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Commercial Banks Rather Harm Economy than Benefit

When appointed as the National Bank President, Giorgi Kadagidze sharply criticized commercial banks and blamed them for frustrating economic development.

However, the time passed and Kadagidze has never dared anymore to make sharp statements in relation to commercial banks. We have not heard sharp statements from the current president of the NBG, despite the fact no positive tendencies are recorded in the banking sector over the past 9 years.

Meanwhile, Georgia-based commercial banks multiply their profits at high paces, while the state economy has not exceeded 5% upturn over the past 4 years. Leading commercial banks grow their profits  even by 60%-80% a year. For example, in January-September 2017 net profits of the banking sector hit the historical high. In the reporting period, the sector recorded 631 815 000 GEL profits, up 30.4% year on year.

It should be noted that commercial banks have never made such high profits in the January-September period. If the banking sector maintains such a high pace of profits growth, by the end of 2017 the sector’s net profits will exceed 800 million GEL.

It is worth noting that over the past years, net profits of commercial banks keep rising and beat new records almost every year.

  • The year of 2012  -134.2mln GEL;
  • The year of 2013  – 389.1mln GEL;
  • The year of 2014 – 474.8mln GEL;
  • The year of 2015 – 537.3mln GEL;
  • The year of 2016 –  631.8mln GEL.

As to January to September indicators: in January-September 2016 commercial banks’ profits hit 484 277 000 GEL, 2015 – 377 077 000 GEL, 2014 – 303 710 000 GEL, 2013 – 274 951 000 GEL.

This signifies profits of commercial banks over the past 5 years rose by 129.7%.

Despite similar growth, the banking sector’s budget payments are  insignificant. According to the NBG report, in 2016 all commercial banks paid only 79.317 million GEL, 2015 – 67.252 million GEL, 2014 – 79.894 million GEL, 2013 – 44.534 million GEL. This year commercial banks paid 65.122 million GEL over the past 9 months.

Despite the banking sector is one of the profitable segments in the country, the state budget receives only insignificant revenues, because commercial banks enjoy preferential tax regime. In the times of Kakha Bendukidze it was decided to promote the banking sector. As a result, the banking sector is exempted from many taxes. A special taxation regime is applied in relation to the whole banking sector. At the same time, the Authorities and the central bank try to ensure all kinds of preferential conditions to boost the crediting of the economy. However, commercial banks mainly finance imports and avoid financing the real sector because of insufficient resources and high profits.

Banking sector specialists note that taxation of commercial banks is a bit different from the taxation regime of other sectors. For example, the reserve amount is included in the part of expenditures. Therefore, commercial banks always have the opportunity for maneuvering to cut their taxation base.

Thus, the Georgian banking sector makes record profits every year and the current year cannot be an exception either. As a rule, in developed countries the banking sector’s revenues grow along with economic growth, however, in Georgia, the banking sector’s profits growth exceeds the economic upturn several times.

Non-interest incomes represent a main source of revenues for commercial banks, such as fines, commission fees, seized property and so on. Benefits from physical bodies also make considerable contribution to the banking sector’s revenues, while the ratio of corporate loans, that are to drive economic activity, is small in the banking sector’s crediting portfolio. If we add the benefits at the expense of the state budget, that is securities taken for internal debts, 4/5 of which is owned by commercial banks, it is clear how commercial banks grow profits at cosmic paces. When the most profitable bank grows its annual profits by 80%, this signifies something is wrong in the system.

Despite absolute mismatch between the banking sector’s profits growth and the economic growth paces, heads of the NBG and commercial bank stubbornly repeat the same that the Georgian banking sector is the most successful sector in the Region. However, it is unclear what they mean under the word of “successful”.

They are genuinely successful in terms of profits growth, not only in our region, because Georgian banking sector is among the world’s top 10 commercial banks in terms of profits growth. However, we should not forget that the banking is the field of services and its efficiency should be appraised due to the level of satisfaction of its clients. For example, nobody appraises the success of a restaurant or a hotel (classification) due to their profits margin, but they are appraised due to the services supplied to the clients. If we make accent on clients of Georgia-based commercial banks, it will be difficult to find content ones. The major business sector has been asking the Authorities for many years to deprive the banking sector of holding non-core business companies, because commercial  banks have already penetrated various economic sectors and it is very difficult to compete with companies supported by the leading commercial banks. For example, businessman Temur Chkonia has decided to abandon the beer production business, because  of plans of Bank of Georgia to enter this segment. When such an influential businessman as Temur Chkonia avoids competing with major commercial banks, what small entrepreneurs can do or will foreign investors enter the low-solvent market with only 3.5 million consumers to take part in similar heavy competition with one of the major commercial banks?!

Small and medium business sectors mainly complain about unattainable finances and sharply criticize commercial banks. Meanwhile, physical bodies are so overtired by relations with commercial banks that pre-election promises for extending credit’s maturity period is the most working promise. The question arises: if both major and small business are discontent with commercial banks, if ordinary citizens criticize crediting institutions, why do we think this sector is successful?

Regretfully, the NBG lobbies commercial banks rather than protects the interests of Georgian citizens. The current banking sector harms the economy rather than benefits.

By Merab Janiashvili
Economic Analyst
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