Outcomes of Banking Regulations – Number of Pawnshops Declines by 400%
“As a result of banking regulations, the number of pawnshops has declined to 137 from 600. Interest rates have also risen”, financier Irakli Berdzenadze said regarding new regulations that the National Bank of Georgia (NBG) introduced 4 months ago.
As a result of new regulations, the majority of pawnshops were on the brink of financial default, and their numbers declined. According to Berdzenadze, the requirements imposed on pawnshops for registration as crediting bodies were so complicated that everybody knew that these regulations would result in the disappearance of a lot of entities, he said.
“On the one hand, the company could not satisfy the requirements which, regretfully, were identical for small, medium and major business companies. On the other hand, the majority of pawnshops could attract crediting resources through commercial banks, and it should be noted that GEL resources were quite expensive. In the case of USD resources, the risks were high, and this was a serious burden for pawnshops. Insolvency as a factor has a negative effect on pawnshops and the financial sector, in general”, Berdzenadze said.
He also explains that the requirements set by regulators for small and medium pawnshops should also be mentioned. The expenditures of pawnshops increased, and their ability to be profitable became questionable. According to Berdzenadze, a radical contraction in the number of pawnshop business companies was caused by strict regulations. As a result, pawnshop business companies have no chance, in practice, for survival, and a lot of companies were made to sell their loan portfolios under terrible conditions, he added.
“It should also be noted that pawnshop businesses did not have a negative social effect. Moreover, this sector represented an ideal mechanism for the fastest access to monetary resources. There was also a lot of competition, and this factor was reflected in interest rates that, in many cases, were lower than the interest rates of banking loans.
In reality, 4 months have passed since the enforcement of these regulations, and we have received quite a dramatic situation, namely: about 137 bodies were registered as crediting companies. In practice, the number of pawnshops declined to a minimal number and, on the other hand, this portfolio moved to major financial institutions. As a result, today, the future of the pawnshop business is questionable, while there is growing demand for these services”, Berdzenadze said.
“If this tendency continues, we will get a nonbank financial market, without competition, with small players and increased interest rates. As a result, consumers will have no alternative” he added.
Ramaz Gerliani, a Doctor of Economics and founder of the Center for Economic Transformation, noted that banking regulations were expected to bring similar effects. “This is the result of regulations, not market realities. It is another issue as to whether this is bad or good. In the short-term, this is quite painful, but we could perceive it as an ordinary case in the long-term period. They were not to make these kinds of urgent and strict decisions. They did not analyze the expected effects of these regulations”, Gerliani noted.
Geostat, the national statistics service, has not published 2018 indicators yet, however, at the end of 2017, there were 875 operating pawnshops in Georgia, with 55.7% of them in Tbilisi, 12.1% in the Imereti Region, 9.9% in Samegrelo-Zemo Svaneti Region, 9.7% in Adjara and 12.5% in all other regions.
The amount of cash in pawnshops at the end of 2017 made up 23.8 million GEL, including 79.8% in the National Currency and 20.2% in other currencies.
As reported, new regulations were imposed on pawnshops several months ago. The sector’s representatives assert that the new requirements are so tough that some pawnshops cannot satisfy them.