AZE.US
The volume of overdue loans in Azerbaijan has increased by 36% over the past year, driven by inflation, declining household purchasing power and a sharp rise in borrowing costs.
Economist Khalid Kerimli said the increase does not yet pose a serious threat to the country’s banking system because the overall loan portfolio, particularly consumer lending, has also expanded.
According to him, nonperforming loans have remained below 3% of the total credit portfolio for an extended period.
By comparison, the ratio was in double digits during parts of the 2010-2020 period and stood at around 4.5% to 5% in the early 2020s.
Kerimli said the latest increase should therefore be viewed largely as nominal growth rather than a sign of systemic instability.
“The value of money has changed, while the overall credit portfolio has grown significantly compared with previous years,” he said.
Borrowing Costs Rise Sharply
Kerimli identified inflation as one of the main reasons for the increase in overdue debt. Rising prices reduce household purchasing power and make it more difficult for borrowers to meet monthly repayment obligations.
Higher interest rates have also increased the financial burden on consumers.
Loans previously offered at annual rates of around 18% are now being issued at 23% to 24%, while rates that once stood at 23% to 24% have in some cases climbed to 28% to 30%, according to the economist.
Late payments can further increase borrowers’ costs through penalties and additional interest charges.
Banks Face Limited Systemic Risk
Kerimli said banks have increased their interest income and are required to maintain reserves against potentially troubled loans.
As a result, the rise in overdue debt is currently a greater problem for individual borrowers than for the financial stability of the banking sector.
Azerbaijan’s Central Bank has also introduced strict rules for consumer lending. Banks are required to carefully assess the relationship between a borrower’s official income and existing financial obligations.
Under current regulations, a borrower’s monthly loan repayments cannot exceed 45% of their officially declared monthly income.
Kerimli said around 98% of the country’s credit portfolio is concentrated in the banking sector, where lending standards, reserve requirements and risk controls remain strict.
Consumers Urged to Assess Their Finances
The economist urged consumers to carefully evaluate their financial capacity before taking out loans, particularly for nonessential purchases.
Consumer loans in Azerbaijan are commonly used to buy cars, smartphones, computers, household appliances and other goods.
Kerimli warned that borrowers whose income is insufficient to meet scheduled repayments should avoid taking on additional debt, especially as interest rates and living costs continue to rise.
Despite the 36% increase in overdue loans, he said the current level does not yet represent a significant systemic risk for Azerbaijan’s financial sector. However, persistently high inflation and expensive credit could leave more households struggling to repay their debts.
AZE.US