Posted: 4 years ago

How the National Bank Swerved from Smoothing Mortgage Loan Regulations

Commercial banks plan to develop new products for GEL-denominated mortgage loans. Namely, commercial banks will use in-house models for appraising the solvency of borrowers in the case of 20% co-participation in GEL-denominated mortgage loans. 

According to the National Bank’s decree N281/04 passed on December 24, 2018, in line with article 6 of the provision on retail crediting, commercial banks are entitled to examine a client’s solvency under in-house procedures. 

In the first months after the enforcement of responsible crediting regulations, the banking system focused  creating an accurate  reflection of regulations and supervision of market activity. After the completion of this process, the banking system is able to move towards a new stage which will allow for the more efficient appraisal of the borrowers’ revenues, solvency and offer healthier mortgage products to consumers. 

As a result of the combined efforts of representatives of the Georgian Banks Association, members of commercial banks and the National Bank of Georgia (NBG), commercial banks will develop new products for GEL-denominated mortgage loans. Namely, commercial banks will appraise the solvency of borrowers under in-house regulations in the case of 20% co-participation in GEL-denominated mortgage loans. 

These  products will diversify mortgage products, including the issuance of mortgage loans for development projects, the Association’s representatives noted.

The Caucasus Business Week (CBW) has inquired as to whether fewer crediting regulations could resolve the current problems in the developmental sector, and whether transactions will increase. 

Tornike Abuladze, the executive director of the Georgian Developers Association, noted that simplified mortgage loan regulations have brought positive effects to the construction and development business. 

Developers and commercial banks adhere to the same position, which differs from the NBG position, he said. This was the most important article, and the NBG was to concede this component. “Before these regulations, the co-participation ratio was 20%, anyway, and today we have returned to the old benchmark”, Abuladze said. 

In response to the question of when the development sector will regain the old benchmark regarding sales, when the reduction of transactions will stop, and when the sector will grow, Abuladze said that the development market will see changes in the autumn. 

“It is summer now, and everybody leaves for holidays. Nobody has the time to buy apartments. The improved regulations will have an effect after this summer. Nonresidents are expected to grow sales before autumn. I think the National Bank has delayed the introduction of improved regulations. The ratio of bad loans in the development business makes up 0.98%. I have no idea why these regulations were introduced. Before taking this decision, NBG representatives were to meet with developers”, Abuladze said. 

The development sector expects prices to rise. Namely, the price of 1 square meter is expected to grow by 100 USD in ongoing projects by the end of 2019 because of new regulations. As a result, the amount of sales will rise and will return to the pre-regulation benchmark, Abuladze noted. 

“The problem is that there are two independent processes: 1. the National Bank has narrowed the number of clients and new regulations in the development sector decreased the number of issued licenses, as well”, Abuladze said. 

The National Bank has not streamlined some components, including the maturity period of mortgage loans. The longest maturity period was 20 years, before regulations, but now this period has shrunk to 15 years. Moreover, when clients were taking a mortgage loan to buy an apartment, it included expenses for repair works, home appliances, and furniture, too. 

Now, this component was neutralized, and borrowers should take separate loans for each process and this regulation worsens their credit indicators.

“When you have taken one loan to buy an apartment, but want to take  loan as well for redecorating and repair, you may face problems”, Abuladze pointed out. 

The third issue is that the NBG has not conceded to commercial banks, and developers are related to issuing USD-denominated loans. “It would be better to issue USD-denominated loans to those who receive incomes in USD”, Abuladze said. 

As is commonly known, starting May 7, 2018, after the enforcement of the NBG regulations, commercial banks cannot issue loans without income documentation. Responsible crediting requirements were enforced for the Georgian finance market on January 1, 2019.

The development sector is an important field, and is a major contributor to the state budget; however, enforced banking and development regulations have almost halved sales in 2016-2017. 

TBC Bank has already launched a reform of regulations. TBC Bank Director General Vakhtang Butskhrikidze told BMG that consumers will receive simplified mortgage loans in 1 week. At this stage, meetings with the NBG will continue.