Central Bank makes changes to regulatory acts related to agriculture loans and other matters

12-10-2023

12 October 2023, Baku: The Central Bank of the Republic of Azerbaijan continues efforts to improve access of the country economy, in particular the real sector to finance. As part of the ‘Socio-economic development Strategy of the Republic of Azerbaijan for 2022-2026’ the Central Bank is providing comprehensive measures in priority directions, like SME development and expansion of financial inclusion.

Ongoing economic growth in the country stipulates the growth of the lending portfolio. The lending portfolio of the banking sector has increased by 11.3% and business loans portfolio by 8.9% since early year. Agriculture loans accounted for 13% of the growth of the lending portfolio. As of 31.08.2023 agriculture loans issued by banks accounted for 12.5% (AZN1.5B) of the total business portfolio.  

All-embracing measures under way in the country on the development of agriculture gave impetus to reduce risks related to agrı-lending and create new opportunities in agrı-financing by banks.

The Central Bank made changes to main acts that regulate activities of banks to facilitate the agriculture, an integral part of socio-economic development, to attain growth targets. These changes include the following directions that address the requirements related to the nature of agriculture and minimization of potential risks in the ‘Regulations on creation of special reserves for asset classification and loan loss provisioning’, the ‘Regulations on calculation of bank capital and its adequacy’, the ‘Regulations on prudential ratios and requirements related to credit risks, including large credit risk exposures’ and the ‘Regulation on credit risk management in banks’:

• The definition of ‘agriculture loan’ and criteria on borrowers have been added to the regulatory framework supporting agri-lending. ‘Agriculture loans’ include the loans issued to finance costs covering the process of production of agricultural products, purchase of production equipment and development projects in agriculture. Loans issued to the persons, who are not producers themselves and are only engaged in processing and trade will be classified as standard business loans, rather than agriculture loans. Moreover, to qualify for the definition, the agricultural entity needs to be registered with the related electronic information system and have certain experience in the field. At the same time, family farms have been included to the range of borrowers on agriculture loans.
• Considering specifics of agriculture loans, including the seasonal factor a more accommodated loan loss provisioning requirements have been established in relation to them.
• Capital requirements on agriculture loans have been determined. National currency denominated agriculture loans to micro enterprises have been attributed to 75% risk group, while family farms to 100% risk group. Agriculture loans to SMEs engaged in agriculture have been kept in current 50% risk group. At the same time, the unconditional secured part of the guarantee of the Funds created by the state and guaranteeing the fulfillment of liabilities on bank loans have been attributed to the 20% risk group. In its turn, it will boost interest of banks in agriculture loans with a guarantee on any of the Funds along with other loans.
• Special underwriting, restructuring, monitoring and credit administration requirements have been determined on agriculture loans. Additional measures on the assessment of borrower’s creditability on loans of the type (agricultural insurance) and additional documents for credit files, classification requirements on restructured agriculture loans have been determined. The requirements related to credit administration include the consideration of the activity cycle and seasonal factors of the enterprise in a repayment schedule on loans of the type, coverage of agriculture loan financing in banks’ credit risk management policies and monitoring of such loans.

These changes are expected to promote banks’ active involvement in the lending of the agricultural sector. Hence, expansion of the access of MSMEs engaged in agriculture to finance will considerably contribute to financial inclusion and economic sustainability.

In addition to the above requirements on agriculture, other regulatory changes have also been made that support real sector lending and sustainable development. To stimulate financing of large projects by banks, project financing loans that meet specific criteria, have been classified as fully secured loans. Repayment periodicity of interest on these loans have been matched to relevant project durations. These changes will allow regulating burden of provisioning on project financing loans, and such loans will be excluded from the concentration limit on unsecured loans. Provisioning requirements related to borrowers’ debt burden on loans issued to finance eco-friendly cars and requirements for production, trade and other dedicated equipment acting as collateral on business loans have also been eased.

In consumer loans, now loans of borrowers, whose debt-to-income ratio cannot be identified temporarily (those who lost their jobs) can be restructured. At the same time, to minimize related credit risks of banks tough classification requirements have been determined.

In general, recent regulatory reforms are forecast to contribute to the effective role of bank funds in economic growth and strengthening of responsible borrowing and sound lending principles.