The International Bank of Azerbaijan (IBA), the country's biggest lender, failed to make a scheduled payment on a $100mn loan to Rubrika Finance Company on May 10, the bank said in a press release.

The failure to meet the payment deadline comes amidst a decision to restructure IBA's debt and swap its junior and senior foreign currency obligations for sovereign ones, the statement added. As a result, the bank has suspended all foreign debt payments with the exception of trade finance facilities.

"Although the suspension of principal and interest payments is regrettable, IBA considers it a necessary step to ensure a successful outcome of the restructuring process which is in the best interests of all its stakeholders," the lender said in the statement.

Accounting for a third of banking assets in the country, IBA used to be majority government owned (51%), but was taken over entirely by the state in March 2015 after a steep depreciation of the national currency pushed it to the brink of default. Since then, Baku has purchased up to AZN10bn (€5.5bn) worth of non-performing loans from IBA and injected AZN600mn of capital into the bank.

Prior to February 2015, the Azerbaijani manat had been pegged to the dollar, and many domestic lenders borrowed externally in foreign currencies and lent domestically in manats. However, the depreciation of the manat sent the rate of non-performing loans (NPLs) as a percentage of total banking sector lending up to 21%, Fitch Ratings said in April.

Other banks operated using IBA's faulty lending model, but not to the same degree. In addition to currency woes, IBA also gave out loans to politically connected individuals that did not repay them.

The fall of IBA in 2015 took down several high-profile business owners in Baku, including Jihangir Hajiyev, the bank's then promising young chairman, who has been behind bars ever since and is being tried; Ibrahim Nehramli, a quixotic tycoon who has been trying to build an ecosystem of glitzy islands and a one-km-high tower off the shores of Baku; Nizami Piriyev, owner of the largest methanol plant in the country, Azmeco, and reportedly a friend of former British prime minister Tony Blair; Rashad Mammadov, co-founder of trading company Azimport and head of the State Flag Square Complex, a large plaza on Baku's seaside promenade; Mehdi Aliyev, director of construction company Azerinshaat; Murad Jabbarli, former head of the northern region of Sheki; as well as some IBA managers, such as Ilgar Abdullayev, director of the bank's central branch, Kanan Orujov, director general of its transport business, Adil Huseynov, director of IBA's Dubai branch, and Ibrahim Huseynov, director of administrative buildings.

Many of these executives lost either their freedom, their businesses - Azmeco was taken over by state-owned oil company Socar, for instance - or both.

Baku did not handle the cleaning up of IBA's debt in a transparent manner; it originally said it would purchase some AZN3bn worth of NPLs from the lender in order to rehabilitate it. However, in November, Fitch Ratings changed its viability rating to 'f' to signal the fact that the bank had failed, after discovering that the Azerbaijani state had absorbed three times the amount of bad loans it had originally indicated.

Despite announcing a surprise profit in the first quarter of 2017, IBA is still grappling with a AZN1.9bn loss incurred in 2016 due to a negative net interest margin, foreign exchange losses due to the continued devaluation of the manat against major trading currencies, and an increase in provisioning against both its retail and corporate loan portfolios.

The bank is to unveil its voluntary debt restructuring plan on May 23 in London; it has employed the services of consultancies White & Case and Lazard in order to work through its problems.

Khalid Ahadov, chairman of the board, said that "IBA is in a difficult financial position, as our financial results for 2016 will show". Both Samir Sharifov, Azerbaijan's finance minister, and Rufat Aslanli, chairman of the financial markets regulatory body, expressed concern over the shape the bank is in.

Sharifov said in a press release: "The ministry of finance has noted with concern the deteriorating financial and capital position of International Bank of Azerbaijan. Re-establishing the financial viability of IBA is critical so that the bank can continue to provide important banking services to the Azerbaijan economy. The steps that are currently being taken by the bank are essential for achieving financial stability, and are being undertaken with the full support of the ministry of finance."

He added: "The ministry of finance hopes and expects that holders of IBA’s foreign currency obligations will agree to support the proposed restructuring plan so as to facilitate the provision of additional support to IBA from the government.  In the meantime, the ministry of finance notes with approval that depositors in IBA will not be impacted by the proposed restructuring, and that the bank’s normal services and operations will continue to be conducted."

Fitch Ratings warned in January that IBA was likely to require further state support. However, thanks to the small size of the banking sector - the assets of which are around 50% of GDP - and Azerbaijan's sovereign savings in wealth fund Sofaz, the country can support the bank, if necessary, the agency said.