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How Many Banks Should Operate in Georgia

Bank of Georgia and TBC Bank Aspiring for Further Enhancement of Banking Sector Oligopoly.

Last week active discussions were underway on how many commercial banks should operate on the Georgian market. On the one hand, it is ridiculous to discuss how many players should operate on this or that specific market amid market economy. However,  even the banking market seems not absolutely free, nor National Bank of Georgia seems interested in boosting competition on the mentioned market.

Under the May 3, 2017 decree of NBG President, minimum supervisory capital requirement for commercial banks rose to 50 million GEL from 12 million GEL.

Objective of the mentioned change is to restrict motivation of commercial banks with low capitalization to take extra risks and attract financially stable institutions into the system in order to promote financial stability of the banking system, the NBG says.

According to the decree, minimum supervisory capital requirement for legal entities seeking banking licenses must be at least 50 million GEL. At the same time, before issuance of the decree, the process was divided in three stages for commercial banks licensed in Georgia. Under these stages, minimum supervisory capital must be 30 million GEL as of December 31, 2017, 40 million GEL as of June 2018 and 50 million GEL as of December 31, 2018.

What factors have necessitated raising minimum supervisory capital from 12 million GEL to 50 million GEL? If commercial banks are facing financial problems, then NBG was to say about this. Statements as if this decision will promote financial stability are fairy-tales. Under this logic, we could raise the minimum requirement to 500 million GEL to make the banking sector more stable. Today 14 commercial banks of 17 ones satisfy the mentioned requirements and the remaining 3 ones have to either draw investments or merge with other major commercial banks. The one thing is clear that previously 12 million GEL was sufficient to open a commercial bank in Georgia, while under the new regulations, you will need 50 million GEL. As a result, this decision will hinder new players to enter the banking market, while there are serious signs of oligopoly and deficiency of competition on the market.

Naturally, major banks have greeted the new regulations. TBC Bank director general Vakhtang Butskhrikidze noted that, under the regulator’s requirements, the minimum supervisory capital requirement has risen to 50 million GEL from 12 million GEL. «However, 50 million GEL is not sufficient because of the market demand», he added.

«Much more investments are required to do business successfully in Georgia and this is natural requirement. Secondly, we think that there is a great number of commercial banks and in medium-term period the number of commercial banks is expected to decline again… I believe 50 million GEL investment is not sufficient to be a successful bank and be represented in one or several segments and to offer new technological products to clients. Several hundreds of millions of GEL are necessary to this end», Butskhrikidze noted and added that TBC Bank’s capital exceeds 1 billion GEL.

The quantity of commercial banks is exaggerated in the country with less than 4 million persons, he said. «Consequently, in medium-term period 7-10 commercial banks should be sufficient for the country like Georgia», Butskhrikidze said.

Bank of Georgia director general has made bolder statements and wished to see only 5-6 commercial banks in the country.

«Minimum supervisory capital requirement has risen to 50 million GEL. I think this margin will rise further in the future. I believe 5-6 commercial banks can provide sufficient competition in the country. Despite there are only two major commercial banks on the market with 65%-70% market ratio, the competition level in the country is quite high, thanks to market offers and interest rate trends over the past 5 years. Namely, interest rates have shrunk by more than 5% on average», Kakha Kiknavelidze said.

Meanwhile, heads of small commercial banks stress the necessity of growth in competition. Part of them talks about the existing oligopoly on banking market. Vladimer Gurgenidze, head of Liberty Bank supervisory board, noted that he agrees with the position that Georgia with 4 million residents does not need so many commercial banks. Gurgenidze has not commented on other details.

VTB Bank director general Archil Kontselidze explains that the country does not need more than 7-10 commercial banks. They should enjoy equal terms and be of equal size and compete with each other. Currently, only 10 commercial banks shape the market trends, in reality, he pointed out. There are expectations that commercial banks will further merge, he added.

«It will be better if medium-size banks merge and the market becomes more competitive. It will be better if the oligopoly is overcome through growing the number of commercial banks. Today we have oligopoly on the market, in practice.

Cartu Bank director general Nato Khaindrava has showed different position. She does not agree that quantity of commercial banks should decline in the country. «Who has determined how many commercial banks should exist? This is ordinary healthy competition and a great number of commercial banks is not a problem», Khaindrava noted.

NBG President Koba Gvenetadze has also commented on the mentioned issue.

«The time will show how many banks will operate in Georgia. We should not make hasty comments. There are major institutions in the banking sector, but there are also organizations and commercial banks of equal size that operate in upper and medium-size segments. This signifies there is competition on the market and interest rates are declining too», Gvenetadze said.

It is difficult to agree with the NBG President as if there is market competition in the banking sector, because the reality is different, regretfully. At the same time, NBG will further deteriorate the situation through its decisions.

It is also planned to raise the authorized capital requirement to micro finance organizations, after raising minimum supervisory capital requirement for commercial banks. Currently, the minimum authorized capital requirement  is 250 000 GEL, the package of changes calls for growing the requirement to 1-5 million GEL. As a result, several tens of MFOs out of current 84 ones will disappear  after merger or bankruptcy.

David Kikvidze, expert of banking products, says that this decision will not bring positive results, because competitive environment will be damaged and  operating capacity will be restricted. Introduction of the mentioned regulations will be a serious strike to microfinance organizations, he noted.

Raising authorized capital requirement to microfinance organizations will narrow access to money, Kikvidze said.

«The Government has killed the market of online loans, in practice. Many organizations are on the brink of bankruptcy and this factor has narrowed an access to financial resources. If regulations refer to microfinance sector, the market will be further narrowed and the access to financial resources will further shrink. Finally, we will receive regulations tailored to the banking sector», Kikvidze said.

Seemingly, officials of National Bank of Georgia do not read recommendations by international organizations completely, otherwise they would see that oligopoly reigns on the banking market and Georgian bankers talk about this openly.

The NBG decision will only strengthen the existing oligopoly. Lack of market competition harms clients, first of all, who will receive more expensive and lower-quality products, while even today the existing situation is unfavorable for clients, as they have been deprived of almost all rights and commercial banks enjoy indefinite authority. Competition restriction will further aggravate the current situation.

By Merab Janiashvili
Economic Analyst
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