Loose Regulation Encourages Raising of Credit Prices
25 October, 2012
Loose Regulation Encourages Raising of Credit Prices

Loose regulation is one of the major factors making credits expensive in Georgia. The fact that Georgia is a country of expensive credits is no secret. But recently exposed rating of Penny Lane Realty triggered Georgian experts to scrutinize ups and downs of Georgian credit portfolios.

Penny Lane Realty made up the rating of 60 countries to find out how accessible mortgage are in the researched countries but Georgia does not show up in the rating at all. GeorgianBank.com, a non-governmental organization,

keeping an eye on Georgian banking sector, calculated Georgian rating based on the Penny Lane Realty methodology and Georgia ranked number 55 below Uzbekistan, Bangladesh, Moldova, Russia, Nicaragua, Fiji and etc. According to the rating, the average mortgage volume is EUR 122 250 thousand for 20-year loan. Georgian banks fix around 15-20% for mortgage and require 20% [around EUR 24 450] co-funding of borrower in the loan. Accordingly, on a EUR 97 800 worth loan Georgian client pays EUR 1288 per month that translates into EUR 309 thousand in 20 years that makes 252% of the core sum.

Besides, nobody can get 20-year mortgages in Georgia in fact especially after the crisis of 2008. The average mortgage timeline stretches to 10 years. 15-year loans are very rare. European countries fix within 1-4% on mortgage and in Denmark for example that provides by the cheapest credits a client pays just 114% of the loan to banks through the interest rate.

Lia Eliava, a financial market analyst, thinks mortgage cannot get cheaper unless Georgian construction sector focused on high class house-buildings will undertake construction of economy-class buildings. But the key factor making credits [including mortgage] expensive in Georgia is the loose regulation. Banks never provide with the information what is the self-price of credits and the NBG looks through fingers on huge profit margin of banks. So does the Revenue Service (RS) of Ministry of Finances that actually forgives the past-due tax arrears to banks as delays them without imposing sanctions, some sources say. Banks are apparently the pampered baby of Georgian government.

“Mortgage price is high because banks actually have short-term financial sources  and when they disburse long-term credits like 10-year mature period they add high risk factor, insurance, re-insurance and many other factors than jack rates up in deed but nobody has ever provided with the information what the self-price of credits are in fact,” Eliava said.  “The NBG tried to establish the risk management mechanism at banks but to no avail. Actually based on Basel convention each bank is responsible for assessment of its risks but they have to inform the regulatory body at any rate. The nonchalance approach of banks is the result of the NBG’s weak supervision.”

Experts agree that credits cannot get cheaper by mandatory decree but the regulatory body can encourage price-cut if presses due keys: makes regulation stronger and competition healthier.

They believe Georgian central bank peeps through fingers on the banking sector’s unreasonably high profit margin averaging to 300% past year - a non-governmental watch-dog of the Association of Young Financiers and Businessmen (AYFB) calculated.

“The NBG has all tools to improve the situation but it has not such a will,” Nodar Chichinadze, President of AYFB, said in the interview to Georgian Journal.  “At least it can pay attention that credits are the dou ble expensive of deposits. Interest rates must correlate closer than that. Based on the World Bank’s data of 2011, average yields on deposits and credits at Georgia banks are fixed as 10% and 25% respectively. It translates into 300% of profit-a huge figure really that bespeaks of lack of competition,” Chichinadze elaborated.

Merab Kakulia, Senior Specialist at the Fund for Strategic and International Researches of Georgia, thinks competition at Georgian banking sector is mainly among 3-4 leading banks [out of 19 operating banks] and is of selective manner: they deliver cheaper credits to corporate clients but disburse expensive credits to the retail market in spite of the fact that unlike smaller banks they have full resources to cut credit prices down. He thinks creation of regulatory framework focused on better competition may alleviate the problem.

On the question whether or not the NBG controls the self-price of credits the NBG made no comment. However, Giorgi Kadagidze, President of the National Bank of Georgia, disagrees that credits are unreasonably high and market lacks competition.

Kadagidze believes credit price are in line with the economic development of Georgia and will become cheaper as the economy develops.

“Interest rates on mortgage and business loans were receding permanently within last several years. Just about 5 years ago [currently active] rates between 11-14% was unimaginable. Of course it is still high but everybody should understand that interest rate is a joint result of macroeconomic parameters and there is no artificial tool to cut rates down. Interest rates will drop gradually alongside with the economic development,” Kadagidze said on October 19, 2012 in his response to the new government’s accusations that credits in Georgia are unreasonably expensive.

He believes Georgian banking sector is the healthiest sector of Georgian economy with GEL 15 billion of total assets and covering 52% of GDP. Such high data cannot be achieved in uncompetitive climate, he said.

Chichinadze thinks that Georgian banking sector just seems to be the healthiest compared to other sectors of economy but the low level of competition leaks behind profit figures.

“In 2011 Georgian banking sector enjoyed GEL 1.2 million in profit on credits alone while profits through deposits made GEL 400 million – by 3.5 times less than the yield in the credit portfolio. How can we speak of high competition against the backdrop of such a big profit?” he wonders adding that the international researches prove credits in Georgia are one of the most expensive globe over.

According to the Global Competitive Index, out of researched 142 countries only 9 [like Tajikistan, Peru, Paraguay, Malawi, Madagascar, Kirgizstan, Haiti, Congo, and Brazil] fix credit rates higher than Georgia.

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