Banks’ Mortgage Rights Will Be Restored
08 March, 2012

Mortgage rights of banks will be equalized with the tax lien again. Due amendment bill to the tax code is already initiated by the government and presented for parliamentary procedures.  

 

The governmental initiative approved by Parliament Bureau sitting on February 27 aims to restore the equal creditor right of banks on double arrested mortgage collaterals. This right was seized from banks by end-December of 2011 under similar governmental initiative in favor of the state leaving banks vulnerable to risks and

affecting Georgian investment climate as a consequence.

As a matter of fact the seizure of equal mortgage creditor right off banks meant that if property of tax-payers was under double-arrest of the Revenue Service (RS) and banks, in insolvency case banks could claim for their lien only after the state even if they attached the questioned property as a collateral to the disbursed mortgage loan before the RS imposed a lien.

The point is banks very rare disburse a mortgage loan if its collateral is under tax lien already while tax service always charges a property by lien even if it has previously been charged by bank lien. Therefore banks chronologically are almost always first creditors and the seizure of this first creditor right might give a powerful impact on banking sector international non-governmental watchdog International Transparency Georgia (TI Georgia) as well as Georgian investment groups warned:  the loans given to the Georgian banks or non-banking entities (industrial companies, etc.) by international financial institutions (IFIs) would bear serious risks and the credibility of Georgian financial institutions as business partners be undermined on the international level that was supposed to lead to more expensive credits and dwindling investments.

Levan Surguladze, Head of the investment bank Caucasus Financial Service, feared Georgian banks and other financial institutions could no longer rely on the assets of borrowers as collateral because there was the possibility that this collateral could be superseded by a tax lien even if the borrower had no tax obligations at the time the financial institution’s collateral was registered. Georgian banks might face risks while borrowing at the international market as International Financial Institutions (IFIs), therefore the banks were likely to request additional collateral and fix higher interest rates.

Actually government did not provide with any explanation why the first mortgage creditor right was revoked in this past December or is to be restored again now.

“This bill is just initiated and actually I cannot say anything more than that of its motivation and reasons at the moment,” Giorgi Khuroshvili, Parliamentary Secretary of Georgian Government, said in the interview with Georgian Journal.

Officially the explanatory note of the questioned bill stipulates that the issue of streamlining creditors’ priority rose in frames of partnership of Georgian government and business sector   and is solved in the bill. However, in private talks experts say that government restored banks creditor right under pressure of international financial institutions as well as both foreign and Georgian business associations. And Nika Gilauri, Prime Minister of Georgia, confessed that they made wrong decision during traditional annual meeting of government and business community in Batumi on February 18-19, 2012. Gilauri promised to retrieve the legislative defect and kept his word.

Georgian economic analysts believe that the first creditor right seizure had a political lining aimed to undermine Cartu Bank assets owned by Georgian tycoon Bidzina Ivanishvili who came out as a political opposition past fall. Out of 19 commercial banks operating at Georgian market Cartu together with Progress Bank [owned by Georgian legionary of football club “Milan” Kakhi Kaladze also appearing as a political opponent of Georgian government where Ivanishvili bought up to 9% past fall], where the only banks that remonstrated the risky change in the tax code. Others turned blind eye.

Nodar Javakhishvili, Director General of Cartu Bank, assured the tax lien change was additional tool of political pressure on Cartu Bank that was suspected in alleged money laundering action and put under the probe of the National Bank of Georgia (NBG) in mid-October of 2011.

As a matter of fact Cartu turned out the single bank that suffered of the questioned change. TI Georgia having researched the impact of the priority mortgage right change came to this conclusion. The international watchdog sent requests to leading six Georgian banks including ProCredit Bank, TBC Bank, Bank of Georgia, Bank Republic, Cartu Bank and Liberty Bank inquiring whether or not the collaterals of their debtors were auctioned to pay off tax lien starting the prvilged creditor right was granted to tax service Only two ProCredit Bank and Cartu responded to the request. ProCredit said no.  According to media reports, as of January 29, 2012, TBC Bank also was spared.

The story for Cartu Bank is different. Between the date the amendments to the tax code entered into force (October 28, 2011) and January 27, 2012, tax authorities discovered tax debts of 16 of Cartu Bank’s debtors, all of which arose before the registration of the bank’s lien on the debtor’s property which (49 lots) were auctioned to satisfy the tax debt for half market price.

Nevertheless, in most cases, there was no buyer at the auctions and the state became the owner of the assets. There were two cases when a person bought the property, but in these cases the auction price was not paid and, ultimately those assets were transferred to the state as well. According to the information received from Cartu Bank, the aggregate market price of the auctioned properties makes GEL 112.883 million.

The point that the burden of the change has fallen only on one bank, makes TI Georgia think that these laws were applied selectively.

“However, without information from other major Georgian banks, it is difficult to say for sure. We hope that those commercial banks which have not yet responded to us will make information concerning these regulations public, in order to shed light on this important issue,” TI Georgia announcement of March 2, 2012 reads. However neither of banks did respond to date.

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