Curbing banks’ appetites
20 February, 2014
Curbing banks’ appetites
Four Georgian analysts have appealed to Georgia’s authorities and its central bank to prohibit non-profile business activity to commercial banks. When banks become dangerous competitors with their own clients, it compromises market competition, and has a heavy impact on the national economy. Three economic analysts - Levan Kalandadze, Irakli Lekvinadze, Giorgi Abashishvili - and a legal analyst - Levan Alapaishvili - sent a joint letter to the Prime Minister, Speaker of the Georgian parliament, and Governor of National Bank of
Georgia on 13 February, in which they called for prohibiting non-profile business activity to banks, as well as restricting financial, but not banking, business. Initiators of the idea believe that there is an obvious trend when banks enter all sectors of the economy, both financial and non-financial, and take monopolistic positions due to their access to financial resources, enabling them to oust weaker competitors from the market.
Analysts fear that this will cause system problems in future, and a large portion of market power will be concentrated in the banking sector. The problem is not with the banks, though, but with the law that fails to regulate the sector properly, a problem that needs to be discussed. In fact the great majority of Georgian economists have been calling attention to this problem for many years, since the liberal former government raised limits of non-profile business assets in banks in 2005.
According to Georgian law on commercial banks, the 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% - whereas the cap limits stood at 20% and 10% respectively before the change. Although banks contrive to have controlling packages in other companies, through setting up daughter companies and affiliations, legislative loopholes leave room for this. As a consequence, eight top-ten Georgian banks out of 19 operating on the market have control of non-profile companies, including hospitals, real estate, a brokerage, some in the construction sector, supermarket networks, entertainment, etc.
Zurab Gvasalia, President of the Association of Georgian Banks, regards the Georgian banks’ investment policy as already strictly regulated and in line with international practice. According to him, banks share risks of the business in which they hold stakes; however, he admits that banks are free of risks if they only invest in non-profile companies. And if they exceed regulated limits, there are strict sanctions, including deprivation of the banking license. But the share of non-profile investments of Georgian banks is just 2.3% of total assets of the Georgian banking sector, he said.
But initiators of the anti-non-banking campaign believe the current law and non-banking activity limits do not actually tie the hands of banks. Even in well developed economies, non-profile business activity is either prohibited to banks, or limited to 3-5%.
According to Lekvinadze, two leading Georgian banks, Bank of Georgia and TBC Bank, cover 58% of the banking sector, but also take up 37% of the entire economy through non-profile business activity. “Just imagine the level of power concentrated in the market,” Lekvinadze told Georgian Journal. “This enables banks to demonstrate their interest whenever they want. This is the business grievance we hear many times. They say that when they have problems with loan payment, instead of debt restructuring and rehabilitation to help companies to withstand the crisis, banks seek to drown the company as soon as possible, or sell it out, for example, to one its partners and get fast money.”
Kalandadze points out a loophole, when banks control other businesses indirectly through bank- affiliated people: founders of banks or members of directorates set up companies. “Banks officially have nothing to do with this, but they indirectly finance affiliated businesses by preferential credits, while withholding credits to competitors. Worse than that, banks create problems for competitors, leading to bankruptcy, and they get rid of them finally.”
Financial non-banking investment activity of banks also includes monopolistic risks, he indicated; therefore it should be not prohibited but restricted and strictly regulated. “Bank of Georgia, for example, does not own hospitals directly, but its affiliated insurance company Aldagi BCI acquired almost all the hospitals in the country,” Kalandadze said.
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