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Does the Credit Bubble Threaten Uzbekistan?

How to reduce the cost of bank products

Anvar Irchaev, chairman of the board of Universalbank

In the first quarter of 2020, loan volume in Uzbekistan has risen by 16% compared to the same period last year. In total, the tally for loans reached 30 trillion som ($2.9 billion), which is 4.2 trillion som ($411.6) more than last year. The growth has been seen in all crediting segments.

According to Uzbekistani Central Bank, the rest of consumer loans as of July 1 was about 4.7 trillion som ($460 million). This is just 1% of Uzbekistan’s GDP and about 2% of banking portfolios combined. During the pandemic, the latter criteria changed just slightly by 2%. In contrast, the number of car and alternative (or microcredit) loans surged by 16% and 28% respectively. The accumulated portfolio of all microcredit entities in Uzbekistan has risen by almost 40% from 407 billion som ($39.9 million) to 561 billion ($55 million).

Consumer relations

The availability of consumer lending is growing each year even though up until recently the cost for retail loans was about 32-36% per annum on average. However, since July 1 almost all banks offer their consumer loan at the rate of 24%. They were forced to do that after the recommendation of the central bank. Of course, someone may say the loans are still expensive and this statement would be correct, but on the other hand, the deposit rate by which banks attract money is also high, about 18%. As a result, the banks’ margin was strongly reduced.

If the funding goes cheaper, it would make the interest rates more attractive. We are expecting that within the inflation targeting framework, the regulator will reduce the base interest rate as inflation slides. For instance, the Russian central bank reduced it to 4.25%, an unprecedented low. The local regulator in Uzbekistan has reduced the base rate from 16% to 15% and then to 14% in September. 

To make the economy work you should fill it with money, especially amid the pandemic. In the U.S. authorities spent $5 trillion for the stimulus, while EU countries allocated $750 billion. As a result, local banks were able to provide the economy with additional lending. In other words, cheap and long-time funding will facilitate the cut of the base rate and the lending growth would follow.

Deposit under the mattress 

It’s necessary to attract money from the population, but it’s just impossible if people have no trust in banks. Unfortunately, Uzbekistanis prefer to save money in dollar, not the Uzbek som. The main reason for this trend is a very small difference between the deposit rate (24% is a maximum) and the cost of a dollar that surged by 22%. So, it drives people to choose their mattresses to keep their cash and avoid banks’ deposits. 

Because consumer lending is still underdeveloped in Uzbekistan, we are expecting a boom in this field even though the pandemic hit the local economy. However, it doesn’t mean that absolutely everyone can borrow that money. Firstly, the regulator would oppose this strategy. Secondly, people in Uzbekistan are used to respect money, and no one waits for the helicopter money. And thirdly, we just have no such cheap money.

Car loans wait for funding

According to Central Bank as of July 1, the rest on car loans is about 6.6 trillion som ($649 million), which is just 2.7% of the loan portfolio combined. One in four cars in Uzbekistan has been bought in credit, the experts say. Since July 1 the car loan rate has reduced. However, most of the banks still require a 30% down payment.

Almost all car loans were obtained for new cars, basically for those produced by GM Uzbekistan. People buy cars in loans to earn money as taxi drivers or other work. Cars by other brands are still rare things in Uzbekistan but it is possible to buy a new one on the same conditions.

Car loans in Russia or Kazakhstan are cheaper because automakers often financially support these deals. In Uzbekistan, there is only one producer and it can’t sell cars to everyone by installments. At the same time, Uzbekistani banks have no access to cheap money and offer loans with high rates (up to 24%).

There was one problem in this segment when the capital burden remained very high in terms of the provisioning rates for expensive car loans. Now, with the decrease in rates, this procedure has become irrelevant.

Mortgage gets closer

Since 2017 the game rules for mortgages in Uzbekistan have changed due to a new state program aimed at affordable housing construction. It is expected that before 2021 more than 1200 houses for 50,000 apartments will be built. Some of these flats will be sold for young families and those who need better living conditions. The loans are provided for 20 years. In the first five years, the rate is 7% and then it will be the same as the central bank’s base rate.

Since May this year, the mortgages in Uzbekistan are provided as commercial products. Now loans under the state program are provided for all apartments on the market even in shell and core conditions. The Ministry of Finance will allocate cash in local banks by 15-16% per annum. In turn, banks will be able to lend people money by a market rate not higher than 24%.

However, the mortgage loans require long-time money that Uzbekistani banks are short of and we have to solve this. The government finances mortgage program only for several financial entities. Even our small bank can offer short-term mortgage loans.

The main tool that regulators use to decrease mortgage loan rates is monetary policy and reducing of inflation. By 2023 the Central Bank wants to make inflation about 5% and I hope that if inflation rises, the rate for banks will stay the same.


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