Cadre reform is required at the Central Bank and the Financial Market Supervision Chamber

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- Akram bey, what can you say about the situation that followed the Presidential decree on resolution to problem credits? Have they decreased in the expected volume?

- It should be borne in mind that the decree is due to consumer credits within certain limits:

1) if a debt of a person in foreign currency does not exceed $10,000 to be paid (compensated) by the state with regard for difference in rates;

2) restructuring of credits not exceeding $10, 000, or 17,000 manats by means of signing a new credit agreement for 5 years at 1% of annual interest.

It is worth reminding that the decree does not cover other credits. However, no expected reduction has taken place in respect of related credits.

- What"s a reason of the fact that no essential reduction in the volume of problem credits has taken place?

- First, the reason is that the second part of the decree is slowed down: as a rule, credit organizations avoid restructuring of credits available. On the other hand, compensation by the first part of the decree was meant to be paid till May 28 notwithstanding, the process has not been completed so far largely due to the bankrupt banks. As is known, their liquidator is the Deposit Insurance Fund (DIF).

Hence, it is the DIF that gives rise to problems. There are lots of borrowers that have not been compensated by the state in foreign currency due to the fact that the DIF has not yet obtained from the state nor paid them (in case where a citizen has paid a difference in rate to the bank). Why is the DIF doping so? Under a common sense, the DIF is interested in obtaining these funds from the state. Even if the DIF shows no particular desire to pay citizens, why doesn"t DIF obtain money it needs?

I admit that the DIF ignores bank creditors while it is major task. However, the DIF even failed to take amounts of compensated and insured deposits (for instance, Bank Standard, Technikabank).

For reasons cited above the Fund was to be interested in obtaining funds the state was meant to pay by overdue credits. Why didn"t this happen? There is a version (not secret for the banking community) that the DIF behaves in this manner to conceal error made by the Chamber over financial markets. Was that an error?

As is known, the Supervision Chamber took no part in drawing up the decree and even learned about it from mass media. At the same time authors of the decree were to be aware both of the number of debtors and sum to be compensated by the state. It was responsibility of the Supervision Chamber only to provide appropriate information. That"s why the authors appealed to the Chamber and got data on borrowers and a sum of debts. However, the Chamber provided balance information only but declined from providing post-balance data. The probability remains that the authors of the decree forwarded an incomplete inquiry to the Chamber (this follows from a language and a style of the decree which goes to show that authors" qualification is not high!). For reasons cited above, the Chamber-provided information proved to be far from exhaustive. At any rate, the Chamber as a professional body in charge of the banking sphere was meant to specify the inquiry and provide total information on the matter.

An explanation is required here. According to "Regulations for classification of assets and creation of sp[ecial reserves to cover possible losses" (http://base.spinform.ru/show_doc.fwx?rgn=22790), banks must write off bad credits from the balance. But that does not mean that the credit is remitted, no! Banks are merely interested where bad credits remain at balance, to create an impression that their financial position is better vthan in reality. Such an approach is not rare in practice: our largest bankrupt "Bank Standard" claimed bad credits as non-toxic while the Central Bank and an auditor (KPMG) shut their eyes to this fact.

Thus, the legislation demands from banks to avoid inflating their balances in an effort to create a false impression about their reputation among their clients and the public. However, at any rate the post-balance accounting of unrecoverable credits is still underway. The point is about the situation around most problem dollar credits. Most of them were bad, yet, the government undertook to repay the difference in currency rate and thus reanimated them for banks!

The main issue is that the Chamber declined from providing comprehensive information about problem, yet, balanced credits in foreign currency. As a consequence, calculations of the decree authors regarding an amount to be paid by the state proved to be erroneous. But in fact, the state was meant to pay more money. In this connection, the Chamber as a chief executor of the decree faced a serious problem: where to find a deficient amount? However, the Chamber failed to admit its gross error and how did the Chamber act?

Naturally, the Chamber clearly realized that banks would not help (whitewash) its deceits: they are interested in obtaining their money as soon as possible. In turn, ownerless banks are not interested in the above: they are under liquidation and subordinated to Chamber-led DIF. Acting executive director of DIF, Vugar Abdullayev is a friend of acting chairman of Chamber board, Ibragim Alyshov. Yet-uncommissioned on continuing basis, both of them are interested in maximum extension of their official status. In other words, the DIF is not interested in getting compensation from the state for problem credits in foreign currency of closed banks thereby assisting the Chamber.

True, the DIF acts differently in respect of credits: an amount allotted by the state has not been overrated, and when the state learned what happened it did not ask: why was extra-money required, why other figures were presented? Reasoning (logic) of the Chamber and the DIF are as follows:

1) At any rate, most citizens are unaware of their rights, nor demand them (fear, etc.), so nothing should be taken from the state by their credits, and these persons be told that no privileges extend to them, and demand complete credit compensation;

2) Citizens being aware of their rights may, at worst, appeal to court while the DIF is experienced in evading compensation for insured deposits at closed banks and prosecuting depositors for many years. Suffice it to say that no DIF representative attends judicial sittings, so procedures, decisions in favor of a citizen, complaints are delayed, etc. As a result, even if the amount is overrated (if majority sued), it would leak out in several years. And till them "either khan will die donkey " - this is the logic of our Chamber and the DIF!

- According to Elman Rustamov, a charman of the board of the Central Bank, who addressed a session of the Cabinet of Ministers devoted to social-economic results of the first half of 2019, the first part of Presidential decree on compensation for credits in foreign currency has been over. However, no restructuring of manat credits has been removed. Why cannot this problem be resolved?

- First, Elman Rustamov is traditionally cunning: as I noted before, issue of compensations has not yet been over.

-Second, as for restructuring of credits, implementation of this part of the Presidential decree is rather slow. Below-cited are the following reasons:

1. It was recommended to carry out a credit restructuring of banks, i. e. they may decline from restructuring. In Azerbaijan, banks cannot openly oppose the Presidential recommendations but they can sabotage them, and they do it.

2. As far as I know, the Central Bank joined the sabotage and declines from allocating 682 mln manats worth lax credits to credit organizations as set forth in the decree.

3. No mechanism of restructuring has clearly been specified I the decree. For instance, banks under liquidation cannot conclude new credit agreements, for their banking licenses have been recalled.

On the other hand, credit institutions were to take measures within a month aimed at recalling cases already at court, including those at proceedings. But if they do that and borrowers decline from concluding a new credit agreement, the banks will lose their right to demand.

- Citizens with problem credits at closed banks and structures acting as non-banking credit organizations are faced with compensation or restructuring difficulties. These banks and non-banking credit organizations decline from concluding contracts on restructuring of manat indebtedness. As a whole, some organizations declare that they are unaware of this. Causing suspicions is the fact that given structures are eager to avail of the current situation and misappropriate funds allocated for restructuring. How far are these suspicions grounded? Can these organizations swindle?

- No, I don"t think that there was a machination, for the process is supervised by all state bodies concerned. However, relations between them are not best. At any rate, funds have not yet been allocated. Even if allocated, credit organizations are not interested in restructuring.

- Will the issue be solved completely with the help of funds provided by the Presidential decree for problem credit resolution? What previously unknown facts revealed after the decree has taken effect?

- Indeed, the problem cannot be resolved through the use of the decree only. At best, the number of problem debtors will sharply reduce. However, even 25% of the problem credits will be resolved. As for facts revealed, there is nothing new for me personally.

I"ve always known that our most officials and bankers in charge of the financial sector are illiterate, greedy and roguish. They contrived to discredit the positive and important initiative of the head of the state.

- What steps are to be made to finalize the problem credits and secure banks, citizens and public budget against misappropriations?

- In fact, an absolute majority of credits is artificial. These are funds taken out of the bank by owners and managers under a pretext of "credit allowance." These funds are legalized as credit to someone"s name. It is very easy to establish. Also, the credits are granted to persons having no actual business. These are large amount credits at low interest for a long period, without a pledge and a real allocation. Who is in charge of all these? The Chamber and law-enforcement bodies. Why don"t they execute their duties? The point is that most functionaries are real businessmen and even bankers. To manage a work properly, it is essential to set up a special body consisting of highly professional and honest lawyers, economists and journalists. It is quite possible to reveal all abusive acts and return stolen money. In so doing, a greater portion of problem credits will be settled.

As for other real problem credits, the state may make allowance for other infringers. It is crucial to radically update the bank legislation and thus prevent misuses.

What important to notice is that as far back as in 2004 and 2014 the President instructed to draw up a bank code. However, nothing has changed. That"s why one of the most important steps is to carry out a cadre reform, first of all, at the Central bank and the Supervision Chamber.