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Sketch by G.Magradze/Caucasus Business Week

Expected Effect of Bank Sector’s Credit Policy on State Economy

Commercial banks have tightened crediting conditions by increasing loan interest rates and introducing conservative loan-issuing regulations.

Commercial banks still consider the commerce and trade field as the target sector for crediting, but similar considerations do not foster the sector development. Moreover, the National Bank of Georgia (NBG) has ceased growing the refinancing loans volume and commercial banks have to increase interest rates on deposits to draw the GEL resources in this way.

In the third quarter of 2015, the credit portfolio’s annual growth rate declined and marked 12.8% in September, excluding the exchange rate effect. According to the NBG report, the growth in the credit portfolio was balanced through issuing retail and corporate loans.

Annual Growth in retail crediting volume has declined quarter on quarter after the economic activity slipped and the demand for imported goods diminished amid the exchange rate devaluation, the NBG says.

Corporate crediting volume continues stable growth. It is worth noting in September, as compared to June, GEL denominated business loans with floating interest rates (i.e. loans affixed to the refinancing loan interest rate) increased by 17%, but its ratio in total business loans still remains small (7%).

As to currencies, the credit portfolio largely increased because of GEL denominated loans issued. In September, the annual growth of foreign currency denominated loans portfolio declined to 6.5% after commercial banks tightened regulations for issuing business loans and the upturn in the GEL denominated loans portfolio marked 22.3%.

In September the retail credits portfolio rose by 250 million GEL, compared to June, as a result of the exchange rate volatility to a considerable extent. By excluding the exchange rate effect, the retail loans growth is considerable anyway, 95 million GEL. As to bank products, excluding the exchange rate effect, the volume of mortgage and consumer loans increased by 57 million GEL and 52 million GEL, respectively, compared to the previous quarter. As to currencies, the mortgage loans volume increased because of USD denominated loans issued (17 million USD and 20 million USD), while consumer loans portfolio increased because of GEL denominated loans issued (60 million GEL).

Similar extreme upturn in consumer loans volume may be hazardous for the state economy. Therefore, the government should take certain decisions, jointly with the NBG, to tighten issuing consumer loans, economic experts assert.

Consumer loans are in much demand in our population, despite their incomes grow very slowly. This process is driven by the general demand to live good today, without waiting for tomorrow. Moreover, the borrowers lack for banking education and therefore, they fail correctly appraising their solvency potential. At the same time, commercial banks do not request for mortgage provision for consumer loans. This sort of loans is an unguaranteed loan or no real estate is required as a guarantee. All these factors have driven a growth in consumer loans portfolio.

The volume of express installment loans and credit cards has declined by 30 million GEL. This category of bank products mainly finances the imports. Consequently, the diminished growth in the volume of these products reflects the contraction in demand for imports and, on the other hand, fosters a downturn in demand for foreign currency. However, an extreme growth in consumer loans stimulates the imports and makes negative effect on the GEL. A contraction in the volume of credit cards is largely related to the decisions of commercial banks. Contrary to the past years, commercial banks carry out aggressive policy of issuing consumer loans and issue less credit cards to the clients.

As to legal entities, in September the annual growth in their credit portfolio declined by 0.3% compared to June and made up 14.5%. According to the research of credit terms, in the third quarter of 2015, commercial banks tightened interest and noninterest terms again after the economic expectations worsened amid the external shocks.

A growth in business loans from the sectors point of view was driven by issuing credits in the housing, commerce, agriculture and processing industries, while an insignificant upturn was recorded in the transport and power sectors.

The bank sector players have positive expectations for a growth in demand for business loans in the coming quarter and they expect an upturn in GEL denominated loans volume and a growth of issuing credits to the commerce sector, the NBG representatives noted.

A part of analysts expects problems in this respect, because commercial banks make focus on crediting the commerce sector and avoid crediting the industrial sector. Naturally, commercial banks expect profits from the commerce sector, as they issue short-term loans with comparatively higher interest rates and they receive much profit in the short period.

According to the research on crediting terms, in the third quarter of 2015, as compared to the previous quarter, crediting terms were tightened for the retail and corporate sectors. Namely, both interest rates increased and credit-issuing conditions were also tightened. Commercial banks have tightened the conditions because of economic tendencies, increased expenditures on financial resources and cessation of smooth monetary policy, the NBG representatives noted.


When criticizing the extreme growth in the volume of refinancing loans, analysts have stressed commercial banks were to draw GEL resources themselves through stimulation of growth in interest rates to increase the volume of deposits. At this stage, because of increased interest rates on refinancing loans, this resource may be unattractive for commercial banks.

Besides all these factors, the NBG also stages “incorrect” criticism over commercial banks. By the way, the Finance Ministry took a decision on reducing issuance of state securities because of increased interest rates. Interest rates on T-bills hit 11.5%, while interest rates on bonds marked 13.6%. Consequently, the state budget has to pay extremely increased expenditures to serve the internal liabilities.

 Zurab Gvasalia President of the Association of Banks of  Georgia (ABG)

The bank sector always provides realistic assessment about the ongoing economic processes in the country. Therefore, the bank sector always demonstrates adequate reactions in relation to bank product interest rates.

Reactions are not made immediately and it always takes a certain period. This refers to loan and deposit interest rates. The fastest reaction follows to the changes in the refinancing loan rates, because the loans affixed to the refinancing instrument grow in value.

The bank sector’s decisions always reflect the ongoing economic developments. The sector always mirrors the economic situation. Therefore, commercial banks always provide suitable credit and tariff policy.

Legislative amendments also considerably affect the bank sector’s policy, because commercial banks have to handle higher risks and the loan accessibility narrows. Naturally, all these factors affect the bank products’ interest rates.

Levan Surguladze Chairman of the Supervisory Board, Caucasus Business Group, JSC.

The effect on the ultimate interest rates for borrowers, both individual and commercial, of the recent hike in the benchmark rate by the National Bank of Georgia (NBG), has, so far, been marginal.  Apparently, the dominant price determinants for funds provided by the commercial banks are supply / demand balance and the riskiness of a borrower.

The reported decline in the credit market for businesses is due to the decrease in the economic activity and the corresponding decline in demand for funds. Furthermore, banks perceive increased credit risks, hence tightening their credit policies, resulting in decreased crediting activity. On the other hand, reportedly, there is no decline observed in a consumer loan activity, stimulating local sales and import. The later is a pressure for the local currency exchange rate, on the other hand, and might affect a quality of the bank credit portfolios.

Reportedly, on the deposit side, there is an increase in interest rates for deposits in local currency. This is due, in particular, to the need for compensation for the high volatility of the currency exchange rate – required by the account holders.