Tashkent, Uzbekistan (UzDaily.com) -- Retail lending in Uzbekistan demonstrated rapid growth, increasing by 171% from 2021 to 2023. This surge was driven by high demand for consumer loans and car loans.

Despite the rapid growth in consumer lending, which raises credit risks for banks, favorable economic conditions, good bank profitability, and regulatory measures are expected to mitigate these risks in the near term. This was reported by Moody’s review of the CIS banking sector.

Economic recovery from the coronavirus pandemic and an increase in household incomes stimulated household consumption in CIS countries, while digitalization made it easier for consumers to access credit services. Moreover, the increase in transactions in residential real estate, driven by mortgage growth, is stimulating demand for consumer loans to finance purchases of durable goods such as household appliances and furniture. These factors contribute to the growth in demand for consumer credit.

On the other hand, high interest rates on retail products and the availability of short-term financing motivate banks to increase lending to the population. Among the CIS countries, the most rapid growth in retail loans was observed in Uzbekistan and Kazakhstan, where it amounted to 171% and 134%, respectively, from 2021 to 2023.

In Uzbekistan, consumer loans and car loans increased by 410% and 264%, respectively, from 2021 to 2023. In Kazakhstan during the same period, car loans increased by 230%, while in Armenia, mortgages showed the highest growth, increasing by 123%. The rapid growth in consumer lending increases credit risks for banks, as the nominal incomes of individual borrowers lag behind the pace of growth in their debt burdens, and high inflation reduces their real income.

Moody’s assesses that retail lending risks are growing most rapidly in Uzbekistan and Kazakhstan among the CIS countries.

Unsecured consumer loans are rapidly growing in Uzbekistan, which is likely to lead to an increase in the proportion of overdue debt over the next 12-18 months. However, this will not significantly impact the overall asset quality of banks, as unsecured loans still represent a small part of their loan portfolio. Such loans accounted for only 6% of the total loan volume and 30% of the capital of Uzbekistan’s banks by the end of 2023.

Banks in Uzbekistan and Kazakhstan are also facing increasing risks from rapidly growing car loans.

In Uzbekistan, the volume of car loans grew by almost 90% last year and accounted for 9% of the total loan volume by the end of 2023, compared to 5% by the end of 2020, while in Kazakhstan, the share of car loans increased from 4% to 7% of the total portfolio over the same period.

Despite car loans being secured by the vehicle, delinquency risks for new car loans are increasing, as significant price increases for cars over the past two years and high interest rates compel buyers to take out larger loans with higher monthly payments.

As a result, the proportion of car loan payments relative to disposable income has significantly increased in Uzbekistan in recent years. The average debt-to-income ratio for car loans increased to 69% by the end of June 2023 from 56% a year earlier, according to the Central Bank of Uzbekistan (CBU). Additionally, the average Loan-to-Value (LTV) ratio for car loans in Uzbekistan exceeded 81% by the end of 2023 due to reduced down payments, also according to the CBU. This increases risks for banks in case of a decrease in car prices.

For now, the proportion of overdue payments on car loans in Uzbekistan remains very low, driven by strong demand for cars supporting prices in the secondary market.

In Kazakhstan, the average size of car loans increased by approximately 10% in 2023 and by 20% in 2022, while the proportion of overdue payments for more than 90 days in the total volume of car loans slightly increased to 6.4% by the end of 2023 from 6.2% two years ago, according to data from the First Credit Bureau.

The proportion of overdue debt on mortgages remains at a low level, but risks may increase if such loans continue to grow rapidly while housing affordability decreases.

Average housing prices in CIS countries have significantly increased in 2022-2023 due to increased demand supported by government mortgage programs, as well as demand from non-residents and citizens who relocated from Russia, as in the case of Armenia. Additionally, real estate in the CIS region is often considered a good hedge against inflation.

As a result, the gap between housing prices and household incomes has widened, reducing the affordability of residential real estate.

After significant growth in property prices in 2022-23, the risk of a market correction has also increased. For example, the Central Bank of Armenia estimates that real estate prices in the country were overvalued by 16%-22% compared to their fundamental level by the end of 2022. In this situation, the risk associated with real estate for banks has increased, and mortgages are increasingly becoming a significant part of their loan portfolio.

In Armenia, mortgage loans increased annually by an average of 30% from 2021 to 2023, comprising 21% of total loans by the end of 2023, up from 12% three years earlier. The main driver of this growth was a government program to refund income tax for interest payments on mortgage loans for purchasing real estate in the primary market.

In Kazakhstan, the share of mortgage loans in total loans increased to approximately 18% by the end of 2023 from 15% three years ago. Moody’s analysts consider mortgages in Kazakhstan as low-risk products due to the peculiarity of government programs that have driven mortgage growth in the country, where about 90% of such loans are subsidized by the government and issued at below-market rates.

In Uzbekistan, the proportion of mortgage loans in total loans reached about 12% by the end of 2023, up from 10% two years ago. Similar to Kazakhstan, a government program introduced in 2020 to provide subsidies for mortgages stimulated the growth of these loans.

Despite favorable conditions, the ratio of mortgage payments to disposable household income increased to 46% by the end of June 2023 from 36.7% a year earlier, according to the Central Bank of Uzbekistan (CBU).

High economic activity, good bank profitability, and regulatory measures will help limit risks for banks.

Despite the fact that rapid growth in retail loans increases credit risks, favorable economic conditions in CIS countries will help contain the growth of overdue loans in the next 12-18 months, while the increasing share of high-yielding retail loans will continue to support the profitability of CIS banks, which significantly improved in 2022 and remained high in 2023.

Central banks in most CIS countries have started lowering interest rates and signaled further cuts in the coming years as inflation weakens. However, interest rates on retail loans are less sensitive to changes in key rates, so Moody’s expects banks to maintain their margins at current levels in the next 12-18 months, even as yields on government securities and corporate loans gradually decline.

Timely and effective regulatory measures aimed at slowing the growth of retail loans will be crucial in mitigating risks in the long term.

Most regulators in the CIS countries have implemented such measures or are developing them, focusing on limiting borrowers’ debt burdens. Moody’s believes these measures will help limit the deterioration of credit quality in Uzbekistan and Kazakhstan, while in Azerbaijan, regulatory measures have already led to a slowdown in lending growth.

In Uzbekistan, regulators will introduce a maximum payment-to-income (PTI) ratio of 60% for all loans in July 2024 and tighten this limit to 50% from 2025 onwards. Currently, a 50% cap is only applied to microloans. Additionally, regulators have increased the risk weight for car loans with high LTV ratios, and in 2023, the CBU imposed a 25% cap on the share of car loans in total loans for each bank. These measures are likely to result in a significant slowdown in the growth of car loans in the next 12-18 months.

In Kazakhstan, the regulator introduced a maximum PTI ratio of 50% in 2014. Additionally, in 2020, they increased risk weights from 100% to 350% for loans to borrowers with high debt burdens and for loans with excessively high interest rates.
Work is also underway on new legislation to tighten requirements for consumer loans.

In Azerbaijan, in 2022, the regulator introduced a maximum PTI ratio of 70% for consumer loans and increased the risk weight for consumer loans for individuals with high debt burdens.