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Government against Online Loans – Purpose of Introduction of Top Margin on Loans

At the end of 2016 Georgian Prime Minister Giorgi Kvirikashvili announced plans for restricting online loans.

Next day other members of the government introduced their interpretation of the mentioned statement and forecast introduction of new regulations. And shortly Government submitted a bill of amendments to the Parliament for protection of consumer rights. According to legislative amendments prepared by Finance Ministry and National Bank of Georgia (NBG), top margins will be set on loan interest rates – annual 100%. Objective of the initiative is to protect borrowers. The bill will come into force on July 1, 2017.

«Under agreement between parties, besides loans determined by part 3 of this article, annual effective interest rate of an issued loan must not exceed 100%, including in case of extension of a loan’s maturity period. For purposes of this part, extension of maturity period of the existing loan may be considered as an issuance of a new loan after loan coverage if the period between covering the old loan and taking a new one does not exceed 5 days», a package of amendments to Civil Code reads.

As a result  of amendments, top margin interest rate on  fines was determined by 150%. This decision will, first of all, make problems to online loan companies.

«According to Civil Code amendments, total maximum interest rate  must not exceed annual 150% and this factor does not enable online loan companies to successfully continue operation», Dimitri Kumsishvili said.

In some cases, annual interest rates on online loans reach 3 000%, even 4000% and this practice should be removed, NBG President Koba Gvenetadze noted.

Explanatory card of the mentioned bill reads that in most cases borrowers cannot realize how much interest rates they have to pay for small loans. Sometimes, unbearable burden leads some of them to suicide, the document reads.

«Today loans have become more attainable and people with low financial education have problems with planning financial management issues. As a result, excessive indebtedness and related problems generate sharpest difficulties in our society.

Expenditures on interest rates are high and sometimes they are openly indicated on due websites. However, borrowers cannot perceive the mentioned expenditures in due manner, because loan amount is very small, as a rule.

As a rule, the borrowed sums are not covered in the first maturity period and borrowers have to extend the maturity period several times, at the expense of additional commission fees. As a result, final expenditures grow very much and borrowers have to pay 34-60% of the loan a month.

All expenditures are aggravated by fines for overdue payment – as a rule, this fine makes up 1% of the overdue amount a day. Finally, payments paid to creditors or current indebtedness in case of overdue loans may exceed initial loan amount several times.

At a glance, we can appraise this product to be necessary, because it provides people with access to finances and it may seem a good opportunity to avoid awkwardness of borrowing money from friends, but in real life, this mechanism frequently becomes a ground of huge problems and tragedies.

The problem is that amid partly non-transparent conditions and low financial education in target segment, the “kind” product is transformed against its nature and instead of quick, short-term loan we receive long-term loan with inappropriate high expenditures.

Consequently, it became necessary to regulate crediting relations with the aim to protect consumer rights”, the bill’s explanatory card reads.

It is worth noting that strict regulations will bring nothing positive for online loan companies. As a rule, annual effective interest rate on quick loans exceeded the annual 100% four times and more. Moreover, introduction of 150% top margin on fines will also make negative effect on online loan companies.

Financial education level is very low in Georgia and financial institutions try to make a use of this factor, especially online loan companies. That’s why Government has taken the mentioned decision. On the other hand, there is much demand for quick loans because of heavy social background in the country.

Therefore, population had to borrow similar loans mainly to cover the current expenditures. As a result of new regulations, number of online loan companies will decrease and they will tighten crediting conditions in quest of better clients. Therefore, the category that had  to use online loans frequently will not be able to do the same in the future.

It is worth noting that  a majority of countries, where online loan companies operate, practice top margin  on credits. Restrictions on loan interest rates differ due to countries. By the way, even Australia, the USA and Singapore with most liberal economies have introduced top margins on credits.

By Merab Janiashvili
Economic Analyst
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