The Central Bank of Azerbaijan (CBA) has amended regulations on consumer credit cards. In a statement issued by the CBA, it was announced that these changes were made to ensure more responsible and sound borrowing, prevent excessive indebtedness of the population, and ensure the capital stability of the banking system.
MP Vugar Bayramov commented on this change on his social media account.
He noted that one of the reasons for delays in consumer loans in recent times is the opening of credit lines on cards that do not correspond to the customer's solvency:
“Also, the calculation of inexplicably high penalty interest rates for delays is among the negative impacts. If the amount of overdue loans in the country was 475 million manats at the beginning of the year, this figure rose to 527 million manats by mid-year. This means that the volume of problematic loans increased by more than 10 percent in the first half of this year. During the same period, the total loan portfolio increased from 24 billion 890 million manats to 25 billion 991 million manats. This means that the loan portfolio increased by only 4.4 percent during that period.”
According to the MP, this also means that the volume of problematic loans increased twice as much compared to the total loan portfolio: “This cannot be considered a good dynamic for the banking sector. On the other hand, an increase in the share of the population's debt burden in disposable income was observed. Naturally, against this background, there was a need to establish new criteria for opening credit lines.
According to the changes, a borrower's credit card is limited to a maximum of 5 times their net after-tax income. The Central Bank believes that this will allow banks to prevent risks proactively. According to the changes, credit lines secured by cash, as well as bank and precious metals, are excluded from the calculation of the 5-times net after-tax income norm of the borrower.”
V. Bayramov stated, based on the new requirement, that the aggregate amount of consumer credit lines exceeding this limit should not exceed 1 percent of the bank's Tier 1 capital after deductions:
“That is, if a citizen's net income is 1000 manats, their credit line, meaning borrowing through a card, cannot exceed 5 thousand manats. Naturally, if the citizen has other debt obligations, those will also be taken into account. If the borrowing is in cash and secured, then these rules are excluded.
Another rule is the inclusion of “overdraft” limits into the concept of credit lines and the determination of a 40% credit conversion factor for consumer credit cards. While consumer credit lines are held in off-balance sheet accounts, a 100% risk weight will be applied to those lines.
Thus, with an “overdraft” service, a cardholder customer can spend more money than they have in their account. Overall, it is credit that can be used by a borrower who needs funds. It should be noted that some banks, by using “overdraft” services, create an excessive financial burden for some cardholders with high interest rates. In this regard, there is a need for continued improvements in this direction.
Overall, the Central Bank's new rules are commendable and can reduce citizens' excessive indebtedness, but naturally, further deepening of regulations in this direction remains a priority.”