Overdue loans are rising rapidly in Azerbaijan as borrowers face high interest rates and growing pressure on household budgets, according to Central Bank data and comments from banking specialists.
As of Sept. 1, overdue loans totaled 721.8 million manats, or about $424.6 million, an increase of 36% from a year earlier. They represented 2.1% of the country’s total loan portfolio.
More recent Central Bank figures show the trend continued in September. Overdue debt reached 754.3 million manats, or about $443.7 million, as of Oct. 1, up 4.5% in one month and 42.8% from a year earlier. The share of the overall portfolio remained 2.1%.
The ratio does not indicate a systemwide banking crisis. Central Bank Chairman Taleh Kazimov said in late October that the rise in delayed consumer-loan payments did not pose a systemic risk and that bank reserves provided strong coverage for credit risks.
Household Income Is Not Keeping Pace
Banking specialist Ismail Mammadov said one reason for the increase is the growing debt burden on consumers. Many borrowers are servicing several obligations at the same time while their financial resources remain limited, he said in a televised report.
Even a relatively small increase in everyday expenses can then lead to a missed payment. The problem is not only how much a borrower earns but how much of that income is already committed to debt service and essential spending.
People who take out new loans while still repaying existing debts are especially vulnerable, Mammadov said.
What a 25% Loan Costs
Interest rates on some Azerbaijani loan products can exceed 20% to 25% a year, creating a substantial burden for borrowers with limited income.
A 10,000-manat loan for three years at an annual rate of 25%, for example, would require a monthly annuity payment of about 398 manats. The borrower would repay approximately 14,300 manats in total, including more than 4,300 manats in interest.
That means the overpayment could exceed 40% of the original principal even before additional commissions or insurance costs are included. Several loans running at the same time increase the strain further.
Why Banks Keep Rates High
Mammadov said lending costs partly reflect deposit rates, which determine how much banks pay to attract funds. Rates on insured manat deposits can reach 12% a year.
The Azerbaijan Banks Association has said final loan pricing also depends on the cost of funding, the loan’s term and amount, the borrower’s ability to pay, credit risk and competition in the market.
Banks set their own rates. Azerbaijan does not impose a single mandatory rate for all lenders or a universal minimum or maximum lending rate, although the Central Bank regulates and supervises the industry.
Can the Central Bank Make Loans Cheaper?
The Central Bank can influence borrowing costs through monetary policy. A lower policy rate and access to cheaper financing can create conditions for commercial loan rates to decline.
The relationship is not immediate, however. Banks continue to price their own operating costs, credit risk and the possibility of default. A reduction in the Central Bank’s rate therefore does not automatically produce an equivalent decline in consumer-loan rates.
Responsibility Is Shared
Mammadov said lenders must evaluate not only a customer’s current income but also the total volume of existing obligations and the borrower’s ability to continue servicing the debt.
If payments begin arriving late, a bank should determine the cause and take steps to limit further risk. But the increase in overdue debt also raises questions about lending standards. A loan whose payments leave a household without enough money for ordinary expenses carries a greater risk of delinquency from the start.
Responsibility cannot be placed entirely on customers. Banks decide whether to approve loans, assess applicants’ finances and set the terms.
The 42.8% annual increase in overdue debt is a warning that credit growth does not necessarily reflect greater prosperity. For some families, borrowing is becoming a continuing claim on income that is already struggling to cover daily costs.
The comments were made in a television report on household income and expenses.
Sources: Vesti Baku, Report and Central Bank data reported in October.