condition of the financial market of Azerbaijan remained largely under the influence of all factors of global character.
In addition to limitations in access to external borrowings, the banking sector also faced demands to accelerate the repayment of loans, as well as the decreased rate of growth of deposits and deposit base as a whole. In these circumstances, the state reacted flexibly and adjusted the levers of monetary and fiscal policies in order to support the financial sector, simplifying the requirements over the obligations, providing tax privileges to banks, which provided additional liquidity in this sector of the financial market.
Each country decides on problems with credit debt upon its own. Ukraine has decided to follow the example of Russia, which blocks the exit of "problem" debtors from the country unless all debts are repaid. Unless performing obligations (including credit), the issuance of passports may be delayed or if the passport exits, it can be confiscated.
However, administrative measures in Russia, Ukraine and Kazakhstan have not yielded the desired results. Practice has shown that such measures in respect of borrowers are not always effective. In this regard, recently Russia takes measures at the state level to resolve the issue with problem debts. Upon the decision of the Cabinet of Ministers of Russia, a grace period is provided to borrowers experiencing credit repayment problems, as well as to those whose social situation has deteriorated during the crisis. This option may also be acceptable to Azerbaijan specificity.
In all cases, government intervention is necessary to solve this problem, and grace period is necessarily required for borrower that will also facilitate the ability of banks to predict their revenues and expenditures. Grace period on problem loans also encourages banks to attract investments from other sources.