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Online Lenders Grossly Violate the Rights of Consumers

An interview with Deputy Minister of Finance Nikoloz Gagua 

What regulations were imposed on online lending? What is the maximum interest rate, maximum amount of fines for non-payment of debt? On what basis was the interest calculated?

The regulations limit the effective interest rate at no more than 150% per year. This item has been necessary to protect the rights of consumers. Existed to date model of online lending has been inefficient in terms of the economy and did not create added value.

At the same time, in terms of this model were the rights of consumers were grossly violated.

What will  the introduction of new regulations change? What was the situation on the market without regulations, and what it will be after their enactment?

The adoption of regulations  is a big step forward in protecting the rights of our citizens while  obtaining  financial services. Debt service for online credit was very difficult due to extremely high interest rates, because due to lack of sufficient financial awareness, to control their own money proved to be difficult for  ordinary citizens.

As a result, borrowers faced  serious problems, they accumulated excessive debts which they were unable to pay.

We have  very serious statistics that show that apart from high interest rates, the borrowers have to pay  very high penalties for late payments on loans. Quick and short-term loans very quickly turn into  long term and  the  state had a duty to respond to this.

We’ ve studied the experience of other countries. World practice shows that there are many different kinds of restrictions on online loans. Basically it is a maximum limit of the interest rate. In some countries, limits are set for  days,  in other – months, and sometimes as we now have, at the annual interest rate.

Restrictions are enacted in the countries such as Canada, USA, Australia, in almost all EU countries. On this basis, we believe that by introducing all sorts of restrictions on interest, penalties and financial sanctions, we give borrowers the opportunity to cover the loans on time, that  will ultimately benefit the  creditors as well.

On the other hand, the rights of borrowers will be  more protected as they will definitely and without any ambiguity know the maximum amount they would have to pay both on the interest rate and financial sanctions.

Does the government have information about how many online loans were issued, how many  companies were engaged in this business and at what interest rate they  issued loans?

We  have not statistics and , respectively, we cannot say exactly how many citizens use an online lending service, and what is the turnover of this sector. The only attempt to account was taken by the National Bank, but their data is imprecise and only partially reflect the situation on the online market. After the online lending falls under the regulation of the National Bank, the situation will be  more or less clear.

As for the incomplete data, in 2016 the portfolio of online loans amounted to GEL 220 million, the number of active users – 600 000. The average online credit is GEL 300. It should also be noted that these data are  based  on information obtained from companies.

The average monthly interest rate on the loan is 34-60%, the penalties are 1% of the loan amount for each day of delay. In the end, the amount that borrowers pay is several times more than the taken loan.

How will government  regulations affect  the  online companies? How realistic is the assumption that they will force  many companies to leave the market?

It is possible that due to the regulations,  many companies will have to reconsider their activities. We assume that most of them will be transformed into microfinance institutions. Their business model in any case will be a little more focused on the real economy.

Their activities will be regulated by  the National Bank – it will concern issues such as the issuance or revocation of registration, study of risks, minimum capital, liquidity, verification, limitations in the amount of penalties, etc.