Georgian Banks Remain Heavily Non-profile
01 August, 2013
Georgian Banks Remain Heavily Non-profile
Georgian commercial banks’ keen interest in running non-profile businesses remains a stumbling block of Georgian economy. The problem is particularly questioned by developer companies who believe the bank-owned construction companies spoil the market competition and ask for curbing banks activity in construction business. Georgian central bank believes commercial banks have no excessive non-profile assets and they have never financed their affiliated construction companies. Some developer companies accuse banks in imposing bondage loan terms and practicing intricate policy of taking assets
from construction companies into the bank’s ownership since 2008.
Non-profile assets management by Georgian commercial banks should not become a subject of speculations, Giorgi Kadagidze, Governor of National Bank of Georgia (NBG), believes. As he said in his interview to radio Commersant on July 18, 2013 banks do have affiliated construction companies however there has never been a precedent of financing those companies by banks. Moreover, Georgian banks do not own by excessive non-profile assets. Kadagidze promised to publish a comprehensive research in the NBG’s publication whether or not banks should run non-profile assets. Construction companies meanwhile claim banks withhold credits to developers while finance their affiliated construction companies thus killing competition and hindering to the construction sector to get recovered after the financial crisis of 2008-2009 when the said sector faced bankruptcy and losses. To solve the problem developers require prohibition of the banks’ involvement in construction activity. Lia Eliava, a financial market analyst thinks that banks do not finance construction sector because they still have incompetent management. However, she acknowledges that non-profile business activity of Georgian banks is a serious problem and creates risks to clients who may lose savings if banks go bankrupt due to financing non-profile risky businesses. Unlike Kadagidze, economic analysts think Georgian commercial banks are excessively flushed by non-profile assets that can have fatal aftermath not to banks alone but to the entire economy. According to Soso Archvadze, an economic analyst, the profit statistic of banks bespeaks of exuberant revenues from non-profile business. In 2011 profit exceeded GEL 300 million in banking sector while the nominal value of property taken over by banks through bad mortgages accounted to GEL 210 million or around 70% of the total income. However the market price in which banks sell the property is at least double expensive that means the profit through mortgages exceeded the reported income by at least 70%. In 2012 the total profit was by 60% lower than in 2011 making GEL 134 million however the property volume taken through mortgages increased to GEL 225-227 million [nominal price]. “In fact the banking profit is more and more based on non-profile activity from year to year and it is excessive,” Archvadze said. Banks’ non-profile appetite increased since 2005 when the liberally inclined ex-power increased the cap for the share of non-financial assets in the total equity capital of the bank from 20% to 50% and the limit for admitted shares at legal company enhanced from 10% to 20%. The new regulation enabled banks to have controlling packages at other companies through affiliations that distracted banks from their core activity to finance economy and became competitors to non-financial sectors in fact. Economic analysts believe the regulation must become stronger again. “There must be such regulation that banks would be interested in non-financial activity at all because it is a very sensitive sector and a lot of other sectors depend on it. When banks or micro-financing organizations take a license they should focus their mind and creativity on financing real economic sectors not on putting someone in a bondage condition. This is no speculation but a real problem and it will be fatal not only to banking sector but to the entire country. No entrepreneur can take a loan unless it is affiliated to bank by some extent,” Archvadze said. “And the NBG should address to solution of this problem.”
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