A Commercial Bank is Not to Build and a Developer is Not to Lend
Last week, David Chichinadze, an independent member of the Parliament of Georgia, expressed an interest in the mechanisms that the National Bank of Georgia (NBG) applies to control internal installment loan schemes of development companies.
He asked several questions of NBG President Koba Gvenetadze, who was introducing an annual report to the Parliament last week.
“It is nonsense to provide internal installment loan schemes with 8-, 10-, 12- year maturity. This is not an installment loan scheme. Any project is finished in 2-3 years. In this case, we should know where this or that company owns financial resources when providing 10- and 12-year installment loan schemes. We should not risk the money of others’, because the example of Center Point may be repeated”, Chichinadze said.
The Caucasus Business Week (CBW) has inquired about the current situation in companies after NBG issued a restriction of mortgage loans, and whether development companies agree with the MP’s considerations.
Tornike Abuladze, director of the Georgian Developers Association, explains that regulations on mortgage loans automatically damage development business. Everybody understands the nature of excessive debts, but it is incorrect to apply strict regulations equally to all companies, Abuladze said.
The ratio of bad loans in the development business accounts for 0.98%. This means that a person taking a 40,000 USD is presumed to be more responsible compared to a person buying a new cellular phone. The regulator has applied the same mechanism to every company, and this is an incorrect decision which should be revised, Abuladze said.
“This decision should definitely be revised in relation to our sector, because the issuance of mortgage loans and sales declined by 40% on average. Commercial banks also prove this”, as noted by Abuladze.
I have for many years struggled against non-core assets. TI has always assured that commercial banks are not to enter the development business and possess non-core assets and inversely, today’s development companies should not apply a long-term installment loan schemes, because this is a different kind of risk management with different threats that require other financial guarantees, Abuladze said.
“Everybody should do its business. A baker should bake bread. A developer should build and commercial banks should issue installment loans, and not the reverse. Commercial banks should not build and developers should not lend”, Abuladze said.
Bezhan Tsakadze, founder of the G&G Group development company, talks about internal installment loan schemes of development companies and the NBG’s control mechanisms on them.
Our company applies internal installment loan schemes on an unimportant scales, because wealthy clients do not borrow money from commercial banks. Anyway, an internal installment loan scheme is an important component for development companies, and the NBG cannot and should not control this component, Bezhan Tsakadze said.
“Two independent bodies conclude an agreement and the NBG should not intervene in this process”, Tsakadze said.
As for mechanisms for the protection of clients in the case of loan payment failure, Tsakadze explained that agreements scrupulously describe all mechanisms in details. For example, a certain part of the paid sum goes to the company, and the remaining part is refunded to the client after the sale of an apartment, Tsakadze noted.
“Internal installment loans were issued previously, too, but now long-term schemes will be applied, but the principle remains the same. We used to deduct 10% of the paid sum and refunded the remaining part in the case of loan payment failure after the sale of an apartment. It is not the business of either the government or NBG. Only two parties conclude similar agreements”, Tsakadze pointed out.
If the NBG restricts 8-12-year installment loan schemes, this will be an intervention in private business, he added.
“When client could not take loans from commercial banks, this function was assumed by development companies. They have to apply this mechanism to receive revenues, and mobilize a certain amount of finance”, Tsakadze said.
As for the sources and origins of these financial resources when issuing 10-12 year installment loans, and the expected risks, Tsakadze said that similar risks genuinely exist, and companies had to take similar risks, because there was no other solution. Financial guarantees will reduce similar risks. Consequently, if companies obtain these bank guarantees or mobilize their own financial resources, then Center Point will not be repeated, and similar risks will not be present. Otherwise, we may see several cases like Center Point, he explained.
“Today, any company is able to enter the market without any starting capital, which have not finished even one tenth of the project. Similar companies begin operations hoping to sell apartments and finish the project. That’s why we have so many unfinished projects. We should adopt a financial regulations component, and this means that companies should submit a letter for this kind of guarantee, or a financial guarantee when obtaining a construction license. Otherwise, this issue cannot be resolved”, Tsakadze said.
It is not a reasonable position that companies focusing on development should be deprived of the right to apply internal installment loan schemes after regulations are imposed with regards to taking loans from commercial banks. Similarly, legislation may lead many development companies towards bankruptcy, Tsakadze noted.
Development companies have problems with the payment of loans, he added.
“The ratio of bad loans was only 0.8%. They know very well that developers have no similar problems. If they ban internal installment loan schemes for developers, the number of unfinished construction projects will increase”, Tsakadze said.