Azerbaijan's financial markets regulator has given banks in the country a one-month ultimatum to devise strategies to address what it describes as chronic violations of prudential norms, Bloomberg reported on August 18 citing a letter that the regulator sent to banks on August 15.

Together with construction, Azerbaijan's banking sector is the area of the economy that has been most affected by the country's economic recession and monetary instability. Questionable lending practices, coupled with an increase in the minimum capital requirement that has been enforced since January and a high dollarisation of loans and deposits have led to an increase in bad assets and have eroded lenders' capitalisation.

In the letter, which Bloomberg claims to have seen, the newly founded Financial Markets Supervisory Body demanded that banks submit plans to address violations by September 15, threatening zero tolerance in monitoring the implementation of said plans. The authorities established the regulator in February as part of efforts to improve supervision of the sector. A dozen of banks saw their licences revoked this year. 

Non-performing loans (NPLs) stood at 8.4% at the end of June according to the central bank, but observers like ratings agency Fitch believe the rate to be in the double digits and closer to 20%.

The Azerbaijani manat lost half of its value in two major depreciations in 2015, after the central bank used up 70% or $11bn of its reserves on futile attempts to bolster the currency. In recent months, the manat lost 6% of its value between May and July, prompting the central bank to raise rates by 200 basis points to 9.5% on August 8 to stave off its depreciation.