Fitch reveals what caused significant losses for Uzbekistani banks

According to a new report by Fitch, stronger lending regulation in Uzbekistan should mitigate overheating risks in the retail lending market and gradually improve banks’ loan book quality. Family business loans have led to large credit losses at some banks recently, the agency said.

Fitch experts believe that stricter regulatory control over retail loans introduced by Uzbek authorities is a response to rapid retail loan growth over the past several years. For instance, the country’s government has introduced maximum payment-to-income limits (60% maximum) on all retail loans; the initiative will enter into effect starting in July 2024. The rate will be 50% starting from 2025. The agency also noticed that the scale of retail lending has already shrunk.

«Family business loans, issued by selected policy banks, shrank by 15% year-on-year in the fourth quarter and 55% year-on-year in the first quarter of 2024. We view this segment as the riskiest in the sector due to weak underwriting standards and a focus on lower-income borrowers. Family business loans have recently led to large credit losses at some banks and their gradual winding-down should help reduce credit risk,» Fitch said in the survey.

The agency’s analysts believe that this rapid growth began from a low base following the start of market reforms in 2017, and was driven by pent-up consumer demand, higher household incomes and the lifting of several lending restrictions. However, Uzbekistan is still significantly underbanked, Fitch says, with retail loans equivalent to just 14% of GDP at end-2023, suggesting high growth potential.

Retail loans tend to be risky in economically volatile emerging markets such as Uzbekistan. The Central Bank of Uzbekistan’s data shows that the restrictive measures the regulator has undertaken may already be having an impact, with early signs that the retail lending market may be cooling, particularly for car loans, after almost doubling in 2023.