The FINANCIAL — Against the background of the high dollarization rate in the Georgian economy commercial banks have started reducing interest rates on deposits in the national currency. The average interest rate on deposits in the national currency, which stood at 11.9% as of November 2015, has dropped to 10.4% as of May 2016. As for foreign currency, the interest rate amounted to 4.1% as of May 2016, down from 4.4% as of November 2015. With 13% Finca Bank Georgia offers the most attractive terms for depositors keeping savings in the national currency. 7% and 4.50% on deposits in USD and EUR respectively, are the highest rates on the market, and offered by Progress Bank.
According to National Bank of Georgia the total volume of non-bank deposits in the country’s banking sector decreased by 6.5 percent (exchange rate effect excluded volume of deposits decreased by 5.0 percent), or by GEL 939.3 million, compared to 1 May, 2016, and constituted GEL 13.5 billion as of 1 June, 2016. In May, the volume of term deposits decreased by GEL 312.6 million (4.0 percent; exchange rate effect excluded volume of term deposits increased by 1.1 percent). Demand deposits decreased by GEL 626.7 million (9.5 percent; exchange rate effect excluded volume of demand deposits decreased by 7.4 percent).
The larization ratio of total non-bank deposits constituted 33.07 percent as of 1 June, 2016. It increased by 2.55 percentage points (or by 1.68 percentage point exchange rate effect excluded) compared to 1 May, 2016.
The annual average weighted interest rate on term deposits constituted 5.3 percent. In particular, the interest rate for national currency denominated deposits was 10.4 percent and the interest rate for foreign currency denominated deposits – 4.1 percent.
The share of the US Dollar in the total volume of foreign currency denominated deposits equals 81.4 percent and the share of the Euro equals 15.7 percent.
According to American specialists, 60-70% of USD is in circulation or being kept in deposits outside of the USA, being a source of dollarization in recipient countries. A high dollarization rate causes problems in the economy including an unstable economic environment and an increased currency risk. The high rate of dollarization has always been a challenge for the Georgian economy. Devaluation has further strengthened the problem. Offering attractive interest rates on savings in the national currency has been considered one of the main stimulators for encouraging citizens to save money in the national currency. In line with devaluation commercial banks started increasing rates on deposits denominated in the national currency. For example, if for May 2015 the average rate on the market amounted to 7.2%, for November 2015 it reached 11.9%. As for savings denominated in a foreign currency the trend has been characterized with a downgrading trend. The ratio dropped to 4.4% for November 2015, down from 4.9% as of May 2015.
Banking deposits have frequently been considered to be one of the most safe and profitable sources of investment among Georgians. Meanwhile, gaining on average USD 350 per USD 10,000 for the end of twelve months, which makes over USD 29 per month, contributes to the drop in popularity of this source of investment.
While interest rates are almost equal in nearly every commercial bank operating in Georgia, there still can be found banks that try to compete with higher rates. The FINANCIAL has studied average interest rates on deposits denominated in national as well as foreign currencies (USD and EUR). We compared the rates of 12 Georgian banks. The figures are related to term deposits with twelve month terms and considering a receiving rate for the end of the term.
With 13% APY, Finca Bank Georgia offers the highest rate for depositors keeping savings in the national currency. Finca Bank Georgia is followed by: Progress Bank – 12.50%; Liberty Bank and Halyk Bank – 12%; BasisBank – 11.25%; Bank Republic, SocGen Group – 9.50%; TeraBank – 9.25%; TBC Bank, Bank of Georgia, VTB Bank and ProCredit Bank – 9%; and, Cartu Bank – 7.5%.
With 7% APY, Progress Bank has the highest rate on term deposit denominated in USD. The Bank is followed by: Finca Bank Georgia and Halyk Bank – 5%; Liberty Bank, TeraBank, BasisBank and Cartu Bank – 4%; VTB Bank – 3.75%; TBC Bank, Bank of Georgia, Bank Republic, ProCredit Bank – 3.50%.
EUR savers have the most attractive offer by Progress Bank with 4.50%. It is followed by: Finca Bank Georgia – 3.50%; Halyk Bank – 3%; TeraBank, BasisBank, Cartu Bank – 2.50%; VTB Bank – 2.25%; TBC Bank, Bank of Georgia, ProCredit Bank – 2%; Liberty Bank – 1.50%; and, Bank Republic – 1%.
According to Deposits.org, online database of deposit markets around the world, the list of the highest deposit interest rates around the world in national currencies is as follows: Argentina – 28.50%; Ukraine – 22.50%; Uzbekistan – 20%; Azerbaijan – 15.2%; Mongolia – 15.10%; and Iran – 15%.
The lowest interest rates on deposits are in: Slovakia – 0.01%; Lichtenstein – 0.02%; Spain and the Czech Republic – 0.05%.
In 2016 the Bank of Japan launched negative interest rates, which is when savers have to pay banks for holding their money and central banks penalise banks for depositing cash with them.
The central bank will charge banks 0.1% for parking additional reserves with the BOJ to encourage banks to lend and prompt businesses and savers to spend and invest.
In recent history, the Swedes were the first to go negative. Between July 2009 and September 2010 Sweden cut the deposit rate to -0.25% in an attempt to fend off the deep recession that followed the 2008 banking crash and global financial crisis. It reintroduced them in July 2014 and the deposit rate is currently -1.25%.
“While high interest can be the result of economic growth in a country, very high interest can be because of inflation. The real rates consumers are receiving after the inflation number is deducted are important because high rates can sometimes not compensate an investor because of the inflation rate. How it affects the economy is that when deposit rates are high it compensates savers but since loans would be higher than deposit rates it penalizes borrowers by making borrowing costs high,” said Peter Fiasco, Founder and Director of Deposits.org.
“Similar to most countries in the world, the factors that influence deposit rates include the influence of the monetary policy of the central bank, such as the Federal Reserve (independent central bank of the United States). When an economy has high inflation it can increase interest rates to keep it under control,” said Fiasco.
“Banks in general are dependent on the interest rates set by the central bank. They are also influenced by funding and liquidity requirements, regulations, competition for deposits and loan to deposit ratio profiles,” Fiasco told The FINANCIAL.