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Consumer Loan Regulations Turned Adrift

Consumer Loan Regulations Turned Adrift

Agrowth in the consumer loans portfolio – the new challenge before the Authorities that creates problems to the economic development, aggravates social condition, stimulates the imports and consequently, undermines the national currency stability.

The consumer loans portfolio exceeds 2.3 billion GEL and this amounts grows on monthly basis. In whole, loans issued to physical bodies exceed 3.3 billion GEL. In the previous years foreign debts increased and the consumer loans growth in turnover was balancing the volume of GEL and USD, economic experts assert. Starting 2013, the Georgian government started intense payments of foreign liabilities. Therefore, maintaining the existing flow of consumer loans fuels the financial exhaustion process in the country. According to economic estimations, if consumer loans are restricted, commercial banks will have to draw business projects and invest money in real sector of the economy.

Economic expert Shota Gulbani says similar tendencies will not bring favorable results to either the state economy or the consumers. “Only commercial banks and financial institutions that issue consumer loans make a fortune. The problem is the consumer loans are mainly spent on essentials or paying off other financial liabilities, and this process make consumers sink deeper in debts. Consumers do not launch business activities through these loans, they do not make products and consequently, they do not contribute to the economic growth. This factor aggravates the heavy social situation”, Shota Gulbani said and added our citizens buy imported products through bank loans and directly stimulate maintaining imports at a high level permanently.

“Naturally, the more products are imported from abroad, the more currency will outflow from Georgia, that is, the imports-exports balance will worsen and this factor will affect the GEL rate too. I believe the Authorities should interfere in this situation and regulate the finance sector through efficient legislative regulations. In this respect I hope the recently established financial supervision agency will launch operation in the near future and this body should make focus on resolvig similar problematic issues”.

Economic expert Mikheil Dundua also confirms that an excessive volume of consumer loans in the credit structure is a real problem. A growth in refinancing loans portfolio is a genuinely problematic issue, he said. Commercial banks use the money taken from the National Bank of Georgia (NBG) for issuing consumer loans and this money does not go the real sector of the economy, Mikheil Dundua noted.

“The sum that is supplied to commercial banks in the form of a refinancing loan does not go for economic stimulation. This money is used for issuing consumer loans and this scheme further finances a purchase of imports products and finally, this tendency is reflected on the currency operations. Naturally, this factor affects the GEL exchange rate and spoils the national currency. It would be expedient that the NBG launch macro-prudent management and restrict crediting the fields that are not related to the economic development. The NBG should also fulfill the IMF recommendations”, Mikheil Dundua said and added:

“The IMF has stressed that in 2014 one third of retail loan payers were spending over a half of their incomes on serving the loans and this process was to be restricted and regulated”.

“The last year Kadagidze stressed that consumer laons were a heavy burden on the economy and our population. The National Bank insures a large-sale crediting of commercial banks through issuing refinancing loans, while the purpose of loans are not determined and no macro prudent policy has been formed. Therefore, we have the reality when money goes to purchaisng imported products, making currency operations, not to crediting the economy” – Mikheil Dundua said.

It is worth noting, according to the INterPressNews media agency, the NBG President Giorgi Kadagidze noted in 2014 that the main challenge consisted in  the growing nonbank finance sector.

“The nonbank finance sector is quickly growing. To put simply, the issue is of fast installment payment schemes, unregistered credit unions and so on. The industry of pawn-shops accounts for over 0.5 billion, various services of quick istallmet payment schemes exceed 100 million and so on. Therefore, if we take into account so huge volume along with very high-interest rate loans and ordinary bank credits, we will see that the debt burden on our population is very heavy and this factor may become a serious challenge for the whole economy” – Kadagidze noted.

The problem and unethical policy is outlined in the fact commercial banks offer new loans to this category of our citizens for covering the old loans, Kadagidze added.

“As a rule, the problem resolution is of temporary, not fundamental character. We will provide adequate reaction to similar cases. At the same time, there is another factor and I would like to ask the consumers and warn and urge them to read not only agreements very well, but show maximum caution in using such products as installment payment schemes, credit cards, payment of loans”, Kadagidze noted.

The reality is following: the problem Kadagidze has emphasized is deepening, but the NBG has not provided adequate reaction to it. The Finance Ministry also proves the relevance of the problem, but nor the government has taken any steps in this direction. Hence, the finance sector seems to be turned adrift.

Bank Sector’s Opinion

Otar Nadaraia NBG Vice President

„The choice of a distinct person, in this case, a consumer, makes sense. If the consumers decide to buy a product through an installment payment scheme and to pay later, they should have such an opportunity. At the same time, the crediting market’s current conditions should be also taken into account. Activity has declined, while liquidity is high. Consequently, commercial banks issue credits for business projects without problems. The bank sector  is able to fully satisfy the demand of both private and corporate clients. Adequately to the demand, commercial banks issue credits for a purchase of furniture and enterprising equipment without sectoral restrictions”.

Asmus Rotne ProCredit Bank director general

“There are a few sectors in Georgia that produce export products (wine, mineral waters, filbert) and commercial banks actively finance these products. The country has real potential and this list should increase, but only commercial banks show such a desire and the reality is different. Loan products are issued due to the demand, including consumer loans. Borrowers’ risks are maximally insured in the loan-issuing process, in line with supervisory norms. The supervision mechanism satisfies the highest standards in Georgia and the country demonstrates special practice and experience in the Region in this respect”.

David Tsaava Basisbank director general

“I see no problem in crediting physical bodies. The bank makes focus on consumers. Hence, the supply is adequate to the demand. If the client needs an installment payment scheme, the bank offers a corresponding bank product. At the same time, I would not say the only consumer loans are in demand. The business crediting also grows, including the micro loans portfolio. The growing demand is reported in all segments with various correlations due to sectors”.

Shota Chkoidze Halyk Bank deputy director general

“Retail lending plays an important role in the development of economy of the country, whilst the care must be taken to ensure the appropriate lending standards are employed and borrowers’ solvency taken into account in a way borrowers being able to face their financial commitments. It is obvious that proper retail lending has not to be limited as in turn it develops business sector further. Mortgage and consumer loans in Halyk Bank Georgia are granted using balanced conservative approaches, thus making the portfolio of the bank the one of high quality.”