What to expect from new regulations?
The president of the National Bank of Georgia (NBG) has passed a decree to add changes to the Provision on the Concentration of Credits at Commercial Banks and Big Risks. The changes aim to protect consumer rights and bolster healthy credit portfolios at commercial banks. The changes restrict issuing loans without meaningful analysis of consumers’ solvency. The total amount of these loans must not exceed 25% of the supervisory capital of commercial banks.
Over the past years debts of individual household have been growing at high rates. Additionally, the practice of crediting physical bodies with higher loan liabilities also grows. Financial institutions change the business model for issuing retail loans and they pay less attention to the source of income, but emphasize other characteristics to ensure risks management. As a result, high risks are reflected in the price, however, the high prices do not decrease the demand from vulnerable groups. This factor diminishes the volume of responsible crediting. At the same time, research has shown that a majority of borrowers do not receive income from employment or any other sources. Many clients have overdue loans. This category, as a rule, has restricted access to bank accounts. Being afraid of legal enforcement measures, they lose motivation to become employed, and this is real problem for the whole economy. At the same time, the social conditions for this part of the population worsens.
“Starting May 7, 2018, commercial banks will be restricted in issuing loans exceeding 25% of supervisory capital without analysis of clients’ solvency. This restriction does not apply to loans guaranteed by precious stones or metals or real estate. The total amount of loans guaranteed by real estate must not exceed 15% of the bank’s supervisory capital without analysis of the client’s solvency, while the loan to value ratio must not exceed 50% when issuing a loan,” the NBG statement reads.
Minister of Finance Mamuka Bakhtadze thinks that excessive indebtedness is a serious problem in Georgia. According to him, this is an unacceptable situation and should be improved through regulations.
“This problem arose after our citizens were enabled to take loans without proof of income. This became a certain form of fashion, then it grew into a trend, and finally, we have created a serious problem of excessive indebtedness, as major groups of our citizens have to spend a majority of their incomes on paying loan liabilities,” Bakhtadze said.
It is necessary to introduce a document indicating what percent of manageable revenues may be directed to guaranteeing a credit, he said.
“I will be very scrupulous, we have specific questions, including sharp questions. We are conducting consultations to answer these questions and take due steps to resolve this problem as soon as possible.”
“We have to reduce excessive amount of debts and prevent this problem from arising again,” Bakhtadze said.
It should be noted that the new regulations do not entirely ban issuing loans without proof of income. Commercial banks will be still able to direct 25% of supervisory capital to these loans. The banking sector’s supervisory capital is about 2.5 billion GEL, so therefore commercial banks are authorized to issue 1.3 billion GEL in loans without proof of income.
At this point, Georgian commercial banks have issued 22 billion GEL in loans, including 3.5 billion GEL in short-term and 17.9 billion GEL in long-term loans. Commercial banks issue predominantly short-term loans without analysis of solvency, and this is the most expensive kind of loan.
Consequently, the 25% gap will enable commercial banks to issue short-term credits with high interest rates without proof of income. According to current estimates, commercial banks will be able to issue about 37% of short-term credits by ignoring the proposed regulations. Consequently, these changes will not have an important influence on the banking system. These regulations were published on April 18, while and will begin on May 7.
NBG would not have given such a short period to commercial banks for harmonization with new regulations. This signifies commercial banks have already satisfied the new supervisory regulations and consequently, new regulations will not create problems for them.
It is excellent when the central bank analyzes the existing situation in the lending field, however, regulations should be efficient and oriented on results, not oriented towards only the appearance of consumer protections.
NBG carries out an unclear policy. If NBG believes that it is a bad practice to issue loans to insolvent citizens, then why does it leave a 25% gap in supervisory capital? These very inefficient reforms cannot respond to the current challenges in the society, and the Minister of Finance has to talk about the banking sector, while the NBG remains in the role of an observer.
NBG reforms over the past years aimed at improving existing problems in the banking system turned out inefficient, because a majority of them were superficial and were not oriented towards problem resolution.
As a result, the current problems between the banking sector and its clients have sharpened. Today, several persons and groups discuss these challenges, but in a few years all political forces will speak about this problem if the existing challenges are not resolved.