Georgian Developers Feel Discriminated
21 February, 2013
Georgian Developers Feel Discriminated
Georgian developer companies feel discriminated by banks and government alike. The imperfect legislation allows banks to be focused on financing their own construction companies and withhold credits to developers while government and central bank turn a blind eye to legislative black holes.
“Construction is the key job creator and one of the best investment opportunity globe over while this sector is neglected in Georgia in favor to banks,” Irakli Rostomashvili, Chairperson of Association of Georgian Developers, said in the interview
to Georgian Journal.
Developers’ key affliction is that banks no more finance the under-construction apartment projects without additional collaterals as they used to do in 2004-2007, during the period of construction boom in Georgia. The scheme brought developers and banks to the brink of bankruptcy when the crisis unlashed in 2008: construction projects were halted; developers could not sell incomplete accommodation spaces and pay-off mortgages. Banks commensurately could not get their money back as the outstanding mortgage loans were backed by the under-construction apartments largely called as “air financing.”
Rostomashvili acknowledges that before the crisis there was a management problem at some developers and banks alike but assures that situation is improved now however banks deny financing even excellent business projects if developers do not provide by alternative collaterals or guarantee almost equal to financing. The reason is that banking loans are channeled on their own construction projects.
“If we ask for USD 5 million, banks ask back for almost USD 6 million as a co-financing that is impossible for us. Business cannot be done this way. Then banks refuse to give loans to our projects under excuse that they are not reasonable but this is a lie. We, Developers’ Association present 4-5 business projects denied by banks and suggest experts of the field to sit down and peruse them at open discussion and let’s see what the unbiased opinion will be. But banks do not come on this,” Rostomashvili said.
He doubts that the real reason is the ex-power lobbied certain banks allowing them to enjoy profits on expense of developers.
“Banks enjoy taxation preferences that make banking deposits more attractive than investing in real estate while in developed countries renting house for example is almost 10% more profitable than banking deposits. In Georgia things are reversed: banking deposits are exempted from the income tax [charging by 18-20%] while you pay the income tax if you buy a house. I ask for equal taxation regime and conditions,” Rostomashvili said adding that even new government does not pay any attention to developers’ problem. He hails government to streamline legislation properly and curb bank’s appetite for non-profile businesses.
According to official statistics, more than GEL 435 million was disbursed to construction sector in 2012 however the statistics do not disclose details which companies got credits that make Rostomashvili doubtful the banks-affiliated companies were the lucky ones.
Zurab Gvasalaia, Head of Association of Georgian Banks, argues there are just three bank-affiliated construction companies with GEL 51 million in balance sheets that banks took over as collaterals of unpaid loans. Based on financial papers of Georgian commercial banks, only three Georgian banks such as Bank of Georgia (BOG), TBC Bank and Basis Bank own construction companies however their number is more than three for banks own more construction businesses indirectly through their affiliations.
BOG, the largest Georgian banks by capital volume, has 100% in SB Real Estate that in its turn has 100% in SB Immobiliare, SB Iberia and SB Iberia 2 construction companies. As to TBC Bank, the second largest Georgian bank and leader of deposit portfolio, it owns 100% at Real Estate Management Company while Mamuka Khazaradze, Chairman of Supervisory Council of TBC Bank, is a founder of Lisi Lake Development project as well as founder and partner of GRDC [Georgian Reconstruction and Development Company] both involved in large-scale construction projects. Basis Bank holds 75% in Paladi Imperial Construction Company.
Banks set up their own construction businesses in the wake of financial crisis of 2008 when they took over the incomplete construction projects from insolvent developers and had to complete them in order to get their money back. However, as Georgian legislation is quite liberal and allows banks to have non-financial assets under loose terms Georgian banks became too bewitched by non-profile business activity including construction.
Lia Eliava, an economic analyst, believes banks refuse loans to developers for they still have incompetent management however acknowledges that non-profile business activity of Georgian banks is a serious problem and creates risks to clients.
Economic analysts fear that excessive interest in non-banking businesses may stray banks off their core function to credit economy and lead to market monopolization and unfair price policy just like developers face. Therefore they think the regulation must become stronger and restrict non-banking activity of commercial banks in line with the international tendency that suggests restricting even investment activity to banks let alone non-financial businesses. But National Bank of Georgia feels at easy side as of yet.
“When the business operates successfully no bank will refuse it in loans,” she said. “But that Georgian central bank needs to address to solving the non-profile business activity of banks as soon as possible and it is obvious however it still turns a blind eye to the problem.”
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