Whether Banking Regulations will Be Smoothed
According to a new survey by TBC Research, in March 2019 the pace of growth in non mortgage consumer loans became negative, and was at 1.9%.
This is the lowest indicator of the past 6 years, and this means that the market for non mortgage consumer loans has stopped growing.
The slowdown trend started in May 2018, when the National Bank of Georgia (NBG) passed a new decree in which commercial banks were banned from issuing loans without an income verification letter. On May 7, 2018, a unified top margin for issuing loans without an income verification letter was introduced – 25% of supervisory capital for commercial banks.
Prior to adopting these amendments, the monthly pace of growth in non mortgage consumer loans was 13%. After five months, the pace of growth of this category of loans halved, and fell to 6.7%.
After the introduction of a responsible crediting system, the pace of growth of this category of loans dropped below zero. The main package of banking regulations entered into force on January 1, 2019.
As a result of the introduction of a responsible crediting model, the unified 50% top margin was introduced on interest rates, and obligatory submissions of with an income verification letter was introduced, and incomes categories were determined. All these requirements must be satisfied by all crediting companies.
At the same time, a unified top marginal rate was set for the maturity of many categories of loans. For example, the longest maturity for a mortgage loan may be 15 years, transport loans – 6 years, consumer loan secured by real estate – 10 years, all other loans – 4 years.
Based onan analysis of applications from the business sector in the first quarter of 2019, the Business Ombudsman has named banking regulations as the new challenge, and noted that new banking regulations should be polished, because the regulations have already resulted in negative side effects for stores of home appliances and other business sectors.
“The Business Ombudsman’s Office keeps up active communication with companies it is regulating. We believe that it is important to further polish these regulations to prevent dramatic effects on business activities. Sales at home appliance stores have dropped by about 40%-60%, especially in the regions. Regulations have also affected the development sector”, Georgian Business Ombudsman Irakli Lekvinadze said.
“After the enforcement of the new banking regulations, the number of pawnshops declined to 137 from 600. Interest rates increased. Four months have passed since the enforcement of these regulations, and we have a quite difficult situation: only 137 entities could get registered as a crediting institution. As a result, the number of pawnshops have dramatically declined and moreover, this portfolio moved to major financial institutions. As a result, the pawnshop business is questionable today, while there is growing demand for their services”, Irakli Berdzenadze noted.
Another group of economic experts has a different position. They assert that these regulations have brought a lot of positive effects.“I do not know how these regulations could slow down the pace of economic growth, but the fact is that the balance of payments has improved, because these regulations have primarily impacted the field of substituting imports. However, naturally, importers are business too, and the slowdown may impact them. Therefore, something balanced should be chosen to save people from getting on the Blacklist and are ejected from the economic process, but also to prevent extreme restrictions and enable people to buy desirable products.
Under my supervision, the NBG and other departments are to find this golden mean. Regarding responsible crediting, the IMF report has quite dramatic appraisals, where business crediting is much lower than retail crediting, while this correlation should be the opposite. The correct monetary policy should encourage business crediting to ensure economic growth”, businessman Irakli Iashvili said.
It is interesting that the Fitch rating company lowered the credit ratings of TBC Bank and Bank of Georgia as a result of the growth in fast retail loans and risks coming from expanded crediting in foreign currency.
“There is nothing surprising about the business sector trying to make profits. This is indisputable issue, but it would be more reasonable to place their focus on a long-term strategy to gain profits and issue business loans, rather than installment loans for sales of fridges and stoves.
Giorgi Gachechiladze, director general of the Bank of Georgia, has recognized in practice and confirmed that NBG-introduced regulations are necessary in the banking sector, because the expansion of retail loans without an income verification letter in the long-term may only provoke systemic risks.
The primary shock from regulations turned out to not be very alarming. The crediting volume of TBC and Bank of Georgia has increased by 158 million GEL and 131 million GEL, respectively”, Shota Gulbani, head of the Association of Young Financiers and Businessmen (AYFB) noted.