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Larization Policy Makes Interest Rates more Expensive

According to the February indicators of National Bank of Georgia (NBG), interest rate on GEL-denominated loans rose by 2.8% to 20.9%, including 11.9% GEL-denominated loans are available for legal entities, while physical bodies have to pay 24% interest rate for GEL-denominated loans.

It should be noted the rise of GEL-denominated loans in value was preceded by Government’s Larization initiative. Under this initiative, loans of about 100 000 GEL are issued only in  national currency. This signifies that consumers’ option was restricted  and they can take loans of about 100 000 GEL only in national currency. Meanwhile, interest rate of foreign currency denominated loans decreased by 0.3%. This signifies that more expensive GEL-denominated loan is an only option for bank clients. Businessmen have  already expressed discontent with loans risen in value. Businessman Tsezar Chocheli says that high interest rates set by commercial banks frustrate business process and many important projects. “Production of ceramics, concentrates and aethereal oils was suspended. Interest rates are very high and production cannot withstand them”, Tsezar Chocheli said.

Vakhtang Khomizurashvili, expert of investments, also talks about high interest rates. Current interest rates have led business sector to a blind alley, he said.

“If borrowers use loans  for buying fixed assets, naturally, this will aggravate situation in business sector, because commercial banks demand guarantees, first of all. As to interest rates,  despite commercial banks set grace periods, clients have to pay interest rates in any case. Interest rates impose heavy burden on any business, especially in agriculture sector, because this sector requires preferential conditions. This sector comprises high risks and it takes a long time to receive profits. Consequently, this business requires individual approaches. In general, any country pays special attention to agriculture sector. As to importers, this factor will make less effect on them, because they have a short-period cycle. The general picture shows that today the business sector has come to blind alley, in practice”, Khomizurashvili said.

The expert has also talked about problem solution ways and pointed out that development of securities market is one of the best ways in this respect.

“In this case, everything is affixed to currency exchange rate. National Bank should first make currency exchange mechanism more transparent. The current system should be completely replaced. Currency exchange hedging mechanism should be introduced so as companies be able to insure currency exchange rate. The country should care for upgrading investment and corporate culture and education. Business should be launched not by bank loans, but partnership capital. Seeking of alternative sources of investments is also very important issue. I mean securities market. If companies start issuing securities and attracting investment resources from abroad, naturally, demand for loans will decline and banks will have to lower interest rates”, Khomizurashvili said.

Bank sector expert Gocha Tutberidze said that business may be developed under any interest rate.

“Naturally, low interest rates are acceptable for business, but this also comprises certain risks. We dream about low interest rates, but there are high risks in Georgia – including political, economic, macroeconomic and so on. That’s why interest rates cannot be lowered. If we try to set very low interest rates, this regime will not be continued for a long period, because an inflow of foreign investments will decline and money resources will become deficient. I understand the position of businessmen, but there are certain circumstances that we cannot avoid, regretfully. As to business development, it may be developed under any interest rate. Development pace is another issue. Interest rates reflect the level of risks in the country. Therefore, high interest rates signify there are high risks in the country”, Tutberidze noted.

AYFB vice president Paata Bairakhtari says the above-mentioned arguments are unacceptable and he makes focus on oligopoly situation in banking sector.

“Commercial banks have been long complaining about higher risks compared to European banks. However, bad loans portfolio shows that the amount of bad loans does not exceed 2%  and it does not exceed the level of bad loans in European banks. Consequently, enslaving interest rates cannot be justified by high risks. In reality, similar interest rates have absolutely different reasons. First of all, high interest rates are caused by a lack of market competition. Today we have duopoly situation on the market, when, in practice, two huge commercial banks control the whole market and the general picture is very heavy, despite there are other market players too. On the other hand, commercial banks represent an only source of attracting financial resources. As to increased interest rates, this is directly related to Larization component.

Namely, commercial banks are obliged to issue loans of about 100 000 GEL  only in national currency. In reality, small business and physical bodies have faced the situation, when they can take loans only in national currency and commercial banks have made a use of this situation and promptly increased interest rates. This signifies small business has no alternative option. It should be also noted that interest rates on foreign currency denominated loans were lowered in parallel regime”, Bairakhtari said.