Easing NPL problem
13 February, 2014
Easing NPL problem
Georgia has to work out mechanisms to mitigate its Non-Performing Loans problem. The best world practice shows that only moderate and reasonable state interference will alleviate the NPL problem so that both the private financial sector and insolvent borrowers can escape bankruptcy. Almost 10% of all bank loans are non-performing in Georgia. More than 100,000 individuals and legal entities are on the list of the Debtor Register.
Among 124 countries in World Bank data on the share of NPLs in
total loans, Georgia stands 52nd - slightly better than average. However, a decent NPL indicator in the Georgian banking sector seems misleading - for it may be the result of an alarmingly high number of NPLs in the unofficial market of private lenders and borrowers, sector pundits say.
One of the most painful consequences of the NPL problem is when people lose their houses and become homeless. The share of real estate secured loans has been on the rise for the last 6-7 years, which indicates that more people are being exposed to that risk.
To find a solution, the Economic Policy Research Center (EPRC), a non-governmental organization, has recently studied the problem. Based on different international examples and precedents, their report offers a solution which can and should be applied by Georgian banks and the government.
The solution covers management of the existing NPLs, and offers measures to prevent future loans from defaulting: by raising the financial literacy of borrowers in Georgia, and adopting the best international experience of Asset Management Companies (AMCs) for managing and/or disposing of bad debts.
AMCs dispose of assets removed from a bank’s balance sheets, or restructure a corporate debt. Non-performing loans can also present an opportunity, since non-performing real estate loans allow investors to buy them out through AMCs, and make a profit in the future. Improving loan regulating/execution legislation is also a must.
“This can be a positive solution for the different parties involved: the bank has bad loans removed from the balance sheets, the borrowers have their debt resolved one way or another, and the investor buys out the loan with the prospect of making the loan and/or the property profitable,” the EPRC report states. “Currently a very immature form of AMCs exist in Georgia that could be further improved and developed. A major constraint is the harsh tax legislation imposing profit taxes. Creation and operation of problem AMCs could become more realistic if the framework for such activities can be elaborated with the National Bank of Georgia and respective governmental agencies, based on international experience and best practice.”
According to the research, the growth of NPLs is driven by macroeconomic factors (economic growth, nominal effective exchange rate, poverty rate, and income inequality), business specific factors (excessive risk tolerance, poor risk management), and other factors such as the low awareness of borrowers over indebtedness (taking a loan to cover an existing loan, for example), inappropriate fines, and unfair enforcement legislation.
Loose legislation eases the hand-over of loan collateral from insolvent borrowers to banks. An amendment enacted in 2009 in the Civil Code of Georgia mandates financial and nonfinancial institutions to keep a debtor in the Debtor’s Registry until his loan is fully covered, even if the collateral on this loan is handed to the creditor - thus a debtor is liable regarding other property as well, even if it is bought in the future.
At the same time, the legislation does not set upper limits on the imposed fines that a debtor might face in case of inability to meet the liabilities. As a result, borrowers pay six-fold, and more than the debt ultimately.
For example, a family from the Kobuleti sea resort took a GEL 16,000 business loan at 17% yearly in 2008, before the August war. The war affected the tourist business and after the loan restructuring, the family paid GEL 109,787, and still has to pay GEL 12,000 to the bank.
EPRC analysts believe upper limits should be imposed on fines, and be regulated by the state. Moreover, an indication in a contract of the effective interest rate must become mandatory.

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