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Azerbaijan to introduce new tools to support banking sector

30 March 2017 17:44 (UTC+04:00)
Azerbaijan to introduce new tools to support banking sector

By Amina Nazarli

Azerbaijan’s Financial Market Supervisory Body (FMSB) developed a legal framework that allows introducing new instruments to support banks facing a capital shortage.

Chairman of FMSB Rufat Aslanli made the statement on March 30 addressing a meeting of the Parliamentary Committee on Economic Policy, Industry and Entrepreneurship ongoing for the second day in Baku.

Banks must meet a number of requirements in order to avoid risks that they may face, he underlined.

“Today's legislation offers only two simple ways to support banks facing capital shortages -- an additional capital injection by shareholders, otherwise the bank closes. As for system banks, the legislation provides for their rehabilitation at the expense of public funds. However, last year showed that the recovery process does not have the necessary arsenal of tools and our experience at Bank Standard has shown that the current legal framework is insufficient to address this issue,” he said.

Changes in banking legislation are a matter of time, according to Aslanli.

"The fact that the legal framework does not give us the proper tools to solve banking problems is natural, since the current legislation came into force in 2004. I myself participated in the process of its development, and I admit that at that time the legislation was mainly directed to maintain the stability of the current activity of banks. But the challenges we faced in 2015-2016 have increased the urgency of updating the legislation," the head of the Body said.

In general, the package of proposals includes changes in the civil, criminal codes and the code of administrative offenses, as well as in the laws on banks and bankruptcy.

In particular, the law "On Banks" proposes to introduce such concepts as "resolution", "transition bank", "system bank" and so on.

In addition, the law also added a new section explaining the process of resolution of banks that have lost their solvency.

Speaking of consumer lending portfolio of Azerbaijani banks during 2016, Aslanli said that the portfolio in real terms shrank by 2.35 billion manats ($1.37 billion).

The real decline in the volume of consumer loans significantly exceeds the nominal decline, according to Aslanli.

"Last year, the volume of consumer lending decreased by 20 percent, or about 1.2 billion manats ($0.7 billion). But this is a nominal reduction. In real terms, portfolio reduction was even higher, as it should also be taken into account that half of consumer loans were issued in foreign currency,” he said.

“After we restricted issuance of loans in foreign currency, lending volume decreased and, accordingly, the actual reduction amounted to 2.35 billion manats ($1.4 billion)," the chairman said.

The payment of uninsured deposits to customers of the liquidated Caucasian Development Bank will begin in April, noted Aslanli.

The volume of uninsured deposits in the Caucasian Development Bank is 9 million manat ($5.2 million).

The Central Bank revoked the licenses of the Caucasian Development Bank and Atrabank on January 27, 2016 due to the inconsistency of their total capital with the minimum requirement of the regulator [50 million manat ($29 million)] and default to the creditors.

As of March 13, 2017, the Azerbaijan Deposit Insurance Fund completed payment of compensation to customers of the Caucasian Development Bank for insured deposits by 94.4 percent, paying them almost 1.97 million manat.

FMSB will announce the issue of turning the liquidated Parabank, operating in the country since 1991, into a non-bank credit institution (NBFI) later today.

"Currently, the insured deposits of the bank's clients have almost been completely paid, and the balances on legal entities' accounts in the amount of 12 million manat ($7 million) have been repaid fully. The bank also returned uninsured deposits of 20 million manat ($11.68 million) to the clients. It has the right to function as an NBFI,” he said.

The bank's license was withdrawn in July 2016 because its assets were not classified in accordance with the legislation, the bank did not create adequate reserves and its aggregate capital did not meet the minimum requirements [50 million manat ($29 million)].

On the first day of the meeting Aslanli informed about the process of liquidation of local banks, saying that to date, 11 banks are in process of liquidation.

He spoke of the frequently asked question of why this process is delayed.

Preparation of a plan to eliminate only Bank Standard requires a lot of legal work, he said. “The bank had accounts of 262,000 physical and more than 47,000 legal entities. It is necessary to determine the list of all their requirements. There are controversial issues. For example, someone wants to get not 5 manat, but 5 manat 15 qepiks. These issues must be resolved. Then it is necessary to draw up a register of bank assets. Both property and legal requirements, as well as the register of expected rights must be prepared, evaluated and approved in court,” he said.

Aslanli further added that under the changes proposed to the legislation, if the management and shareholders of the bank are responsible for the problems in this bank, they will have to pay for the damages.

“We for the first time offer such a practice in Azerbaijan. This practice is widely used in the world. Often as a result of irresponsible management actions, the bank becomes bankrupt, and loses funds attracted from the population. In some cases, fraud is committed intentionally. Now the state through the Azerbaijan Deposit Insurance Fund returns the deposits of the population, but neither the shareholders nor the management of the bank are responsible. It is not right. The legislation for the first time introduces this practice. To ensure this, we have added the necessary articles to the civil and procedural legislation,” the FMSB chairman explained.

The FMSB has already submitted a package of proposals to the government to change the legislation, where one of the most important items is the application of the process of voluntary restructuring of banking obligations.

“This procedure is widely used throughout the world. This is one of the possible solutions for banks that have lost solvency and are facing problems. Banks will be able to apply for a restructuring of their obligations in court. The application will be considered within 10 days, after which they will receive the answer,” he said.


Amina Nazarli is AzerNews’ staff journalist, follow her on Twitter: @amina_nazarli

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