Problem: Banks cannot provide loans at low interest rates

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- Samir bey, on March 4, the term of full deposit insurance has expired and the Law on Full Deposit Insurance adopted in 2016 has not been extended. And in this case, the term of another normative act, the Law on Deposit Insurance, should come into force. So what is expected for the depositories in this case?

- In January 2016, a law on full deposit insurance was adopted. The general essence of this was that if the deposit was deposited at the interest rate set by the Deposit Insurance Fund, it would be fully protected. At present, the interest rate is 2.5% against foreign currency and 10% against the national currency. In other words, if any insurance event occurred, deposits would be 100% refundable. But in the previous law, it was not possible to collect more than 30,000 manats. The term of the full insurance period expired. In February last year, the term was increased as one year. On March 4 this year, the term has expired and this issue has been brought to agenda again. As the term of this law was not extended, the old law, the Law on Deposit Insurance, was automatically put into effect. That is, it is impossible to get more than 30,000 manats. Experts were in favor of the extension of the law on full insurance. The government did not react to this. In my opinion, the failure of extension is more of a technical nature. From that point of view, the parliament was dissolved, new elections were held, then the recognition of the results by the Constitutional Court took time. The new parliament will go into action next week. In other words, technically, it did not allow taking a step for the extension of the term of this law until March 4. The new information is that the Financial Stability Council decided to extend this law by nine months. After the Council, the Deposit Insurance Fund also upheld the decision. If Parliament again approves the extension of the term of this law, the deadline will be extended until December 4. The parliament will likely approve this. In fact, the government did not have the intention to extend it. Coronavirus, which is simply taking its source from China, has created a new situation all over the world. These events create enormous problems for the world economy, including the economy of Azerbaijan. In this case, the government likely changed its mind and decided to extend the law for another nine months.

- Why do you still think the term of the Law on Full Deposit Insurance should be absoutley extended? What do you think are the reasons for making this necessary?

- According to the latest data from the Central Bank, as of February 1, the volume of bank deposits is 8.6 billion manats. 75.6% of these deposits are short-term. Thus, people are not fully convinced of the durability of the banks and the stability of the national currency. 34% of deposits are current accounts. This means that the deposit of 2.9 billion manats can be withdrawn from banks at any moment and collapse banks. Unfortunately, the Deposit Insurance Fund works in a closed manner and does not publish any statistical information on its website. We do not know, for example, what part of deposits is 30,000, 50,000, 100,000 manats. If there is either this or that data, it would be possible to evaluate the real situation more accurately. In fact, there are many questions. What is the share of the deposits worth millions? Or what will be the behavior of the depositories, especially ones “worth 100 thousand” and “worth millions”, if the government does not extend the term tomorrow?

By considering all this, the government should extend the term of the full deposit insurance. In the event that it does not extend the term, then the insurance mechanism should be changed. At least, it should increase the amount of compensation to 100,000 manats.

- Several banks are collapsing in Azerbaijan. For example, Atabank’s depositories have not been able to get their money back for a while, and there are rumors that the bank will soon go bankrupt. In addition, the situation is not good in several other banks. What should depositories with deposits in those banks do when the banks go bankrupt? Who will protect the rights of depositories if the term of the law does not extend?

- There are several banks that have not yet fully recovered from the negative impact of the devaluation in 2015. One of them is Atabank. Several other banks are also facing the same situation. In connection with Atabank’s fate, the government and the bank’s owner are probably in talks. As a result of these discussions, it will be decided whether the bank will continue its operations. In any case, I support the consolidation of banks, not their closure. Because the closure of any bank has a negative impact on the banking sector on the one hand, and on the other hand, the government is forced to incur additional costs as it generally insures deposits. Here's a nonsense situation. This means that the bank has not yet closed, that is, no insurance accident has occurred. People cannot receive compensation since the insurance accident has not occurred. On the other hand, the bank is regarded as operating because it is not closed. However, customers cannot withdraw their deposits. This is an undesirable situation. A decision must be made in this regard. Either the bank should be closed and people should be compensated. Or, the bank should continue its activity by recovering its bad assets. There is nothing that people can do. In any case, even if the bank is closed, the deposit must be repaid in accordance with the requirements of the law on full insurance. Because the deposits deposited in that bank were deposited at the time when this law was in force. Therefore, those deposits must be 100% fully repaid.

- Banks’ inability to gain trust in Azerbaijan is due to the failures of some of them frequently. Do you think deposit insurance is the way out of the situation? This can be for the benefit of the depositories. But what can be done to improve the situation of banks? In other words, what to do for banks to operate normally, the depositories to be satisfied, and the trust to be developed?

- The law on full deposit insurance was issued during a sensitive period. At that time, people were trying to massively withdraw their deposits. Banks were falling apart. In this case, the 100% guarantee from the government was needed for people not to be afraid. The adoption of this law was the right move and took its effect. Of course, the government does not always have to insure the deposits at 100%. It has its drawbacks too. First, it can increase abusing banks. The second disadvantage is that it can lead to concentration in the deposit market. This means that people deposit their deposits in several banks. As a result, deposits are massively transferred to several banks. The remaining banks remain without deposits. From this point of view, if the deposits are not 100% insured, the depositories will distribute their deposits in several banks and the deposit will be available to several banks. The third disadvantage is the rise in interest rates on deposits. As deposits are accumulated in several banks, the remaining banks are forced to raise their deposit interest rates. This step will eventually lead to an increase in interest rates in the deposit market.

The way out is that the amount of compensation should be raised from 30,000 to 100,000. If this step occurs, it can significantly reduce the volatility of the deposit market. Competition in the banking sector can have a significant impact on the deposit market. The main problem today is that banks cannot grant low-interest loans. At the same time, it is difficult for banks to find a reliable customer. Because they are not able to provide loans, the interest of deposits they receive from people remains on them. Since they are unable to grant the loan, surplus costs are accumulated in banks. If the process continues like this, the deposit market may face a huge problem in the next period. Banks may face difficulties meeting their obligations and repay deposits.