The FINANCIAL — Despite a sharp decrease in external borrowing by Georgian banks since 2008, foreign financing still plays a key role in the operation of the overall banking system whether it’s foreign equity at banks or the amount of deposits by foreign residents.
As National Bank of Georgia Vice-President Archil Mestvrishvili told The FINANCIAL, interest rates would be much higher if foreign financing was not provided.
As of June 2012 the total assets held by commercial banks is roughly GEL 13 billion. The banking sector’s own funds (equity capital) is equal to GEL 2.4 billion, which makes up 18.3 percent of commercial banks’ total assets whilst foreign capital in banks’ total paid-in capital constitutes 77.4 percent.
Foreign capital is present in 16 Georgian commercial banks out of the total 19 with the corresponding types of shares given below:
Borrowed capital from foreign financial institutions (FIs) at Georgian banks in May 2012 – 13.8%
Subordinated loans – 4.1%
Non-resident deposits at Georgian banks – 7.3%
Non-resident shareholders equity at Georgian banks – 15.7%
By May of 2012 the overall share of the foreign capital portfolio in Georgian banks had reached 41%, whilst for the same period of last year it hit 47%, according to statistics provided by National Bank of Georgia.
“In the absence of sufficient domestic capital, it is positive that foreign capital can participate in the Georgian banking sector. Foreign capital, because it creates accountability to foreign shareholders, can also bring greater accountability and therefore safety in the banking sector,” Edward Gardner, IMF’s Senior Resident Representative in Georgia, told the FINANCIAL.
“For the most part, and most notably in the case of the two largest banks (TBC Bank and Bank of Georgia), foreign shareholders are greatly diversified and no single shareholder has a controlling stake. In fact, these two banks, despite having majority foreign ownership, are really “Georgian” banks with Georgian management. This means they are not at risk of seeing their capital pull out and are not exposed to the risks of a parent bank,” Gardner told The FINANCIAL.
“Interest rates are indeed high in Georgia, but I would not attribute this to a monopolized system claimed by many. There is a good deal of competition in the banking sector.”
“The high interest rates rather reflect two factors. First, is the interest rate at which the rest of the world is willing to lend to Georgia. This rate has come down very significantly since 2008 because markets have gained confidence in Georgia, and in fact the rate at which Georgian sovereign Eurobonds trade in the market is now lower than that of Italy and Spain. However, the interest rate is still relatively high in absolute terms, at around 6 percent.”
“The second fact is the cost of banking intermediation, which is high in Georgia. By cost of intermediation I mean the margin between the rate at which banks can borrow or collect deposits and the rate at which they lend. This large margin is due to three main factors, I would say: the banking sector is relatively small (so fewer economies of scale), lending activity is risky (so banks need to be compensated for that risk), and finally there is a cost to banks of maintaining relatively large capital buffers, i.e., Georgian banks are not as leveraged as banks in advanced countries. Low leverage makes Georgian banks much more secure and resilient to shocks, but the counterpart of that is higher lending rate,” concluded Gardner.
“On top of their own capital (equity) typically banks also borrow in international markets.”
“Borrowing is more risky, because it may dry up. However, external borrowing by Georgian banks has decreased very significantly since 2008, and at the moment exposure of banks to external debt repayments is within prudent margins.”
“IMF also has a line of credit to Georgia which is about USD 400 million over two years (through March 2014). Half of it is at a rate of around 3 percent; the other half is on very concessional terms (rate of 0.5 percent). This government has agreed not to draw from this line of credit, but these amounts would be available to the National Bank of Georgia (NBG) in the event it faced a need for foreign exchange, Presently, the international reserves of the National Bank are quite comfortable at over USD 2 billion, so we do not see any need for the NBG to draw on this line of credit,” Gardner said.
As the USAID Economic Prosperity Initiative’s team of experts told The FINANCIAL, the majority of cheap credits are apportioned to the clients of banks with the best credit history.
“Some of those loans can be directed to typical projects like facilitation of trade, SME financing, etc. – the latter is a part of borrowed money from IFIs (international financial institutions). Differently from the previous type of loans the subordinated debts give flexibility to Georgian banks to lend money in their preferred way. Also another good side of foreign financed loans is that they are mostly long term loans,” noted the EPI team of experts.
“Apart from foreign attracted capital, Georgian banks as well as other financial institutions like micro finance organizations attract capital from the local market too in the name of deposits (which have high interest of 15-17%), that’s because the former cheap credits don’t fully satisfy the demand of Georgian consumers and the amount is not enough for banks to finance the Georgian economy.”
“Despite the positive consequences of foreign owned capital in the Georgian banking system, the flip side of this is that if the Euro crisis deepens further which we are witnessing now – then the whole system will be shaken – leaving the real economy with a lack of cheap credits,” EPI experts believe.”
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