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Why Credits in Georgia are Rising in Value
Sketch/ Caucasus Business Week

Why Credits in Georgia are Rising in Value

Commercial banks have tightened the crediting conditions, increased interest rates and they show a higher level of caution in issuing loans Commercial banks still consider the trade sector a target segment, but similar approaches do not foster the sector development.

After the National Bank of Georgia (NBG) stopped growing the refinancing loans volume, commercial banks have to increase interest rates on deposits and draw GEL resources in this way.

Similar approaches have further grown GEL denominated loans in value. Last period interest rates on individual loans rose by 2.1% to 24.5%. The interest rate on USD denominated loans declined by 0.1% to 10.9%. Moreover, for preventive purposes, commercial banks issue loans in GEL, but receive them back due to the USD exchange rate and substantiate the decision by the GEL devaluation.

According to the NBG report, the month of September has recorded an issuance of about 90 million GEL loans. Anyway, the ratio of GEL denominated loans remains low and accounts for only 36% (5.5 billion GEL), while the ratio of USD denominated loans is 64%, as commercial banks and finance organization know very well that they should not issue such amount of loans that may be devaluated after a certain period.

Loan interest rates grow because of passive economy and legislative “intensity” that makes serious effect on tariff policy, increases risks in the bank sector and restricts access to loans, the President of the Association of Banks of Georgia (ABG) said.

“The bank sector always provides realistic appraisal of the economic developments in the country and shows adequate reaction in relation to interest rates and this reaction is provided immediately and covers a certain period”, the ABG President Zurab Gvasalia noted.

This refers to both loan and deposit interest rates and the fastest reaction is provided when the refinancing rate is changed.

“The bank sector takes steps in response to the existing economic developments. The sector has always reflected the economy, as well as credit and tariff policy”, Zurab Gvasalia noted.

What criteria do commercial banks use to determine the loan interest rates? Besides verification of personal credit history, financial institutions supervise the price growth indicators too. For example, amid 1%-2% inflation rate, the 3%-4% interest rates on loans suffice to maintain purchasing value of the returned money.

In Georgia the price growth pace is nearly 6%, it may even reach two-digit indicators, and in this situation considerations about cheap credits are unserious.

Therefore, commercial banks set 12% or 15% to compensate a growth in prices and not to bear losses. Anyway, it should be noted, the difference between the inflation and the average weighed interest rate on GEL denominated loan is about 6%. Meanwhile, the population is facing growing difficulties with covering the loans and attracting due resources to serve the interest rates. They have to reject cooperation with commercial banks. Frequently, borrowers have to take additional credits or debts from private persons with high interests to pay interest rates of old loans and these factors aggravate their budget. As a result, they fail to pay off any of the credits. They face difficulties with paying loans in both GEL and USD, but they are trying to mobilize financial resources from month to month, take the so-called online loans. All these factors push families into heavy social conditions.