The Central Bank of Azerbaijan issued a statement on January 22nd regarding bank lending practices amid concern at the rate of growth in unsecured consumer credit.

The press release appears to have been in response to a report by Trend, an official news agency, on January 16th, that the Central Bank had issued a memorandum to commercial banks instructing them to ensure that credit rating procedures for consumer loans were adequately implemented. 

Trend suggested that the Central Bank is concerned that banks are not checking applicants' employment record and credit worthiness prior to issuing consumer loans. The Central Bank criticised "loose comments" made by media outlets, but also conceded that it had instructed banks to "enhance control" over credit portfolio quality in order to "further amplify the banking sector's financial sustainability". However, it does not appear that the Central Bank intends to make any formal amendments to credit rating regulations at this stage, or to bring in measures to slow the rate of loan creation. Indeed, as discussed in a previous update, from February 1st the Central Bank will loosen the capital provisioning regime against potential losses, which may enable banks to boost lending further.

The rate of growth in total domestic credit has remained steady at around 26% in 2013, compared with an average of 24% over the past five years. However, unsecured consumer credit growth has accelerated since January last year. In October 2013 total outstanding lending to households (excluding mortgages) was up 47% year on year. The share of unsecured consumer credit in total lending rose from 25% in January 2011 to 33% in October 2013.

Officially, non-performing loans account for 5.2% of the total loan stock, which is low for an emerging market. The recent growth in consumer lending suggests that rating criteria may have been relaxed, which raises the risk of a rise in delinquency in the future, particularly as household income growth is forecast to slow in 2014-15. In addition, as the IMF noted in a report in 2013, the authorities need to improve procedures for classifying asset quality and non-performing loans. This suggests that the risks to the financial system are greater than official statistics would imply.

(EIU)

ANN.Az