Abstract

This article examines the impact of commercial bank deposit growth on the expansion of loans in Armenia from 2022 to 2024, assessing the potential risks associated with this trend. The surge in deposits—driven by Russo-Ukrainian conflict migrants, Nagorno-Karabakh displaced ethnic Armenians, and geopolitical, financial shifts—has enabled banks to increase lending, especially in construction and agriculture, while exposing them to foreign exchange risks and potential liquidity challenges.

This study analyzes how the rapid growth in deposits has influenced loan expansion, the sectors most affected, and the potential vulnerabilities in Armenia's banking system. At Nexus Intellect Research, we have evaluated the sustainability of lending practices, the risks of currency mismatches, and the broader economic implications of Armenia's dependence on foreign capital inflows. By modeling both a realistic and pessimistic (worst-case) scenario for 2025–2027, we highlight possible financial and banking crises if external shocks, such as a collapse of the Russian financial system, lead to capital outflows and increased non-performing loans. The analysis underscores the necessity of Government intervention to mitigate systemic risks and ensure financial stability.

Background. The tremendous growth in deposits placed at the commercial banks of Armenia by both residents and non-residents that started from 2022 onwards by the moving of Russians and other migrants to Armenia contributed to the acceleration of the economic growth, thus causing an increase in the household income, and coupled by the moving of ethnic Armenians from Nagorno Karabakh (forcefully displaced people). The Western sanctions imposed on the Moscow Exchange and the fear of losing savings caused a capital inflow in Armenia that was placed into deposit accounts at the commercial banks of Armenia in 2024 (from September onwards). Mainly, the increase in deposits drove the growth of loans extended by the commercial banks, namely from 2023 to 2024, since loans extended to the banks by international organizations (financial) declined from 2020 to 2024, which allowed the banks to extend more loans to Armenian households and businesses (majorly foreign currency-denominated loans) starting from 2022, thus boosting domestic demand growth. However, this didn’t cause a serious decline in loan interest rates extended to residents. This means that Armenian commercial banks became vulnerable to exposure to foreign exchange risk and currency mismatch. In turn, the growth of loans (extended to construction and agriculture) was fueled by the policies adopted by the Government to boost construction and agriculture, which led to a massive increase in the mortgage loans extended to Armenian households and agricultural loans. We expect that in the short-run and medium-term, Armenia could be hit by a financial crisis, and under the worst-case scenario (if a GDP decline amounts to 15-20% and even above), it could cause a banking crisis.

Growth of Deposits of the Commercial Banks and their Impact. The deposits of commercial banks were growing at a compound annual growth rate (CAGR)^[1] of 10.3% from December 2020 (end of period) to December 2024, reaching 6.46 trillion Armenian drams at the end of December (16.30 billion USD), compared to 3.71 trillion Armenian drams. The growth was driven by a substantial increase in deposits attracted by the banks from residents (CAGR: 12.1%)^[2]. At the end of 2024, residents deposits accounted for about 76.9% of all deposits, at commercial banks amounting to 4.97 trillion drams (12.53 billion US dollars). The increase in the deposits of the residents was explained by the economic growth the Armenian economy experienced from 2021 to 2024 (CAGR: 8.9%), the fleeing of the forcefully displaced ethnic Armenians from Nagorno Karabakh in 2023, who placed their money into deposit accounts at the commercial banks of Armenia in 2023. 

The immigration of Russians to Armenia and other migrant workers in 2022 caused an increase in deposits of non-residents by 548.84 billion Armenian drams in 2022 compared to 2021, reaching 1.43 trillion Armenian drams. The emigration of Russians to other countries caused a decline in deposits placed by non-residents in 2023 (by 71.60 billion Armenian drams). As was discussed in one of our previous articles, our team expected that the Western sanctions imposed on the Moscow Exchange (which became effective on 12 June 2024), coupled with the possible fear of losing savings, could cause an inflow of capital, translating into an increase in the deposits by the non-residents placed at the commercial banks of Armenia. Hence, as was predicted, the deposits placed at the banks of Armenia by non-residents increased by 136.60 billion Armenian drams, reaching 1.49 trillion drams (3.77 billion US dollars). Moreover, non-residents’ major inflow of capital in 2024 was reported during the last quarter of 2024. That means that non-residents, mainly Russian citizens, viewed Armenia as a safety cushion for their savings. If Russian citizens decide to transfer their capital into Armenia, under the worst-case scenario, they could be exposed to so-called “bank run” risk (but not in the classical sense over the fear about the bank's solvency). At the end of December 2024, about 18.6% of the deposits were foreign exchange-denominated deposits (3.03 billion US dollars) attracted from non-residents. 

As long as the banks managed to attract more and more deposits, they could have applied rather loose requirements while considering loan applications, meanwhile compensating the possible risks by charging rather higher interest, which did not change seriously or even declined dramatically in the case of loans extended to the non-financial organizations. In December 2024, the commercial banks were extending national currency-denominated loans to households by charging an interest rate of 16.7% on average (the maximum interest rate: 20.0%), while in the case of non-financial organizations, the average interest rate comprised 13.1% (the maximum interest rate: 17.7%) concerning loans ranging from 12 to 60 months. Just for comparison, in December 2023, these interest rates comprised 17.4% (the maximum interest rate: 20.3%) and 12.5% (the maximum interest rate: 17.2%) accordingly.

The banks could continue the same strategy in the short and medium term. However, the Armenian banks could be exposed to the “bank rank” when the Russian citizens simultaneously (within a rather short period) decide that it could be safe to transfer their savings back to Russia (upon the possible ceasefire with Ukraine and lifting the imposed Western sanctions) over the short-run and medium term, and could cause a classical bank run when many Armenian residents (bank clients) decide to withdraw their money from a bank because of their perception on insolvency concerns that the bank could fail under the worst case scenario.

At the end of December 2024, 46.3% of the deposits attracted by Armenian commercial banks (including non-residents) were foreign currency-denominated deposits. This means that Armenian banks could be exposed to foreign exchange risks and possibly currency mismatch if they had been extending national currency-denominated loans.        

Growth of Loans Extended by the Commercial Banks and Expected Consequences. The increase in commercial loans extended by the commercial banks was explained by the rise in deposits attracted by banks (as discussed above) from 2023 to 2024, while the loans that banks received mainly from international institutions (financial) such as EBRD, etc., declined. Compared to December 2020, both short- and long-term loans obtained by the commercial banks declined by 122.60 million US dollars and 474.77 million US dollars, respectively (comprising 118.97 million and 912.91 million US dollars accordingly at the end of 2024). 

The loans extended by the Commercial banks of Armenia to both residents and non-residents were growing at a CAGR of 6.8% from December 2020 (end of period) to December 2024, reaching 6.64 trillion US dollars at the end of December (16.13 billion US dollars), compared to 4.18 trillion Armenian drams. The growth of loans was driven by a substantial increase in loans extended to households (CAGR: 12.4%), while the loans extended to the private sector were growing slower (CAGR: 3.5%). At the end of 2024, the loans extended (in terms of the amount) to households comprised about 48.8% (in December 2020: 39.7%) of the total loans of the commercial banks (including loans to non-residents), while the loans to the private sector accounted for 41.7% of all loans (in December 2020: 47.3%) (see Figure 1). The loans extended to households amounted to 3.12 trillion Armenian drams at the end of 2024 (7.87 billion US dollars), compared to 1.66 trillion Armenian drams, while the loans to the private sector comprised 2.67 trillion Armenian drams or 2.67 billion US dollars (19.8 trillion drams at the end of 2020). The growth of loans accelerated starting from 2023, and compared to December 2022, the loans extended to the private sector, and households increased by 0.88 and 1.10 trillion Armenian drams, respectively. 

Figure 1. Distribution of loans extended by the commercial banks by sector at the end of 2024 (million Armenian Drams)

Although only 31.6% of the loan amount was extended to residents in the foreign exchange, the amount of foreign exchange loans extended to the private sector of Armenia accounted for 60.4% of the total amount of loans extended to private companies of Armenia. This means that the private sector is vulnerable to foreign exchange. Hence, if a currency crisis is reported in Armenia in the period 2025-2026, it could affect the banking sector of Armenia owing to the difficulties associated with servicing foreign currency-denominated loans by companies that would result in layoffs. Therefore, under the worst-case scenario, it could cause a banking crisis (twin crisis).

The major growth in lending was reported for loans extended to agriculture and construction, although the share of lending to these industries didn’t exceed 17% at the end of 2024 (see Figure 2). From December 2023 to December 2024, loans extended to agriculture increased at a compound annual growth rate of 10.9%; meanwhile, the CAGR for construction amounted to 20.2%. 

Figure 2. Commercial banks' total loans to residents by fields at the end of 2024 (billion Armenian Drams), excluding loans from financial institutions.

Lending to Agriculture and Possible Risks: The increase in lending to agriculture was explained by the Government support programs aimed at switching to smart and green practices by covering the interest paid and compensating the costs incurred while constructing greenhouses, planting orchards, etc. It is expected that these programs will start seriously increasing the output of agriculture in the medium term, positively contributing to GDP growth. However, two factors affecting the capacity of farms and agricultural companies to repay loans are the foreign exchange rate of the Armenian dram vs. the Russian ruble and the expected economic decline in Russia in the second half of 2025. Since the domestic market is relatively small, and if the farmers and agricultural companies fail to find other export markets, they will have difficulties repaying the principal amount of the loan. Hence, this could cause an increase in non-performing agricultural loans over the medium term.

Lending to the Construction and Households (mortgage loan borrowers) and Risks. The growth in lending extended to construction companies and households as mortgage loans were initially explained by the Government initiative to boost the construction industry that started in 2015. The Government introduced a personal income tax (PIT) return scheme by returning the PIT paid by the employee in the amount of mortgage loan interest paid every quarter when purchasing an apartment in a newly built residential building^[3]. This scheme boosted the purchase of new apartments in newly constructed buildings, thus driving the growth of the mortgage loans extended to Armenian households at a CAGR of 25.9% from December 2020 to December 2024. 

This growth was substantiated by the fact that they decided to gradually phase out this program from July 2022 and eliminate it in the capital city (Yerevan) at the end of 2024, while the residents could be considered the beneficiaries of the scheme in other provinces of Armenia up to the end of 2028 ending mainly in the bordering locations^[4]. The decision of the construction companies to start building new residential districts and/or buildings, namely in the period 2022-2023, was driven by the perception that the influx of Russian migrants from the Russian-Ukrainian war would cause an even larger influx in the coming years. The availability of new apartments for rent would trigger those who could afford a new apartment to buy one more and make it available for rent, especially in the capital^[5]. The construction companies could face difficulties if they fail to sell their apartments, which means they could face problems in servicing the loans. Hence, an increase in the non-performing construction loans could be reported over the medium term. 

The mortgage loans extended to households would not grow much over the medium term. However, servicing the principal amounts would depend on how severely the economy could be hit by the possible financial crisis transmitted to Armenia from Russia in the second half of 2025. Although the government PIT return would continue over the medium term, the major guarantee is that the beneficiary has a job. If the crisis that Armenia could face in the medium term causes substantial layoffs, causing an increase in the unemployment rate among the PIT return scheme beneficiaries, it could cause an increase in nonperforming mortgage loans.    

Lending to the Trade Sector and Households (consumer loan borrowers) and Risks: Both lending to the Trade Industry and Consumer Loans reported a compound annual growth of 15.9% and 64.2% from December 2022 to December 2024. Since the growth of lending to the trade industry was fueled by the increase in the final consumption expenditure of households, it was explained by the rise in consumer loan lending. Hence, the expected worsening economic situation in Armenia could put additional pressure on the ability of households to service the consumer loans (both principal and interest rates) by reducing the final consumption expenditure, which would negatively affect the trade industry and cause difficulties in servicing the loans. This could cause an increase in nonperforming loans extended to the trade industry and households (concerning consumer loans).

The efforts of the Government to support those whose loans were classified as nonperforming loans: The Government approved the measure and procedure for stimulating the economic activity of people with bad credit. Accordingly, it is planned to direct the income tax calculated from the salary of people with bad credits classified as bad for at least 3 years to repay the loan. Still, the total principal amounts of the citizen's loans should not exceed 1 million AMD^[6]. It is proposed to provide the beneficiary with financial assistance in the amount of the income tax calculated from the salary and payments equal to it formed as a result of the formal employment to be acquired by the beneficiary, which will be directed to repay the beneficiary's bad credit obligation, provide financial assistance for a maximum period of 24 months, starting from the 1st of the month following the date of becoming a beneficiary, and set the amount withheld from the salary at 20% for 24 months in the event of being recognized a beneficiary^[7]. According to information provided by the Central Bank, as of October 1, 2024, the number of individual borrowers with bad credit is about 341 thousand, and their credit burden is about 642 billion AMD^[8]. As of April 2023, this burden amounted to 525 billion AMD. Sixty-five percent of the beneficiary group is between the ages of 26-50; that is, they are in the most active period of work capacity. It is expected that during the application period for becoming a beneficiary within the framework of the event, until January 31, 2026, about 60 percent of the target group, or 131 thousand people, will become beneficiaries of the program and begin to repay their loan obligations. 

State Support in the Agricultural Sector. The 2023 Annual Report of the Ministry of Economy of the Republic of Armenia outlines the Government's strategic vision and the current state of the agricultural sector, emphasizing various support programs and initiatives implemented throughout the year^[9]. Over ten state support programs are active in the agricultural sector (Agricultural Insurance System Implementation, Support Programs for Agricultural Machinery Leasing, Subsidizing Interest Rates for Agricultural Loans, Promotion of Intensive Horticulture, Development of Greenhouse Facilities, Enhancing Veterinary Services).

These programs focus on increasing capital investments, expanding production capacities, introducing modern technologies, and stabilizing farmers' incomes. Between 2018 and 2023, new large-scale investment programs were launched, and existing programs were modified to address evolving economic conditions, external challenges, improvements in the insurance system, and climate change adaptation and mitigation policies. In 2023, investments under these state support programs amounted to approximately 93.3 billion AMD, with capital investments alone accounting for around 72.0 billion AMD.

Possible Scenarios to Expect in the Period 2025-2027

We expect two scenarios: realistic and worst-case. Under both scenarios, we expect a financial crisis in Russia that could hit the Armenian economy. Under both scenarios, we expect a currency crisis, and its aftermath would be less severe for the economy than under the worst-case scenario (GDP decline could reach 15-20% and even higher). Under both scenarios, we expect that the number of non-performing loans will start increasing; however, in the realistic scenario, the growth will be slower than in the worst-case scenario. The banks could face liquidity risk since the deteriorating economic situation would force the households to withdraw their money from their deposit accounts. The banks would make the requirements more rigid when making decisions on loan applications regarding collateral. Hence, the Government's rescue package would be crucial, as it would attempt to rescue banks through bailouts and even attempt to receive loans from international financial institutions and the Governments of Western countries. Under the realistic scenario, we do not expect a banking crisis. Under the worst-case scenario, we expect a banking crisis if the Government fails to design a rescue package to provide the required money.

Authors: Anna Makaryan, Ph.D., ORCID: 0000-0003-0505-7869.

Hamlet Mkrtchyan, Ph.D., ORCID: 0009-0002-8588-2921. 

Verej Isanians, Ph.D., ORCID: 0009-0008-1145-9251.

Nexus Intellect Research NGO. 

[1] Source: Armstat. Consumer Price Index (end of period) adjusted real growth rate. December 2020=100. Link. 

[2] Source: Central Bank of Armenia (CBA). Authors’ calculations. If not stated otherwise, the CBA is the source of all data (online databases, various publications). Link.

[3] Decision of the Government of Armenia N 205-N dated February 19, 2015. (in Armenian). Link. 

[4] Tax Code of Armenia, Article 160, (in Armenian). Link.

[5] Expert opinion at the Discussion TV program. Link.

[6] The Government approved the measure and procedure for promoting the economic activity of individuals with bad credit history. Prime Minister of the Republic of Armenia. Link.

[7] Decision of the Government of Armenia N 1990-N dated December 12, 2024. (in Armenian). Link. 

[8] The Government approved the measure and procedure for promoting the economic activity of individuals with bad credit history. Prime Minister of the Republic of Armenia. Link.

[9] Ministry of Economy of the Republic of Armenia. (2023). Annual report 2023. (in Armenian). Link.