National Bank is Expected to Spend 400 million USD for Loans Larization, while Reserves were not Applied for Curbing National Currency Depreciation.
Starting January 17, 2017 the so-called loans Larization program started. Physical bodies, who took mortgage loans in foreign currency before January 1, 2015, are able to convert them into GEL denominated loans. At the same time, advance payment commission fee will be abolished on this category of loans. Total portfolio of these loans is about 400 million USD.
Subsidization concerns principal sum of bank loans or its part (no more than 40 000 USD) and its remaining value must not exceed the amount as of January 1, 2015.
The Larization program participants will receive state budget subsidization in the amount of 20 Tetri for conversion exchange rate. Currently, the exchange rate is 2.69, while state budget subsidy will reduce the rate to 2.49. State budget allocations on the mentioned subsidy will be 65 million GEL.
According to Ministry of Finance, all commercial banks are ready to provide due services to all clients under the mentioned program.
Subsidies will not concern bodies, whose annual revenues exceeded 100 000 GEL in 2016 or total debts of their loans’ principal sum exceeded 100 000 USD as of November 28, 2016.
“Objective of the mentioned scheme is to alleviate loan service burden after GEL exchange rate volatility. According to the current estimations, this program concerned mainly loans issued before January 1, 2015. These changes do not concern those, who took loans after serious changes in exchange rates, but this category is able to negotiate the issue with commercial banks and achieve loan Larization”, the NBG officials noted.
The announced program concerns about 33 000 borrowers, who have taken foreign currency denominated mortgage credits before 2015. According to Minister of Finance, total portfolio of loans is about 400 million USD.
“Larization program will concern about 400 million USD. This signifies this amount will not be claimed on the market, national bank will carry out direct intervention on commercial banks, cover open current positions. This amount of 400 million USD will not make effect on national currency and will help GEL stabilization process”, Kumsishvili noted.
However, it is worth noting that in about a week after the program inauguration only 100 borrowers have converted USD denominated loans into GEL. According to Georgian Banks Association, loans’ average rate in the Larization process made up 10-11%. In the credit conversion process, the bank grows clients’ interest rate on individual basis, based on credit history of borrowers. And this factor explains the low demand for loan Larization. Moreover, in some cases commercial banks raise interest rates on credits and add them to refinancing loan rate and this causes mistrust amid expectations that monetary policy may be tightened.
«The interest rate will be close to market interest rate, depending on the clients’ solvency, There are various coefficients under which commercial banks appraise level of risks, but, on average, we expect that interest rates will be closer compared to the current rates and this is about 10-15%. this is a floating rate for mortgage loans. If a client wants a fixed rate, this depends on maturity period and interest rates vary due to maturity periods. We foster commercial banks to have adequate resources in both GEL and USD so as interest rate be close to market rates», NBG vice president Archil Mestvirishvili said.
The Government-proposed Larization program is a part of dedollarization policy. Starting January 1 new changes were enacted for credit organizations, under which commercial banks will be banned to issue loans of about 100 000 GEL in USD. The amount will increase to 200 000 GEL in 2018.
The time will show whether government’s steps for economic Larization are efficient. However, it should be noted that the economy dollarization is determined due to deposits. Consequently, Georgian citizens may convert credits in national currency by support of Authorities and in fears of further depreciation of GEL exchange rate. However, if the society does not acquire confidence in GEL, they will not be able to accumulate finances in national currency. And confidence in GEL depends on exchange rate stability.
It should be also noted that Government and National Bank introduced Loans Larization program for alleviating losses after GEL exchange rate depreciation. But we should remember that over the past 2 years our society expected NBG to spend currency reserves and tighten monetary policy to curb GEL exchange rate depreciation. In that period NBG refused to spend international reserves, while under Larization program NBG may have to spend 400 million USD reserves, even more so under exchange rate preliminarily determined with commercial banks. As a result, commercial banks will receive serious benefits.
Under Larization program, National Bank will supply foreign currency to commercial banks. This signifies that NBG currency reserves may decrease by 400 million USD. According to NBG indicators, as of December 31, 2016 Georgia’s currency reserves make up 2.56 billion USD, down 12.6% compared to October 2013, when reserves volume recorded highest figures (2.9 billion USD).
It is interesting whether GEL exchange rate would have depreciated by 60% if NBG had spent 400 million USD reserves in due time on GEL exchange rate stability. In this case state budget would not have to subsidize clients damaged by the mentioned process nor the whole economy would be damaged after GEL devaluation.