Not normal lending

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- Are the rates on loans offered by banks to the population normal in Azerbaijan?

- In Azerbaijan, in general, interest rates are abnormal. Both for deposits and loans. Imagine that the rate of the protected (insured) interest on deposits is 12. A bank that accepts a deposit at such a high interest rate, of course, must also issue a loan at a high interest rate. Because, as we know, the main source of income for banks is the difference between savings and loan interest (margin). The costs of banks (administrative, salary, etc.), official costs, as well as unofficial costs), the amount received after deduction is the profit of the banks depends on this difference. Banks also pay taxes on these profits. The remainder is the net profit that shareholders can distribute in the form of dividends.

True, the margin of our banks is very large, even against the background of such high interest rates on deposits. The reason is the high credit risk of banks. We have a high risk of non-repayment or difficult repayment of issued loans. Because the state of the judicial and legal system is unsatisfactory. This increases not only official (lawyer, commission), but also unofficial costs.

To repay loans, banks turn to courts, to bailiffs, to appraisers, to auction organizations - these are unofficial expenses. Of course, not in all cases. The situation is gradually improving; but still, there are many problems, and banks shift these costs to credit interest.

The existence of the shadow economy also increases the problems of banks. Most debtors' income or their main income is unofficial. In such a situation, banks further increase interest rates, as they find it difficult to correctly assess the financial capabilities of borrowers in order to cover possible losses.

On the other hand, our banks do not have a transparent and unambiguous mechanism for obtaining loans from the Central Bank. Today, the Central Bank's discount rate, that is, the interest on loans it provides to banks, is 6.25, but most of them, for some reason, cannot afford to buy such loans and get access to cheap financing. Therefore, they can only hope for depositors. Most of our depositors want to invest at high interest rates. So we got into a vicious circle.

I think, first, the psychology of depositors should change. They need to understand that savings are not a source of income. Savings are a tool for safe storage and use of money. Getting a small percentage should be the second issue.

-Why do interest rates on loans differ in region? For example, in some regions, interest rates on loans are higher. What is the reason? Is it logical?

- Because in the regions, credit risks are higher. The financial capabilities of borrowers are lower, and it is much more difficult to sell the property pledged there. Therefore, there is logic here. In a market economy, the higher the risk, the higher the interest rate.

Most of the borrowers live in Baku, Sumgait and Ganja. What does this mean? People take more loans because of lower interest rates on loans in these cities, or because they have more needs than people in other areas, or, on the contrary, people turn to loans more because they have a job, then are they sure they can pay it off?

This is the same. In these regions, people's incomes are higher, and the funds they have pledged are liquid. That is, getting too many loans is not associated with a higher demand. People are insatiable without it. The better he lives, the more he will want. Therefore, although the population of these regions lives better than others; they want to live even better with loans.

- Mortgage loans in Azerbaijan are also at 4-8 percent. Domestic mortgage loans from banks start at 10 percent. Isn't this percentage high for large loans?

- In fact, it is surprising that banks give mortgages even at 10 percent, while they accept deposits at 12 percent. Consequently, these loans are provided through sources other than deposits. Again, as I said earlier, because our interest rates are generally high, the fact that banks issue mortgages at 10 percent at their own expense, which is actually a positive thing.

- What interest rates are loans and mortgages issued in normal countries?

- The difference between the countries is big. Some even give loans at negative interest rates. The average is 3-5 percent.

-Whom does the normalization of credit interest in Azerbaijan depend on? Banks or Central Bank? What steps should be taken to issue loans in general, as well as mortgage loans at normal interest rates and conditions?

- First of all, it depends on reforms in the judicial and legal system. There should be a normal business environment. The size of the shadow economy should decrease. Work in these areas is underway. New staff is doing the job; but many of the old employees who have remained in positions hinder this.

On the other hand, banking legislation needs to be updated. The President's instruction to prepare the Banking Code, given 17 years ago, must finally be fulfilled.

Naturally, fundamental reforms should be carried out in the field of banking regulation and control. Including in the personnel issue.

If it is done, everything else will fix itself.