The FINANCIAL — Interview with Zurab Gvasalia President of the Association of Banks of Georgia.
Q. According to NBG indicators, the total volume of current accounts and termed deposits is higher by 2.3 percent compared to the same period of the previous year. How would you assess this indicator? What was the tendency of growth compared to earlier years?
A. It would be wiser to compare this indicator to the data of August last year instead of the same period of the previous year. Firstly, because economic growth demonstrated a high rate in the previous years, it had almost reached a two-digit figure, which respectively reflected in the 50% growth of bank deposits and assets. Just for your information, current growth of deposits has reached 47% compared to the same period of 2008; the Russian-Georgian conflict together with the global economic crisis has seriously tightened our economy.
The volume of non-bank deposits (current accounts and term deposits) placed in the banking sector had reached GEL 3 billion by February 2009, while it was GEL 3,1 billion in August, 2008 and decreased to GEL 2,7 billion in September.
Actually, we are now at the same position where we were at the beginning of August last year. But if we take September as a reference point, we will see that against the background of a 400 million reduction of the deposit base and deterioration of the economic conjecture, the current indicator is quite good. The reference point of the post-crisis situation is the closest period to this crisis, which means that we need to go where the fall started. This factor indicates major sources of the deposit base growth were the deposits flown out from the banking system.
Q. The structure of deposits in foreign currency has changed in favor of the EUR. The share of EUR has also increased, but significant change between the exchange rates of EUR and USD has not been observed. Why do you think people are more loyal towards the EUR?
A. Another important factor of the post-crisis period is the growth of dollarization. For instance, coefficient of the deposit dollarization, by 1 February, 2009, reached 76.2%. The tendency of Dollarization growth in the deposit base proves that people have some fears against GEL deposits. Growth of the dollarization of the deposit base has naturally reflected on the banks’ credit portfolio. The volume of credit investments of commercial banks (including loans granted for non-residents) has increased by GEL 1,189.3 million as compared to the February data of 2008. It reached GEL 5.9 billion by February 1, 2009. Interestingly, loans granted in foreign currency have the biggest share in the total volume of loans (96.8%). Dollarization growth is not good at all; its reduction will be directly connected with the economy state and political stabilization of our country.
As for giving preference to EUR, the impact of the US economy recession plays an important role here.
Q. In October 2007, the Association of Georgian bankers and Caucasian University established the banking training centre of Georgia, which was facilitated by the Banking Association of Greece and the Banking institution. How many people are trained by now and what are the perspectives/plans of the training center?
A. I do believe that against the background of the global economic crisis, when the majority of US and European banks are closed and current nationalization process of some banks, re-training of bank staff and developing their qualification is a priority issue. The Banking Training Centre is a new financial educational institution in our reality established a year ago and being in the process of developing.
Modern strategies of managing assets and liabilities are more and more inclined to creating new models of interest rates as well as risk management in general. Minimization of market risks is impossible without developing these models. Perspectives of the training centre and the plans for the nearest future consider focus on financial and risk management issues.
Q. The USA was the first country to create an official deposit insurance system in the period of the Great Depression and the banking crisis (1934), how productive was it in the USA and will a similar fund be good to insure Georgian banks?
A. Against the background of the world’s economic recession, significance of the deposit insurance institute has seriously increased. It is not a coincidence, the minimal deposit amount that can be insured has increased from USD 100,000 to USD 250,000 in the USA. As for Europe, they have already made decision on increasing the volume from EUR 50 to 100 thousand.
The structure of the deposit base of Georgian banks is different from American and European counterparts, which is mainly due to the low income level of our population. Significant portion of deposits of physical persons comes on GEL 5,000 deposits, hence the size of the minimal margin of the insured deposit would be between GEL 5,000-10,000. Unfortunately, the consensus has still not reached Georgia. The Georgian Association of Bankers was always supporting the idea of introducing this kind of insurance in Georgia, it would be obligatory for all banks to join it. In 1998 our association set up a working group to work on the model which would be appropriate to Georgia and the major principles.
Q. A few days ago, Moody’s analytical team seriously dropped the rating of two leading banks of Georgia, the reason being – the August war and restrictions imposed by these banks. What has particularly changed in the banking sector in the post-war period, what are the restrictions imposed by the National Bank of Georgia and what can be done to reach the stage we were at before the war?
A. The fact that the ratings of Georgian banks fell down is not surprising, but it is not the fault of the August conflict only. The analytical group of Moody International also lowered the ratings of banks in countries which had no wars or political chaos. The main criterion for decreasing a bank rating is the impact of the world’s economic recession on the financial markets of these countries.
Ratings in terms of investment as well as default indicators have deteriorated in many countries. A serious fall in ratings is being observed in Ukrainian banks. Lithuania has even adopted a law on the banking nationalization as a follow-up on dropping the rating B to a negative point. The sovereign rating of this state was evaluated as something inadequate.
Liquidity management and deterioration of the gap between assets and liabilities sensitive to the changeability of the interest rate in terms of the income reduction are the most important factors in hard times. National Bank of Georgia made an absolutely correct decision by refinancing banks in the crisis period and dropping the current coefficient of liquidity.
Another important decision of NBG was the reduction of interest rate on re-financing to increase the liquidity of the banking system and stimulate the economy.
Banks carried out an absolutely correct policy when they tightened terms on loans and de-classified some of the credits to minimize related market risks and prevent possible loss of reserves. The banking system had a big loss, banks additionally reserved GEL 208 million, reserves are included in the expenditures and subtracted from the operational profit.
Q. This is the first week when positive changes have been observed at the London Stock Exchange since the price on BOG stocks seriously dropped there. Do you expect an end to the crisis earlier than forecasted?
A. The Georgian economy as well as the banking system has already fallen in the post-crisis period, if we mean post-August months under the crisis. The economic recession has not reached such large scales in Georgia as it did in Europe, including Post-Soviet Europe, Baltic States and Ukraine. Unfortunately, we don’t have large local production, which would directly be affected by this crisis as an exzogenic factor. Donors’ aid played a very important role in mitigating the crisis; some of this aid has already entered the state economy and the banking sector.
For a country with such a small economy like us USD 4.5 billion assistance is a good precondition to avoid large scale impact of the global crisis and recession of the leading countries even if it lasts till 2011.
Q. It is not long since you were granted with the prize of Honor in Britain for special contribution to the banking sphere. Could you please tell us about the event?
A. It is a very prestigious prize, named after Queen Victoria – the Queen Victoria Commercial Medal. This medal is annually granted by the European Business Assembly, which has its headquarters in Oxford.
Personally I was granted a prize in the nomination “For courage, honesty and professionalism” in supporting the banking and finance sector.
I do believe that it is not only my personal victory, it is a recognition of the whole Georgian banking sector, as one of the most dynamically developing and sustainable sectors of the Georgian economy.
It is noteworthy that no one has received this type of medal not only in former Soviet Republics but in East European countries too.
It is a very prestigious jewellery product, made from 999.9 probe of gold and Swarovski stones.
Q. What are the plans of your association for 2009?
A. In 2009, the banking association is fully oriented on supporting the banking sector in the post-crisis situation. Furthermore we have developed a draft project on Corporate Management Code for bank managers, the presentation was held at the hotel Tbilisi Marriott a few days ago.
At the same meeting we set up a working group which will develop a draft version of Corporate Management Code. The group will be structured not only with representatives of the Association of Bankers and its member commercial banks, but with people from the International Finance Corporation (IFC), corporate management project and Georgian stock exchange.
The main purpose of the Corporate Management Code is to raise the current level of corporate management and make it maximally closer to international standards.
We do believe that the introduction of the Corporate Code by commercial banks will raise their reliability and attract new additional investments to make the banking sector more sustainable. Even though the code is not a normative act, it is a good example of how the private sector should regulate itself.
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