Central Bank changes regulatory framework

01-08-2025

1 August 2025, Baku: The Central Bank has enhanced its regulatory framework to promote more responsible and sustainable borrowing practices on consumer credit cards (credit lines). These changes aim to reduce the risk of over-indebtedness among the population and strengthen the capital resilience of the banking sector.

Analyses conducted by the Central Bank reveal a surge in credit card usage within the consumer lending segment. While this trend aligns with positive growth in household disposable income, it has also coincided with an increasing share of debt relative to disposable income.

According to the regulatory changes, consumer credit card limits are capped at five times the borrower’s net after-tax income, with calculations factoring in existing liabilities to other credit institutions. Credit lines backed by cash, bank deposits, or precious metals are excluded from this cap. Additionally, the total value of credit card exposures exceeding the established limit must not surpass 1% of the bank’s Tier 1 capital, post-deductions.

These requirements encourage banks to assess the true creditworthiness of borrowers and proactively manage credit risks during product issuance. The regulatory amendments promote responsible lending by banks and ensure that consumer borrowing remains aligned with actual financial capacity. The approach is consistent with the Bank’s broader policy on responsible and sustainable consumer lending and seeks to minimize social risks by preventing excessive financial burdens on households.

Further changes stipulate that overdraft limits are now included in the definition of credit lines. A credit conversion factor of 40% has been applied to consumer credit cards, reflecting their specific risk profile. While consumer credit lines (unused part of a credit line) are recorded in off-balance-sheet accounts, a 100% risk weight will apply to them. This change ensures that capital adequacy indicators more accurately represent the true risk exposure and maintain the systemic stability.

An additional amendment to the Bank’s regulations classifies securities issued by multilateral development banks with an 'A-' credit rating as high-quality assets, given their low-risk characteristics. Banks are no longer required to create loss provisions for these instruments.

The Central Bank always attaches great importance to the financing of the real economy by the banking sector. As part of this effort, regulatory guidance on asset classification has been updated to refine the definition of a borrower operating at a loss. The revised definition no longer refers solely to net loss, but instead reflects cases where a borrower’s earnings before interest, taxes, depreciation, and amortization (EBITDA) are lower than or negative in comparison to total interest expenses. This clarification allows for more realistic assessments of enterprise performance as part of business lending by banks, as well as for more adequate management of credit risks.

For approved changes please go to: https://e-qanun.az/framework/60285