Retail lending imbalance in Azerbaijan
Baku, Azerbaijan, May 23 / Trend /
Leyla Abdullayeva, Trend analytical centre expert
The population of Azerbaijan is becoming adapted to living on credit. It is now impossible to find an area where the citizens are not using borrowed funds. The majority of purchases such as housing, automobiles, home appliances and so forth are made through the borrowed money. In response to the increased demand, Azerbaijani banks have extended to a limit and simplified the range of loan programmes offered to the public.
According to the Central Bank of Azerbaijan (CBA), the lion portion of loans in Azerbaijan is granted to households. In particular, in the first quarter of 2013, domestic banks granted loans to households to the um of 4720.9 million manat, which is 36.4 per cent of the total lending market.
It would seem that in this situation there is only positive side. Credit stimulates consumer spending and, as a consequence, has a positive effect on economic growth. In other words, the population improves their lives through credit and this process should be encouraged by reducing interest rates and so forth. However, it is necessary to observe a certain balance, since disturbing moments may arise in this direction as well.
We are talking about the possible dangers that may be caused by an increase in retail lending, exceeding the welfare of the population. Such growth may provoke a fall in economic performance in the future and lead to social problems.
According to the State Statistics Committee, in the first quarter of 2013, real disposable income of population rose 5.5 per cent compared to the same period last year, while during the same period, the bank loans to households in the country increased by 34 per cent. At least 1.9 per cent of total revenue was spent by the population on payment of loans.
However, it has not been excluded that in a short period of time, the amount of this expenditure in the household budget of Azerbaijani citizens will grow. After all, until recently these costs were not even taken into account by official statistics. In connection with this trend, there are concerns on the growth of the debt burden of the population.
In addition, the availability of consumer credits changes the structure of consumption expenditure of citizens in general and the structure of meeting important social needs in particular. One of the main reasons for the increase in demand for goods in the mid-price segment is a sharp rise in consumer lending. By easily purchasing another household appliance or a piece of furniture on credit, the citizen besides regular expenses, carries the burden of additional payments which could be used to purchase paid services in education and health care which directly affect the quality of human capital.
Mass development of unsecured consumer lending also causes a threat of non-repayment of loans. According to the CBA, today the share of overdue loans in the total loan portfolio amounts to 760.8 million manat (5.87 per cent) versus 663.9 million manat in the first quarter of 2012. While much of this debt was formed during the financial crisis and defaulting of consumer loans is growing rapidly as well.
This factor and high retail lending rates have long raised concerns of the leadership of the Central Bank of the country. To this end, in early February the CBA sent a letter to the commercial banks with a request to stop issuing consumer loans at retail outlets, but to provide them centrally, directly through the banks themselves.
Then, the CBA prepared requirements for banks to provide justification for interest rates on consumer loans. In accordance with these requirements, the data on interest rates will be reflected in more detail and transparent way. These measures should be implemented to ensure banks do not make use of the population's financial illiteracy and provide them with complete and clear information substantiating the real interest rate on the loans provided.