The FINANCIAL — The average maturity of loans in Georgia has increased reaching 16.1 months in 2014, up from 15.8 months in 2013. Meanwhile, access to long-term loans remains a problem in Georgia for domestic borrowers. The maturity of loans is considered to be the main obstacle in the development of SME business in the country.
“The Georgian banking system depends on foreign capital. The deposit portfolio is not sufficient for providing loans to the local economy. There is a deficit of savings, especially due to the world economic crisis. The Georgian financial system depends on the dynamics of international markets’ capital. To avoid risks, the banking sector is focused on financing relatively short-term projects. Banks avoid financing long-term investment initiatives. Internal risks, political and economic, also affect the decisions of the financial sector. Georgia is a country of high risks. According to Fitch’s rating, our long-term status is ‘BB-’. It is not a particularly satisfactory result. This is reflected in the ROE stated by the banks’ shareholders and the price of equity,” Irina Guruli, Programme Manager at Economic Policy Research Center (EPRC), told The FINANCIAL.
“Georgian banking sector growth opportunities can either be realized through the existing customer base or through the search for new customers,” said Maya Grigolia, Senior Researcher at ISET Policy Institute.
“Given the lack of direct financing sources, and the high debt service obligations of the existing customers, growth based on the existing client base could be achieved through maturity lengthening or decrease in interest rates,” said Grigolia.
According to Guruli, access to long-term financial resources is one of the obstacles in the development of small and medium-sized business. “Business loans, in most cases, require collateral. This forces businessman to pledge their own property. The Central Bank has set the upper limit of lending without collateral. It should not exceed 25% of the total loans issued by the bank. This limit protects banks from issuing a large number of risky loans and promotes the creation of a more secure portfolio. Therefore a large part of the loans are secured by real estate,” she said.
According to NBG, GEL 653,688 thousand was issued by commercial banks in the national currency as of January 2014. By comparison, GEL 319,802 thousand was issued in foreign currency. Consumer loans have made up the major part of the loan portfolio issued in the national currency. This is confirmed by the fact that the number of credit agreements is 640,584 and the majority of loans varies from GEL 1,000 to 5,000 and 30% of the credit portfolio amounts to over GEL 1,000.
“More than 35% of loans issued in foreign currency make up credit exceeding more than GEL 1 million. If we consider that 82% of loans issued to legal entities is in foreign currencies, we can say that the long-term obligations in the local currency make borrowers wary. This is due to the low level of confidence people have in the national currency,” said Guruli.
“According to NBG data, average maturity of loans is 16.1 months (as of February 2014), while the average lending interest rate is 18.4%. The total loan amount is about 6 billion as of December 2013. Undoubtedly, lengthening of credit maturity and decreasing the interest rate could have a significant positive impact on borrowers’ indebtedness and the cost of debt service. For instance, increasing average maturity to 3 years and freezing the interest rate at the same level would decrease an average borrower’s monthly payment by 48%. However, only decreasing the interest rates would have a much more moderate impact. For example, decreasing the average interest rate to 16% would lower monthly payments by just 1.6%,” said Grigolia, ISET.
“Improving the maturity structure of private lending seems to be the most effective path for the banking sector’s development. However, lengthening the maturity of private sector loans could be a challenging task, and would require overcoming informational as well as institutional hurdles,” she added.
The maximum term on business loans is 10 years. Mortgage loans are issued for 15 years. The average annual interest rate on loans of commercial banks for 2013 was 15.9% (20% in the national currency and 13.5% in the foreign currency).
“First of all, we should note that the interest rates on loans in the Georgian banking system are some of the highest in the world. According to World Bank data, Georgia is the 11th country in the world with the highest average interest rate, it is the second country with the same rate out of all the post Soviet countries and the first in the Caucasus,” said Guruli.
Nodar Khaduri, Minister of Finance of Georgia, spoke about the lack of competitiveness of the Georgian economy. “Georgian products fail to compete not only on the external but also on the internal markets. The low level of access to funding is the reason behind this,” said Khaduri.
“Banks do not have a shortage of liquid assets, but the long-term cash flow problem still stands. They have short-term money, they are motivated to finance short-term projects, and in most cases avoid financing serious investment projects,” said Khaduri.
In his words, the first steps have already been taken in this direction. “The Georgian Government has launched a project called the Money Extension Project. They borrowed 44 million from banks. An additional GEL 200 million will be borrowed from banks. They will re-borrow this sum to banks with approximately +1% of the interest rate, but in the long term.”
“This programme initiated by the Government indirectly looks like a cheap loan subsidizing programme. A clearer scheme is required in regard to which direction the loans will be issued in and under which conditions. This is important for avoiding various risks while crediting. The Government should provide prioritized sectors where it plans to create an optimal investment climate and invest its own or attracted funds. This programme may include financing spheres which commercial banks are financing less due to their high risk. Agriculture is one such sector. Besides the high risk the problem is that 70% of agricultural lands are not registered. Accordingly, attracting long-term funds in this sector is very unusual,” said Guruli.
Contrary to Guruli, Grigolia thinks that the Money Extension Project will be reflected in a positive way on the financial market. The Money Extension Project turns the banks’ liquid assets into long term lending facilities in GEL. This will be reflected in a positive way on the financial market. This will enable the financial intermediaries to increase the maturity of loans. Increased maturity stimulates demand for bank lending leading to increased market scale. Finally, this will have positive spillovers on the real sector and capital accumulation,” said Grigolia.
According to Guruli, the existing problem of maturity of loans can be solved by creating a competitive environment, improving the investment climate, reducing the country’s risks, which is reflected in creating a more predictable environment and establishing a sense of stability. Improving the country’s position in the international rankings will allow banks to attract more affordable, long-term resources and invest them in long-term projects.
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