Parallel Financial Sector Jeopardizes Fair Competition
31 May, 2012
Parallel Financial Sector Jeopardizes Fair Competition

Introduction of Qualified Credit Institutions creates a parallel financial sector, affecting fair competition and consumer interests. Georgian central bank believes the initiative is harmless and it only serves the legalization of shadow market. 

According to the National Bank of Georgia (NBG), there are plenty of non-banking  legal entities in Georgia, attracting resources from retail market comprising a large scale of population that were not taken seriously before for its insignificant size but the trend has changed recently. The questioned institutions

started enhancing significantly through quite intensive ad campaigns posing risks to the sector ultimately and having researched the best world practice government decided to put them under the NBG regulation based on certain limits.
To this end, creation of Qualified Credit Institute (QCI), a public law entity was decided under initiative of majority MPs. According to the bill introducing the QCI, this title will be granted to any legal entity attracting deposits with total amount exceeding GEL 5 million or deposits from more than 400 persons. The registered QCIs should meet all requirements the NBG will put out furthermore. 
The mushrooming credit institutes very much resemble the notorious financial pyramids of not to remote past in 90s of the past century when about 240 unlicensed financial institutions fixing high yields on deposits enjoyed huge profits. Eventually they went bankrupt and disappeared successfully escaping punishment and depriving their clientele off their money.
But people have short memory when it comes on high profit touted by unregulated credit institutes recently. The NBG presumes that certain trust of population toward questioned institutes is caused generally by stability of financial sector represented by banking sector actually. Therefore putting such institutes under control will enable the NBG “to raise awareness of population against potential risks when acquiring product of different financial institutions thus creating preconditions for fair redistribution of capital,” the NBG elaborated to Georgian Journal.
On the other hand the bill lays grounds to legalize shadow financial sector and at the same time gives a chance to continue activity.
Sector pundits question the bill however. Some fear that the suggested regulation opens a real Pandora box to banks and micro-finances.   
The volatile QCI definition makes skeptics wary. According to the bill, legal entities crossing the limits set for QCI title have registration obligation if NBG requires it that means the NBG may not demand registration either.
“I expect of this amendment to create serious problems to banking sector,” Lia Eliava, an economic analysts, said. “It actually says that any Ltd that attracted 399 deposits or GEL 5 million minus one Lari will not be put in frames of obligatory regulation, they will seize depositors from banks and may disappear just like credit institutions did in 90s and nobody could trail them down. This amendment leaves depositors vulnerable to risks the more so that we have no law on deposit insurance.”
On the other hand, a kind of parallel sector is created to banking sector that undermines fair market competition for this new sector will be less regulated: the bill does not stipulate mandatory registration terms and further eligibility criteria.
“I cannot understand why this parallel space is created for? It means that the NBG does not trust commercial banks and creates a parallel sector called the Qualified Credit Institutions meaning that the already operational banks that are also credit institutions are not qualified,” Eliava wonders.
Zurab Gvasalia, Head of the Association of Georgian Banks, plays down the alleged risks.
“This sector does already operate, nobody can prohibit two legal entities to borrow and lend money, no law prohibits this kind of activity and this was uncontrolled. This amendment just sets the risky sector under regulation and if the NBG finds something risky it will take the suspicious institution under regulation, what’s wrong?” he counters. “If there had been such regulation in 90s there would not have been such terrible results.”
Ditrikh Muller, an expert with the Georgian Investment Group, assures the unlicensed credit institutions will spoil the market by fixing unreasonably high interest rates on deposits that will entice clients from banks and the latter will have no other way than to fix equally higher yields thus making credits more expensive too.
“Only crazy liberals might have come to such an idea to place the licensed and unlicensed institutions together to compete, the unlicensed one has no obligation and will swindle like 90s and disappear leaving the market spoiled,” he said.    
Experts of the USAID supported Economic Prosperity Initiative (EPI), find the initiative of regulation uncontrolled sector in line with the EU directive and think irrelevant to surmise of possible negative impacts till actual outcomes come true. They discuss QCI as competitors to micro-finances rather than banks for the QCI credit resources have higher risks and will be much expensive than at banks. Besides regulatory burden is supposed to reduce the QCIs yet low competitive power and they can neither affect general interest rates nor take any niche at the market.
What EPI experts question in the bill is the paragraph demanding registration of all enterprises involved in financial mediation as QCIs in fact. According to the bill, enterprises that did not cross the QCI limits also can be required to register at the NBG in certain cases while the case conditions are pretty unclear: Such obligation emerges if the NBG finds their activity, amount of attracted resources, the region and segment where they do operate important for the financial sector; also if activity of the questioned legal entities and the clientele attraction methods bespeak of significant enlargement plans of the circle where they attract resources from. Moreover, the NBG is mandated to require any information including the confidential one and if the QCI does not meet the demand it will be liquidated and fined by GEL 150 thousand. 
“It comes out that the NBG can supervise not only QCIs but also other enterprises involved in financial mediation [including demand on confidential information]. In this case there is a question: why the law had to put out criteria for QCIs then?”-the EPI experts ask.

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