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Mamuka Bakhtadze

Georgian Banking System Hampers Economic Development

Minister of Finance against Commercial Banks

Georgian banking system frustrates economic development, Georgian Finance Minister Mamuka Bakhtadze said at TechnoPark, where a memorandum on implementation of digital Silkroad project was signed.

«Bank loans with high interest rates frustrate development of entrepreneurship and business. The Georgian banking system is to drive economy, not hamper it. Regretfully, in our country commercial banks do not fulfill this function», Bakhtadze noted.

“We see that the current interest rates do not provide opportunity for starting business”, the Minister of Finance noted. Government of Georgia plans to launch Startup Capital Supply Reform to expand access to money resources for small and medium entrepreneurs.

The reform calls for supply of  interest-free startup capital to young entrepreneurs with the aim to develop entrepreneurship, especially startups. Finance Ministry and Government of Georgia have developed small entrepreneurship promotion initiative, Mamuka Bakhtadze said.

“We lack for startup capital and this is a very important factor. We, representatives of state structures, should do our best to fully remove similar barriers. Today, our budget is shaped by about 300 companies. This is a very bad tendency. This signifies that in economy we have sectors with highest monopolization risks and this factor makes our economy vulnerable. At the same time, the current interest rates in our system does not enable to start business. The banking system should not hamper economic development, but should drive it. Therefore, we have taken decisions to launch a major economic reform. This initiative is called as Startup Capital Supply Reform and it calls for supply of interest-free initial capital to our young startupers”, Bakhtadze noted.

Economic expert Mikheil Dundua has commented on the mentioned statement. Georgia-based commercial banks are leaders in Eurasia in terms of profitability, while they frustrate economic development, he said.

«According to International Monetary Fund (IMF), the Georgian banking sector ranks first in terms of profitability among Eurasian countries in 2017. In Georgia Return on Equity (ROE) is 23.3% (new historical maximum at the end of the year), while Return on Assets (ROA) is 3.1%. Both parameters make the Georgian banking sector leader in Eurasia and the country is behind of only  economically frustrated countries in Africa, Asia and Latin America. To be precise, we rank 15th in terms of ROE and 17th in terms of ROA.

In January-February 2018 debts of household economies before the banking sector rose by 130 million GEL, while debts of legal entities rose by 16 million GEL. This signifies debts of household economies have increased 8 times more compared to legal entities. In the mentioned period debts of physical and legal bodies in foreign currency is almost equal – about 19 and 20 million USD.

Commercial banks continue issuing high interest rate mortgage loans without income records officially form in the form of the so-called real estate pawn loans.

In January 2018 National Bank set limits to make the loan service schedule adequate to the client’s incomes (physical body). Despite this bold decision by Koba Gvenetadze, the new regulation does not give important results, because:

a) there are no adequate sanctions against violation of this regulation. Moreover, in a number of cases this violation is not considered as an infringement of standard act on commercial banks.

b) new regulations are applied only to mortgage loans, while in 2017 comparatively higher retail crediting and this decision is evidently reflected in practice and advertising campaigns.

c) Starting 2010 commercial banks introduced a formulation of loan agreements, under which any borrower of mortgage or non-mortgage loan bears responsibility before the creditors for failed loan services  (and not only in mortgaged property). Earlier the situation was different. Namely, borrower of non-mortgage loan used to lose only personal incomes, while mortgage loan borrowers used to lose  mortgage property and personal incomes for failed loan services. To put it otherwise, today commercial banks are able to more freely issue non-mortgage loans of several thousand of GEL to unqualified borrowers and expropriate their property in case of problems with loan service.

Solution:

  1. a) commercial banks should be banned to issue loans without income records. Loan service limit in foreign currency should be 20% of the client’s income. The figure should be 30% in national currency;
  2. b) The violator bank should be fined strictly;
  3. c) Only mortgaged property and personal incomes should be claimed in case of essential frustration in loan service. Any other formulations should be restricted in loan agreements. Consequently, commercial banks will show more caution in crediting physical bodies”, Mikheil Dundua said.

High-ranking officials rarely criticize Georgian banking sector, despite relations between commercial banks and their clients is one of the sharpest problems in the country. Giorgi Kadagide, the former president of National Bank of Georgia (NBG), was the last high-ranking official who criticized commercial banks. Shortly after his appointment as NBG president, he noted that the Georgian banking sector was frustrating economic development. And that’s all. After this nobody has heard about his critical statements regarding commercial banks. On the contrary, he started lobbying commercial banks. We hope Mamuka Bakhtadze will save himself from similar transformation and efficient steps will be taken after his statement.

In 2001-2013 total net profits of commercial banks made up 1.119 billion GEL. In 2014-2017 total net profits of commercial banks constituted 2.561 billion GEL. Over the past 4 years the banking sector’s profits exceeded the 2001-2013 indicators twice. In 2013-2017 the annual profits growth pace exceeds economic growth at least 6 times.

The banking sector’s profitability is determined by two factors: ROA and ROE. Georgia occupies one of the leading positions in both parameters. The Georgian banking sector is recorded in top ten countries in terms of profitability. According to IMF, Georgian banking sector ranks 9th in terms of profitability after undeveloped countries of Africa, Asia and Latin America.

Total revenues of commercial banks in 2017 made up 3.58 billion GEL, including interest incomes made up 77% (2.76 billion GEL) and noninterest incomes made up 23% (821million GEL). Last year commercial banks earned 368 million GEL from commission fees, 202 million GEL from currency exchange operations, 77 million GEL from fines. In 2017 commercial banks spent 1.247 billion GEL on service of deposits, while interest incomes from loans constituted 2.76 billion GEL, nearly twice more compared to service of attracted financial resources (deposits).

By Merab Janiashvili
Economic Analyst
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