Fitch Finds Georgian Banking Sector Over-banked
10 May, 2012
Fitch Finds Georgian Banking Sector Over-banked

Georgian banking system is over-banked for a small economy, Fitch Ratings Manager James Watson assumes. Some Georgian financial market analysts agree, pointing at the weak banking regulations as the reason, which attracts non-transparent high-profit-oriented capital to Georgia. Others find Georgian bank market is just in a right stance since each operating bank finds its niche.  


“Georgia is over-banked for a small economy, with 18 credit institutions currently registered. Putting it simply, there is just not enough banking business in the

country to sustain so many banks. At the same time, most of the country’s lenders have relatively strong foreign owners, and smaller, less profitable institutions are for the most part under limited near-term pressure to deliver improved performance”, Fitch Ratings Manager James Watson said in the interview with The Financial, adding however that the sector is well capitalized, comfortably liquid with stable asset quality. Watson is responsible for Georgia, Azerbaijan, Kazakhstan, Ukraine, Armenia, Belarus and Uzbekistan's bank ratings.

According to some financial market analysts National Bank of Georgia (NBG)  shares this position in fact unofficially but has not presented argumentation backing this standpoint as of yet.

Officially NBG acknowledges that most of the banking activities on Georgian financial market are performed by top largest banks. Top 5 banks account for 81% of total assets and 81% of gross loans as of February 2012. The remainder 19% is redistributed among 13 banks that do not influence market rules in fact and spoil statistics in fact, Lia Eliava, a financial market analyst, believes.

“Such small banks are not active from economic point of view; they cannot create any climate here and only spoil overall statistics, for based on figures only one-third of Georgian banking sector is profitable,” she said.

NBG believes the presence of small banks poses no risks. Nevertheless, it urges petty market players to get larger to improve competition.

“Although majority of the banks obviously share only a small portion of the market, their presence does not pose any risks/inefficiencies to the sector as long as they remain adequately capitalized and governed in a way that is relevant to their business model and activities undertaken,” NBG commented to Georgian Journal. “Despite this, NBG would only welcome if market forces drive enlargement of activities of small institutions either via mergers or on its own as relatively larger players on the market could enhance competition in the sector.”

As of February 2012, Georgian banking sector is represented with 17 banks and 2 foreign bank branches. All of the institutions rely on foreign capital participation according to analysis of beneficiaries, the NBG informs.  Eliava believes the statistic indicates banking market is really over-cooked as well as too oriented on foreign capital and the weak supervisory policy of Georgian central banks is the reason. Namely, NBG unlike other central banks of developed world as well as the post-soviet space allows affiliations of foreign banks to operate in Georgia and does not insure transparency of stake-holders’ identity at Georgian banks that attracts profit-oriented risky capital here.

“Branches of foreign banks from regional neighbors like Azeri and Turkish banks are not interested in getting a large foothold at Georgian market. Branches just follow their business here to perform service to restricted number of clients.  As to other banks foreign capital prevails everywhere while nobody can trail down real names of stakeholders for they are registered in off-shore, Eliava said. “And none of them works on Georgian economy in fact, they all work on import mainly to insure smooth entrance of import in Georgia [that by 80% depends on import] and money outflows abroad through this import it does not contribute to Georgian economy.”

As a matter of fact the import-led trade is the key sector financed by banks in Georgia as about 50% of loans of  entire Georgian banking sector is disbursed to legal entities involved in trade,  only around 20% comes on industry and 10% on construction. As to agriculture that is responsible for about 50% of job creation in the country it cuts a miserable share in the credit portfolio.

“This is due to a weak point of the NBG and too liberal regulatory policy. No other state allows foreign branches to operate within the country for they do not have their own equity and may evaporate in case of bankruptcy in a blink of an eye. Azerbaijan that has two branches here prohibits itself operation of foreign bank branches over there and no one except Georgia allows it in fact,” Eliava assures.

Zurab Gvasalia, Head of Association of Georgian Banks, opposes that the NBG follows Basel regulation in all terms and that the big number of banks at Georgian market is a proof of good not a weak regulation as far as in spite of big number of banks no consumer has ever faced banks insolvency problem and nobody rallied in front of banks to hail them return deposits.

“Ok, larger banks are better for better financing of the economic sector, but I really cannot understand what does it means that banking sector is saturated?” Gvasalia wonders. “If banks operating at Georgian market meet all requirements of the central bank on the side of capitalization, reserves, liquidity, etc, is profitable and if it has its niche all this means the market can have it. If they find apt getting larger they will find ways to this end by their own way.”

“The Keynesian invisible market hand theory did not justify expectations and everybody makes stronger regulation now,” Eliava argues. “The NBG should put out stronger requirements to prevent suspicious stakeholders to enter Georgian market, on the other hand should make incentives to local banks to finance industry and agriculture so as to reduce the import share in the country. For example, it can reduce the reserve figure to banks 10% of whose loan portfolio will be made of agriculture or something like that,” Eliava elaborates.

She believes the reason for a big turnout of foreign banks in Georgia is the high profit and vulnerability of Georgian consumer.

“One can fix 40% of interest rate and nobody will check exactly how fairly the rate is defined, the taxation burden is light to banks and no deposit insurance system protects consumers,” Eliava elaborates.

Some experts believe it is small banks that create more-or-less competitive climate against the backdrop of two giant leading local banks otherwise the yet expensive banking product will be much more expensive in Georgia.

Eliava downplays the further monopolization risks in this case for these giant banks already set out the rules of the game and the petty fry does not influence the market in fact for they are oriented on their restricted circle of clientele.

“While larger local banks are a better financing source for local economy,” she said.

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