How Banks Feast while Clients Ail
06 December, 2012
How Banks Feast while Clients Ail
The profit of Georgian banking sector increased in proportion with the growth of the blacklisted clientele during last five years. Some sector analysts suspect that banks have been spreading nets out to trap and impoverish clients. Others think the key reason is loose regulation, inadequate risk management and gaps in consumer rights’ protection.
The tripled profit figure Georgian banking sector enjoyed in 2007-2011 alongside the similarly increasing list of defaulting clients at Creditinfo Georgia, a private company compiling credit histories,
sends a signal of alert that the crisis-affected consumer needs a help.
According to calculations of GeorgianBanks.com, an internet portal focused on highlighting Georgian banking sector, number of clients blacklisted by Creditinfo doubled since the financial crisis of 2008-2010 to 400 thousand at the moment. The figure makes around a quarter of the total number of employed people [standing at roughly 1.6 million] across the country that inclines GeorgianBnaks.com to infer that every fourth employed Georgian potentially is either insolvent or a cheater.
On the other hand, the figure of property [movable and immovable] taken by Georgian banking sector through unpaid loans since 2008 to 2012 increased 37-fold from GEL 3.3 million to GEL 116.2 million respectively. Economic analysts believe the real market price of the property is much higher as banks generally underestimate the price of mortgaged property by around 50% even 70% below the market price. As a consequence, 73 658 families are registered at the National Enforcement Bureau registry expecting eviction while banks faced unprecedented growth in 2011 translating into GEL 323 million – a 300% profit margin, non-governmental Association of Young Financiers and Businessmen, calculated.
GeorgianBanks.com experts wonder how banks with 25% of blacklisted clients may enjoy such a high profit and doubt that the reason can be an intricate strategy of banks to gain extra profit on the expense of seizing property from blacklisting clients and imposing high penalty rates on overdue credits.
As a matter of fact, the statistics of three quarters of 2012 reports that banks net profit accounted to GEL 205.9 million totally while GEL 27 million or 12.7% of the figure is made by fines.
Soso Archuadze, an economic analyst does not rule out scheming [on the banks’ side] however he believes the reason banks flourished during the crisis lays in high interest rates [acknowledged among one of the most expensive world over], lack of social responsibility and chase after non-profile business.
“This looks like a Feast during Plague,” he said in the interview to Georgian Journal. “After one woman committed a suicide in November for she had lost her home to a bank in Spain the state declared a moratorium on mortgage loans. Here we have much worse situation if compared in percentages but banks go ahead with property seizure without any halt. Spanish population making 46 million is ten-time bigger than Georgian standing around 4.6 million. Nevertheless, within the similar period 120 thousand families lost their homes in Spain due to mortgage loans while 173 thousand victims are registered in Georgia that means we have 13-14-time larger victim number but no preventive measures have followed.”
Archuadze acknowledges that borrowers must observe contracts but insists that banks should have moral responsibilities too and take into account lack of legislative culture for years and nihilism inherited since 90s when so called banks impoverished people through financial pyramid without punishment.
“People have no experience, besides they are frequently deceived and disappointed by banking contracts that are very asymmetric: borrowers’ responsibilities are on the one bigger scale that completely weights down the tiny scale of clients’ rights,” Archuadze elaborated.
Besides, chase after non-profile businesses [prohibited in some countries as such] distracts Georgian banks to pay due attention on risk managmnet. They are keen to diversify their businesses and risks accordingly on non-banking business where from they enjoyed almost twice bigger profit in 2011 than from core banking: the market price of the property taken by banks in lieu of unpaid mortgage loans roughly accrued to half billion in national currency while banking activity resulted in GEL 323 million of profit.
“This is such an important issue that central bank as a regulatory cannot solve the problem alone. It concerns to the financial stability and sustainability of the state itself and authorities should solve the problem together with the regulatory body,” Archuadze said.
Lia Eliava, a financial market analyst, downplays the fears that banks trap people in the black list. She explains that Creditinfo’s statistics includes different types of allegedly insolvent clients part of which may have already covered the debt but old data are kept in the database. She ascribes the growing insolvency list with the underdeveloped economy.
“The more banks enhance their coverage the more people [in percentage] become insolvent due to hard economic conditions. Insolvency is not the problem caused by banks and clients but a problem of economic development. If economic level improves the insolvency level will diminish,” she said. “Banks are not happy over taking property instead of unpaid loans, they prefer to get paid and have quick profit in money to make quick reinvestments again rather than handle with renting or selling the real estate when the market is so sluggish, it is an extra headache to banks.”
Eliava stresses that poor risk management skills is among major factors that lead Georgian banks to unpaid loans. Banks interested in profit frequently ignore vulnerable aspects like whether or not borrowing business is a law-obedient tax-payer or profitable.
“This is the central bank’s fault in fact as far as it still has not worked out a risk-management guideline obliging banks never to ignore the obvious risky factors they do today,” Eliava said
On the other hand, she believes Georgian National Bank (NBG) has to pay more attention on proper education of consumers. NBG worked out regulations obliging banks to provide clients by full information on contract terms prior to credit approval, and special consumers’ claim monitoring structures were set up at all banks but the overwhelming majority of consumers has no idea of that as the NBG did not disseminate information properly.
To assist victims of the mortgage crisis Eliava suggests mechanisms alternative to moratorium. She reminds that in 2007 when the crisis unlashed in the US, government created a fund for vulnerable mortgage clients to cover their debts to banks. On the other hand, few months ago five big European banks faced huge penalties in favor of clients after European Central Bank researched their balance sheets and revealed banks incorrectly calculated interest rates on credits.
“I mean it would be great if Georgian regulatory also ruffles banks up and compels them to pay out if consumers’ rights are violated,” Eliava said.
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