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Bank of Georgia Subsidiary M2 Killing Competition in Development Business

The issue of ownership of noncore assets by commercial banks maintains relevance.

Besides Georgia, many other countries have been monitoring involvement of commercial banks in various noncore activities for many years. These countries have set various restrictions. Thus, this issue is relevant in   many other countries, not only in Georgia.

In 2012 World Bank (WB) conducted Bank Regulation and Supervision Research and the issue of ownership of noncore assets by commercial banks was one of the key topics.

It is an indisputable fact that ownership of noncore assets by commercial banks destructs economy, even more so in developing countries, like Georgia, because valuable market competition is one of the key preconditions for economic development. In this situation everybody knows that in Georgia commercial banks control a major part of such important sectors as development, healthcare, tourism, educational, winemaking and other business sectors.  In 2014 National Bank of Georgia passed a decree to restrict banks to hold noncore assets. At a glance, this is a very important and due decision. Naturally,  any regulations promoting perfect and healthy competition will bring positive results to the country. However, NBG has left a number of gaps that enabled commercial banks to maintain noncore businesses. Commercial banks managed to easily bypass this instruction of NBG and they formally separated their activities, but in reality they maintained control over noncore businesses through subsidiaries.

Meanwhile, commercial banks have not conceded their noncore assets, on the contrary, this ownership becomes more and more evident every day. For example, the ongoing developments in pharmaceutical market is alarming. Georgian Healthcare Group has already completed a purchase of Pharmadepot. Competition Agency has already issued a permit to GPC for purchasing a 100% stake in Pharmadepot. As a result, a new pharmacy network will be arranged – JSC Georgian Pharmacy that already controls 25% of the market. Georgian Healthcare Group, which is the pharmaceutical market leader, is a subsidiary of Bank of Georgia.

The same situation is in development business. The 100% stake of M2 development company belongs to BGEO Group. In reality, M2 company is owned by Bank of Georgia. Naturally, Bank of Georgia refuses it is owner of noncore assets.

“Bank of Georgia has left noncore businesses. For example, M2 has independent management from the bank and it has no relation with the bank. It has attracted financial resources independently from the commercial bank. According to new regulations, naturally, Bank of Georgia acts in compliance with National Bank requirements and will carry out structural changes and consequently, will separate noncore businesses in legal terms too”, the bank representatives noted.

However, representatives of other development companies have different position. For example, Besik Tkhelidze, founder of Atori development company, says there are real problems with market competition.

“Any commercial bank issues a mortgage loan for our apartments. However, Bank of Georgia stands behind M2. Therefore, Bank of Georgia will issue more preferential loans to M2 clients and customers are cheated in this way, because, compared to our company, M2 has higher prices and lower quality”, Besik Tkhelidze said.

It is also problem that commercial banks do not issue business loans to development companies, while loan security conditions are enslaving.

Irakli Rostomashvili, head of Developers Association, confirms that commercial banks control noncore businesses again and in practice nothing has changed in this respect. That’s why economy is not developed in the country, he said.

‘They have changed the shape, but follow the same scheme. I know that M2 development company is owned by Bank of Georgia. The bank’s function is to earn money by promoting other business sectors. Let’s imagine that Georgia’s biggest bank owns a development company and considers other development companies as competitors. At least, similar bank will not support other companies”, Irakli Rostomashvili said and added that this issue does not refer to only development sector.

Economist Romeo Saria sees serious threats that commercial banks are able to own noncore assets.

“Many statements were made on ownership of noncore assets and everybody knows which companies are implied under these accusations. Naturally, this fact seriously damages healthy competition, because the resource is more attainable for similar companies compared to other players.

Georgian development market is very scanty. Consequently, when a big company operates  on the market and its financial resources exceed resources of competitor companies, even more so its name is related to a big bank, this automatically ejects other companies from the market, even more so similar problems are not controlled on the market”, Romeo Saria noted.

Finally, both experts and government officials agree that ownership of noncore assets by bank sector is one of the hampering factors of economic growth and development. It hampers development of business, especially small and medium business sectors and competition. We hope Government of Georgia and National Bank will continue taking efficient steps.

Source bfm.ge