Regaining Borrowers – Commercial Banks Wish on the 2020 Year

The Georgian banking sector is meeting the year of 2020 with hopes, as the Government announced plans to remove the 200 000 GEL top margin on loans and the National Bank of Georgia (NBG) promised to half four (4) categories of incomes. 

The Year of 2019 – Commercial Banks Lose 1/3 of Borrowers

Enforcement of the so-called framework regulations on responsible crediting has confused the whole sector in 2019. Georgian consumers addicted to technological innovations have lost the opportunity to say: - I Want to Buy Today, but will Pay Tomorrow. Primary mission of the credit product is to stay flexible, while strict regulations neutralize this flexibility. Drivers, nurses, recipients of money transfers from abroad cannot take loans, because they are unable to submit sufficient incomes after the correlation between incomes and loans was determined by 80%-20% and 75%-25%. 

Coefficient/with net incomes for unhedged and hedged borrowers.

Restrictive signals were transmitted to trading outlets and developers, because mortgage loans and installment loans were limited. As a result, we received financial stability at the expense of impoverishment of our citizens.

The Georgian Prime Minister pledged that the coefficients will be halved in spring 2020.                                                                                                              

The year of 2019 – New Challenges for Borrowers with Annulled Debts

Aleksandre Dzneladze, president of the Association of Banks, suggests to avoid misleading expectations, as happened with 600 000 borrowers with annulled debts. After disappointments in 2019, they will not be able to take new healthy loans in 2020 either. 

Their debts were written off and their Black List records were removed on condition they cannot take loans for a period of 2 years. Even simple overdrafts are unattainable and commercial banks refer to their low ratings.

Thus, borrowers with annulled loans have to pay much more from their net incomes to serve loans compared to other borrowers so as commercial banks not face risks. The responsible credit framework regulation has not taken into consideration this factor. However, the part of financiers forecast that creditors would reinsure risks and the burden would fall on borrowers. These forecasts turned out realistic. Nevertheless, nothing has changed and only Finance Minister Vano Machavriani expressed regrets.

I would not Sacrifice Larization – Finance Minister Vano Machavariani

Vano Machavariani has divided regulations of the last 2 years in three blocks: 1) Larization/dedollarization; 2) responsible crediting – tightening of conditions; 3) security – requirement to commercials banks to increase capital and ensure additional buffers.

“Microfinance organizations were also unhappy. Regulations hurt pawnshops too and they are also irritated. The regulations turned out excessive, but not tragic”, the Finance Minister critically appraised the initiative that ex Prime Minister Mamuka Bakhtadze proposed for introducing the 200 000 GEL top margin on foreign currency denominated loans.

Refusal to prioritize Larization was painful for the Central Bank, but it has to take steps for dollarization, because inflation was pressured by depreciated GEL and stability of prices was threatened.

Key Challenge of 2019 – GEL Devaluation

“The latest devaluation of GEL burdened the inflation. The NBG is mandated to control inflation and we have taken due steps, tightened monetary policy and carried out interventions. For further reduction of  GEL depreciation pressure on inflation, we have decided to lower foreign currency denominated reserve requirement by 5%. As a result, commercial banks will enjoy certain preferences  in terms of foreign currency liquidity. This signifies  commercial banks will be able to issue 700 million USD foreign currency resources in the form of loans in addition. This factor is to stabilize the exchange rate. Consequently, pressure on inflation will decline in the course of time”, Koba Gvenetadze noted.

Prior to alleviating the GEL depreciation burden on inflation, we should promote economic development. Dedollarization was to serve the same goal. (Larization promotes economic growth through reduction of risks), that Dollarization will replace it temporarily.

The National Bank will have to stimulate dollarization again. GEL devaluation and growing inflation remain key challenges in 2019-2020.

Crediting component should also ensure economic growth, but the NBG regulations obliged commercial banks to increase capital with conservation, system and counter-cyclical buffers. System banks TBC Bank, Bank of Georgia and Liberty Bank are obliged to increase capital through system buffer.

Tightening-alleviating Loan Regulations in 2019

“Naturally, more people will be able to take loans, but radical changes will not take place”, Aleksandre Dzneladze, president of the Association of Banks, noted regarding plans for lowering retail loans coefficients in spring 2020 and dividing them into 4 income categories. However, alleviated conditions will not apply to everybody.

The 200 000 GEL top margin for taking foreign currency denominated loans will be removed for only those with >4 000 GEL incomes a month. The banking sector lobbyists agree the regulation alleviation process with the NBG and the NBG agrees the mentioned issues with the Government.

Dzneladze assures that loan security and profitability coefficients should be evened on certain condition (currency and GEL loans). Currency loan borrowers should have 15% higher incomes and this signifies less attainability to finances.

Resolution as New Regulation in 2019

Parliament of Georgia has adopted the National Bank’s initiative of the resolution mechanism. “The resolution starts in the same way as the liquidation. This is the authority of the National Bank to apply the resolution mechanism instead of liquidation”.

The bill of amendments transmits a  new instrument to the supervisory body with the aim to heal commercial banks, not to fine them. The resolution mechanism enables creditors and depositors to take over a commercial bank. This mechanism has filled the legislative gap. A commercial bank is not regulated by the law on bankruptcy that calls for the bank rehabilitation. The resolution mechanism  allows to replace the owner. Even the Finance Ministry is entitled to become the commercial bank owner if it puts as much money in the capital as the bank’s stakeholder is obliged. 50 million GEL should be taken from the state budget – this bill introduces the instrument of a temporary bank (when the Finance Ministry establishes a temporary bank prior to its sales) and the resolution fund’s institute.

A commercial bank with worsened financial indicators will be deprived of high-quality and healthy assets and the bank will be directed for recovery through transmitting it to another commercial banks or the Government, while bad assets will be directed for liquidation.

This regime takes effect immediately and suspends all other norms not to frustrate the transmission process. It may take only 3 days. The maximum period is 1 year with the right for extending the term for another 1 year.

The National Bank’s promising explanation accompanies the framework resolution that all commercial banks are healthy in the market and the resolution mechanism is to protect the sector.

More Women in Banking Sector - 2019

“A commercial bank must staff the supervisory board to ensure diversity of considerations by involving bodies with diverse skills, qualifications and experiences in the board. At the same time,  at least 20% of the supervisory board members must be (at least 1 member) women”, the new regulation by the National Bank of Georgia (NBG) obliges commercial banks to employ women in the supervisory board. The new regulation came into force at the end of 2019.

Not all women agree with this gender segregation, however, part of men finds similar approaches acceptable. Certain category thinks that artificial intervention in the staff policy and introduction of gender quotas are unacceptable.

The 80/20% balance is determined by the Corporate Management Code and it obliges all commercial banks to have at least one women in their supervisory boards.

The system banks have already satisfied this obligation. Namely, TBC Bank keeps 2 women in its 6-member supervisory board – Tsira Kemularia and Luiza Chikoniani. Bank of Georgia has employed 2 women in its 8-member supervisory board – Hanna Lokainen and Veronica McKerol.

Gakharia’s Letter – Secret of 2019

The real author of the letter, where Giorgi Gakharia allegedly threatens Mamuka Khazaradze remains still unknown.

“Strange circumstances are revealed in this case. The Prosecutors Office has not added the interrogation of Mamuka Khazaradze regarding the letter to the case. The prosecutor’s office has not interrogated the bodies that, according to Mamuka Khazaradze   have transmitted Gakharia’s letter to him”, Zviad Kordzadze, defense lawyer for TBC Bank founders Mamuka Khazaradze and Badri Japaridze noted.

The letter and accusations of illegal revenues legalization are related to the 16.66 million USD loan transaction carried out 11 years ago.

Not to damage the interest of borrowers and depositors, the bank stakeholders left the bank management, several major projects, including Anaklia Seaport project.