Azerbaijan’s banking sector has expanded rapidly, but the growth in lending is increasingly accompanied by a rise in non-performing loans (NPLs), raising concerns about household debt sustainability and credit risk management.
As of October, the total loan portfolio in Azerbaijan has approached 30 billion manats. Of this amount, 528 million manats are classified as non-performing loans – roughly 1.7% of the total portfolio. While the ratio remains moderate by international standards, the upward trend points to structural weaknesses in both lending practices and household finances.
Income growth lags behind credit expansion
One of the primary drivers of rising NPLs is the widening gap between credit growth and household income growth. Lending volumes are increasing faster than wages and disposable income, leading to a growing imbalance.
When income growth fails to keep pace with debt accumulation, borrowers become more vulnerable to shocks, even when loans appear manageable at the time of issuance.
Weak debt burden assessment
Another key issue is the inaccurate assessment of borrowers’ real debt burdens. Experts note that banks and non-bank lenders do not always fully account for a client’s existing obligations when approving new loans.
In practice, some borrowers receive loans of 5,000-10,000 manats despite income levels that would justify a much lower exposure. This overextension significantly increases default risk.
Aggressive non-bank lending
Beyond traditional banks, non-bank credit providers play an increasingly influential role. Consumer loans are widely offered for cars, household appliances, furniture, and other goods, often through simplified approval processes.
Not all of these obligations are consistently reflected in centralized credit histories, making it harder for banks to assess total indebtedness accurately when customers apply for new loans.
“Loan-to-loan” behavior
A growing number of borrowers attempt to service existing debt by taking on new credit. In some cases, goods purchased on installment plans are resold at discounted prices to generate cash for debt repayment.
In parallel, aggressive advertising of so-called “quick money” products on social media encourages consumers to treat loans as an easy source of spending rather than a long-term obligation. This behavior further amplifies default risks.
Financial literacy remains a constraint
Low financial literacy is another systemic factor. Many borrowers underestimate the cumulative impact of multiple loans, fail to plan for long-term repayment, and overestimate their future earning capacity.
As a result, debt burdens become unsustainable, contributing to the steady rise in non-performing loans.
Policy implications
While Azerbaijan’s NPL ratio remains relatively low, continued growth could strain banks’ balance sheets and limit future credit expansion. Analysts argue that stronger borrower assessment, better integration of non-bank credit data, and broader financial literacy initiatives are essential to prevent household debt risks from escalating.
