Expert shed light on facts behind decrease in problem loans in Azerbaijan

The banking sector in Azerbaijan continues to strengthen by eliminating the negative impacts of devaluation in 2015 and then COVID-19. The last report from the international rating agency Moody’s confirms it as well. The agency underlines that the loan quality of the bank sector in Azerbaijan will continue to improve in the next 12–18 months.

Besides, nonperforming loans decreased to 2.6% of gross loans in 2023 from 3.8% in 2022, reaching new historical lows. Asset quality will continue to improve, while problem loan coverage by reserves will remain above 100%.

The report says that asset quality will be supported by favourable economic conditions on the back of robust performance in the non-oil economic sectors and the rising total income of the population, which strengthens many borrowers' debt repayment capacity. The tightening of the regulatory framework on consumer lending and the stability of the manat will also support the quality of foreign currency loans, which decreased to less than 20% of total loans as of year-end 2023 from around 30% in 2020.

In his comment to Azernews, economist Eyyub Karimli pointed out that, in comparison with previous years, the decrease in the percentage of problem loans in the country is due to the further improvement of the economic climate and business environment in the country. This suggests that the delays in repaying the borrowed loans have decreased in parallel with the amount of overdue loans.

"This, of course, is related to certain changes in the development of the non-oil sector. It was related to the further improvement and expansion of the business environment in the non-oil sector and the better performance of micro- and medium-sized entrepreneurs. Other indicators also confirm what we said. So, according to the report of the state statistics in Azerbaijan, growth was observed in the non-oil and gas sector of the economy last year. An increase in income from the non-oil and gas sector was also observed,” he said.

The economist underscored that this can be associated with the general economic development, the further efficiency of economic activity, and the further development of business activities in the country. It goes without saying that this situation also ensures the stability of banks, as the reduction of problem loans also has a positive effect on the banking sector.

As for the decrease in foreign currency loans, the expert assumes that it was related to the stability of the manat. The stable exchange rate of the manat gives impetus to this process.

"However, since January of this year, there has been a sharp increase in foreign currency loans. This also indicates the emergence of certain agitations. Overall, there has been an increase in the deposits of the population and currency. It goes without saying that all this is related to the stability of the country's economy. On the other hand, the general situation of banks in the country can be assessed positively. It is true that there are weaker banks,” Eyyub Karimli said.

The expert mentioned last year, saying that there were closures and cancellations at some banks. He said he believes that several banks will be closed in the future. However, according to the economist, this is not a scary trend, adding that at times, there have been bank closures in Europe and the USA.

"I believe that the process of concentration in banks will continue. Larger banks may be formed, or certain banks may be merged. It should also be noted that there are certain problems related to banking in the country. For example, loans are expensive. This situation creates certain problems for business development. However, we hope that this problem will be solved in the future.

The only thing we need to take heed of is to be a little careful here. Because the reduction of credit interest rates triggers inflation,” the expert concluded.