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New Regulations for Credit Companies

New and fairer rules will be established in Georgia’s banking and finance sector to protect consumer rights, Minister of Finance Mamuka Bakhtadze said. The reforms are to establish new qualitative standards and support sustainable, long-term economic growth.

Excessive indebtedness is a key challenge the reforms will address, as it is impossible to defeat poverty without controlling the high indebtedness levels, according to the minister of finance. Several innovations will be introduced as part of the reform:

  • Only mortgaged property will be seized in case of unpaid debts, and no other property will be seized
  • It is limited to mortgaged vehicles and real estate – registered property on behalf of pawnshops and private lenders (the usurers)
  • The top margin of an annual effective loan interest rate will be reduced to 50% from 100%
  • In case of overdue loans, fines or sanctions will imposed on borrowers and the fines will be calculated from the principal sum of the loan balance; this will not exceed 1.5 times the remaining principal sum
  • A limit is set on the amount of any expenditures determined by the loan agreement (fine, commission fees and financial expenditures) and it will constitute an annual 98.55%, instead of the present 150%. The limit will reduce these expenditures by 51.45%
  • Bodies issuing loans using mortgaged real estate (pawnshops) should ensure high levels of transparency and register all mortgaged things within a reasonable period

According to the minister of finance, those wishing to provide valuable financial mediations should be under the supervision of the National Bank of Georgia (NBG) and only after that implement these activities.

It is noteworthy that the new regulations will apply to the whole financial sector: commercial banks, microfinance organizations, pawnshops, private lenders (usurers) and any private and legal bodies who are involved in financial operations in this field.

Moreover, the reform also introduces the requirement that payment for property should be carried out only in cashless form, to avoid what the minister of finance called black commission fees.

“Today we see that citizens who suffer from excessive debt have been ejected from active economic life. Today, about 30% of the economically active population are recorded on the “black list.” This is a lost resource for economic development. Excessive debt frustrates economic growth. We already see the results – about 630,000 people cannot become valuable members of the workforce. Reduced manageable incomes lower economic activity, and savings decline. The existing crediting models create no added value to the economy, especially high-interest-rate loans, which are not guaranteed by borrowers’ incomes,” the minister of finance said.

A majority of the initiatives from the minister of finance refer to the regulation of commercial banks and finance organizations, but it is the responsibility of the National Bank of Georgia (NBG) to supervise this area. Bakhtadze has no legal right to give instructions to the central bank, but the finance minister is an active figure in criticizing commercial banks and protecting consumer rights.

In recent years, despite rising criticism against credit companies, the NBG has done nothing to disclose reasons for the existing discontent or provide for real protection of consumer rights. Our society frequently asks whether the NBG prioritizes consumer rights protection, or only lobbies commercial banks.

“I welcome the Finance Minister’s initiatives, because they direct the finance sector. These initiatives should be coming from the NBG, because the initiatives refer to the credit sector. Regretfully, the NBG shows indifference. It is difficult to cast doubt on the professionalism of Mr. Gvenetadze, but he and his team show indifference. As a result, the NBG remains an inactive regime, and the Ministry of Finance has to fulfill the duties of the NBG. Necessary steps should be taken and NBG activities require additional attention.”

“It seems the NBG does not regulate the banking sector, but several major commercial banks dictate the rules of play for the NBG. An independent Georgia has never had such a useless central bank and this is alarming.”

“Antagonistic moods are rising in the country, and this is genuinely detrimental for the country and for its weak economy. Therefore, it is necessary that the NBG activate its operation, and the Parliament of Georgia should to request this, first of all,” said Professor Lado Papava, the former Minister of Economy.

By Merab Janiashvili
Economic Analyst
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