The FINANCIAL — The August war in Georgia revealed the new importance of financial institutions and the banking sector. The Association of Banks of Georgia is already conducting negotiations about deposit insurance with the government.
“We started working on deposit insurance a few years ago. For this project we attracted financial resources to the amount of USD 4 million from German donor company KfW for 40 years. The received money covered 70% of the useful amount for basing the deposit insurance fund. The other 30% was to be filled by local banks. Everybody agreed on this. We had negotiations with the government but suddenly they made the decision to use this money for developing the sewer system of Batumi. They announced that they don’t want to have any shares in it,” Zurab Gvasalia, President of the Association of Banks of Georgia, told The FINANCIAL.
According to Gvasalia, “Actually it was not holding shares. This was a debt which we received with big effort. There are several forms: when the government states a deposit insuring fund itself, when the commercial sector organizes it, and the third one – when it is mixed; when half the shares are of the government sector and the rest – commercial. In this case we asked only for guarantees, nothing else, but were refused. Now we are working on basing this fund.”
Explicit deposit insurance is a measure introduced by policy makers in many countries to protect deposits, in full or in part, in the event of a “run” on a bank or banks. The failure of a banking institution has the potential to trigger a much broader spectrum of harmful events. Deposit insurance systems are one component of a financial system safety net that contributes to the promotion of financial stability.
The United States was the first country to establish an official deposit insurance scheme, the Federal Deposit Insurance Corporation, during the Great Depression banking crisis in 1934.
A separate fund, the National Credit Union Share Insurance Fund (NCUSIF) administered by the National Credit Union Administration (NCUA), was created in 1970 to insure deposits at credit unions.
The sum of insuring a deposit is not yet solved but the segment of this system is clear.
“At this moment it is hard to name the exact amount, it needs deeper analysis of the existing deposit base,” a Cartu Bank representative says.
“It will be insuring deposits with the amount of GEL 500, sums over that amount require different forms and must be organized in another way. The deposit insurance project is oriented at middle and low income segments of the population. This is a big way to encourage customers and increase clients’ trust in banks. The insuring system will shorten banks’ efforts to attract additional funds to their sector,” Gvasalia says.
“Deposit insuring increases the degree of trust in financial institutions’ stability, as it decreases risks associated with individual bank deposits. We are ready to participate in negotiations and contribute to the legislative process. Deposit insurance definitely raises costs for depositors, but it also adequately decreases risks for the depositors, thus encouraging saving in banks,” Cartu declared.
“I can’t see the inevitability of insuring deposits,” says Irakli Gilauri, General Director of Bank of Georgia. “We have shown our ability and passed a big exam during the war.”
“During the war time all regulating companies, like National Bank of Georgia and other financing agencies made very quick and adequate steps and gave the banking sector the opportunity to rule itself and act easily. The background to all this was the banking sector’s crisis,” Gvasalia says.
The return of the Georgian banking sector to its pre-war condition is expected in February, Gvasalia predicts.
“The increase of actives won’t be as high as it was last year (70%), we suppose that this year it will be 20-25%. This is not enough to finance our economy, but still the fact that the banking sector has retained its steadiness is worth being mentioned. The restoration of the banking system needs time and human resources. The banks must overlook their credit portfolios with the point of risk management. All this needs time and only in February approximately will everything reach the state that it was in in July.”
“Besides the local political situation the Georgian economy is also facing the world economic crisis,” Zurab states.
“The Georgian economy and banking-investing sector is integrated with the international system. But the level of integration is not so high that the world economy crisis can influence us very severely.”
Progress Bank and Halyk Bank said credits will not be their main focus in the most immediate future.
“The most careful people in the business sector are bankers,” explains Gvasalia.
“Financiers are oriented at exact actions and even one small mistake can cause catastrophe. I understand why newcomers to the Georgian market are treading carefully. They are analyzing, researching the market and will later restore all portfolios.
The Association of Banks of Georgia is among the members of the working group controlling monetary aid that the government has allocated for the banking sector.
Written By Madona Gasanova