Banks’ Non-Financial Appetite Should Be Curbed
15 November, 2012
Banks’ Non-Financial Appetite Should Be Curbed

The ravenous appetite and excessive aspiration of Georgian banking sector toward non-banking businesses must be curbed.  

The loose cap limit fixed for Georgian banking sector in non-financial activity laid ground to unfair market competition, monopolization and expensive credits. To keep the market off malfunctions, stronger regulation is prescribed.

Too excessive inclination of Georgian banking sector for acquiring non-financial assets is one of the key reasons responsible for expensive credits and the spoilt market competition in Georgia. Apart of banking activity by

today Georgian banks run a large scale of businesses of both financial and non-financial profile ranging from leasing, brokerage, investment, real estate management, and construction  to medical sector, sport, entertainment and trade.

Eight top ten Georgian banks out of 19 operating at the market have controlling packages at non-profile companies. But the most impressive list belongs to Bank of Georgia, the single Georgian bank enlisted at London Stock Exchange. It leads the sector by owning around 50 sundry businesses including three hospitals   and a surgery center in regions, a winery, a brandy company, two travel agencies, fitness center, newspaper distribution company, real estate company, a brokerage, a construction company and so forth. TBC Bank, another leading Georgian bank, is a runner up by managing just 10 non-profile businesses mainly in financial and real estate sectors. Basis Bank, VTB, Cartu, PrivateBank, Bank Republic, and Basis Bank have comparatively moderate appetite: they have around-2-3 non-banking businesses. However the list of non-profile businesses of banks is quite difficult to define as their affiliated companies have also got daughter companies and so forth.

What makes financial market connoisseurs worry is not holding non-financial assets by banks but unreasonably high shares of the said [non-banking] shares in the banking portfolios.

According to the Georgian law on commercial bank, share of non-financial assets should not exceed 50% of the total equity capital of the bank and shares acquired in any other company should be under 20% [although banks contrive to have controlling packages at other companies through setting up daughter companies and affiliations as the legislative loopholes leave room for this].

Almost all experts find the limits too loose. Actually until liberal financial reforms launched in 2005 by ex-ruling rose-government, limits were lower and stricter: the cap for the share of non-financial assets in the total equity capital of the bank was fixed at 20% and the limit for admitted shares at legal company stood at 10%.

Dietrich Muller, an economic and legal expert with Georgian Investment Group, believes the liberalized limits encouraged Georgian banks to chase after non-financial assets that led to unfair market competition and monopolization of certain sectors that ultimately make credits expensive – the reality that Georgia tries to discharge now.

“There is a clash of interests. Banks that hold controlling shares at non-profile business lend credits to their own businesses thus controlling price through their credit lines. And since money is cheaper to bank-owned businesses they [along with banks] enjoy super-profit dictating their prices to the market and setting monopolies,” Muller elaborated.

Besides, risks taken by bank through entrance in equity capital of non-banking business is an equity risk unlike of credit risks that banks usually assume when they simply disburse credits. But the equity risk is much bigger responsibility than the credit risk and may have a fatal outcome to banks and its clients. If banks’ non-profile businesses face equity problems banks would be compelled to solve this problem most probably by allocation financial resources from banking revenue or deposits. Thus, exposing deposits to bigger risks while there is no deposit insurance system in Georgia as of yet.

As the best world practice shows banks are allowed to have non-banking assets of insolvent company under temporary management but as soon as banks compensate their loss they have to sell out the non-financial assets. But this practice was distorted in Georgia.

“Georgia is a small market offering small profits therefore banks need to manage non-financial assets temporarily when they need to reimburse the losses of insolvent clients but this practice became vicious lately and banks own anything starting from petrol stations to whatever man can fancy,” Lia Eliava, a financial analyst, said. “One should always remember that any business is risky and when a bank enters non-profile business it poses threats to depositors as far as if that business faces problems bank will aid it through banking incomes particularly deposits.”

According to Nodar Javakhishvili, a candidate for the post of president at Georgian central bank, non-profile businesses distract banks from proper risk management. When it comes to financing their non-banking companies banks are prone to underestimate risks [once they manage with the assets] that may have fatal outcome to banks.

Experts fear that excessive interest in non-banking businesses may stray banks off their core function to credit economy. Therefore they think the regulation must become stronger and restrict non-banking activity of commercial banks in line with the international tendency.

Levan Surguladze, managing director of CFS [Caucasus Financial Services] Investment Bank, reminds that the loosened regulation and excessive involvement in non-banking activity was the reason triggering financial crisis of 2008. And now the entire world is focused to make the banking regulation stronger. The latest Basel’s recommendations suggest restricting even investment activity to banks let alone non-financial businesses.

Surguladze thinks even the old 20% limit of non-banking assets in total equity resources of banks is quite large and recommends to keep closer with Basel recommendations ignored so far in Georgia.

Print
Other Stories
The World Digital Mining Summit to be held in Georgia
The summit is scheduled to take place between 21st-23rd September in the Hualing Hotel, Tbilisi, Georgia.
Galt and Taggart - Tourism Boom Continues in Georgia
Tourism has become one of the key drivers for the Georgian economy. Galt and Taggart has recently published research about the Georgian tourism sector in the first half of 2018.
"The worst dream for Putin is that Russians want to live in Georgia"
This year, visitors to the Adjara region would notice that there is a boom in construction in and around Batumi.
Underground gas storage facility to be built in Georgia
KfW, a German government-owned development bank signed a EUR 150 million promotional loan with the state-owned Georgian Oil and Gas Corporation (GOGC) for the construction of the first underground gas storage facility in Georgia.
New gambling rules for Georgia
Georgian lawmakers are preparing a new draft law relating to online-casinos and gambling that will seek to curb gambling addiction in Georgia.
How expensive is it to visit Georgia?
The Georgian Lari (GEL) is the official currency of Georgia and is the only legal means of payment in the entire territory of Georgia.
Trade with the EU and the Commonwealth of Independent States (CIS) has grown significantly
Trade with the EU and the CIS has grown by 26% and 33.5 % respectively, says GeoStat, the Georgian National Statistics Office.
The unemployment rate decreases in Georgia
The unemployment rate decreased in Georgia by 1,9% and amounted to 12.1% in the 2nd quarter of 2018 compared with the previous quarter,
Memorandum of Understanding to be signed between Georgia and Malaysia
According to the Georgian Ambassador to Malaysia Nikoloz Apkhazava, Georgia plans to sign a Memorandum of Understanding (MoU) with Malaysia.
“Blauenstein Georgia” due to expand in Georgia
“Blauenstein Georgia” is planning to open more shops in Georgia. It is an agriculture company that sells meat products, meat and convenience food.
The amount of Direct Foreign Investment rises in Georgia
According to the information of the National Statistics Office of Georgia, the amount of direct foreign investment in Georgia has risen
It’s going to get  harder for foreigners to get residence permit in Georgia
It’s going to get harder for foreigners to get permit of residence in Georgia.
Mziuri Park in Tbilisi to be renovated soon
It was the dream of prominent Georgian writer Nodar Dumbadze that when the original Mziuri park was constructed and opened in 1892 that it should be a park for children,
Winemakers to produce Kvanchkara in its place of origin - Racha
Khvanchakara is a semi-sweet Georgian red wine which originates from Racha, in the western part of Georgia. Kvanchkara is made of two types of grape Mujuretuli and Aleksandrouli.
The level of Georgian wine and Chacha exported has increased
The National Wine Agency of Georgia has recently published statistical information about the level of Georgian wine and Chacha exported between January and July, 2018.
New fire engines to be Manufactured in Georgia
The Acting Head of the Emergency Management Agency Shalva Khutsishvili said that the old Zili fire engines (which were made in the USSR) will be phased out and replaced with new ones, manufactured in Georgia.
Georgia witnesses a record number of tourists
The Georgian National Tourism Administration publishes statistical information about international visits to Georgia.
Canadian businessman plans to build a hotel in Bakhmaro
Canadian businessman Vadim Malishev plans to build a hotel in Bakhmaro resort, Guria, in the western part of Georgia.
Coffee Factory will open in Tbilisi in October
The first coffee factory (which will be located on the Kakheti highway) in Tbilisi will open in October.
Places in Georgia where real estate is the most expensive
The real estate market in Georgia is growing annually. In Tbilisi as well as other regions of Georgia new developments are increasingly taking place.
How much does a vacation cost in Tbilisi?
It is the middle of summer and those who have not yet taken a vacation are looking for an appropriate place for sure!
The price for extreme sports in Georgia
Georgia offers a variety of options to extreme sport lovers.
The number of Georgians who own property abroad increases
The number of foreign properties owned by Georgians is increasing.
How much does Taxi cost in Tbilisi?
Stories how Taxi drivers try to deceive passengers and charge them with more money than they should pay are known for everybody all over the world.
What are the highest paid areas in Georgia
According to the data collected by the National Statistics Office of Georgia in the first quarter of 2018 the highest paid jobs in Georgia are found in the financial and insurance fields.
PHOTO OF THE DAY
Exchange Rates
GEL Exchange Rate
Convertor
17.09.2018
18.09.2018
USD
1
USD
2.6128
2.6156
EUR
1
EUR
3.0578
3.0498
GBP
1
GBP
3.4296
3.4259
RUB
100
RUB
3.8669
3.8379
Other Stories
Recently Toyota rolled out Global Campaign under this slogan that reflects the Olympic and Paralympic Spirit of Encouragement,
A couple from Switzerland combines Swiss tradition and technology with Georgian products. Their cheese is made in the Georgian mountains and sold in local stores and hotels.
It has been more than five years since the residents of Lilo village, near Tbilisi, cannot open their windows.
63 000 GEL was received by the Georgian Agro Export Group which is just a small part of the European Neighbourhood Programme for Agricultural and Rural development.
Georgian entrepreneur Guka Tavberidze, who runs his own business in the UK and does it quite well, has been invited by BBC
The grand opening of 7-star The Biltmore Hotel Tbilisi took place in Georgia’s capital on July 31.
DUSHETI, Georgia – The Georgian government and the World Bank will allocate USD 5.6 million (12 million GEL) to fund
A new Georgian clothing brand named Person has emerged in Georgian market.
Georgia is in the midst of an economic maelstrom, Euronews reports.
Situation at Georgia’s mineral water market is interesting: over the last year, the volume of export has grown by 56 percent. According to “GeoStat”, over $114 million worth of mineral water was sold
GEL Exchange
USD
1
USD
2.6156
EUR
1
EUR
3.0498
GBP
1
GBP
3.4259
RUB
100
RUB
3.8379
September 2018
Mon Tue Wed Thu Fri Sat Sun
1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30