“We created the resolution framework to promote risk management culture in the banking sector, respond to the financial crisis in a timely manner, and ensure the continuity of critical economic functions, while maintaining financial stability at the system level.”
The National Bank of Georgia (NBG) is the central bank of Georgia, whose main goal is to ensure price stability and promote the country’s economic progress.
In an interview with The FINANCIAL, President of the National Bank of Georgia, Koba Gvenetadze, spoke about the achievements and challenges in the banking sector of Georgia. He outlined the importance of the National Bank in terms of the stability and development of the country’s economy and financial sector.
Q. What is the role of the National Bank of Georgia in terms of the economic stability and sustainability of the country?
A. Manageable and stable inflation, along with a steady financial system, are vital components of the stability of the national economy and long-term sustainability. Serving the goals of the country’s long-term economic development is our primary task as a central bank. One can easily imagine what happens when inflation is high and unpredictable and public confidence in the banking system is weak. Regrettably, world history remembers such episodes, and Georgia’s recent past is no exception in this regard. That’s why building credibility in pursuing a price stability mandate is so important to us.
The NBG has a good track record of strengthening both monetary policy and financial stability frameworks. The Lari, in spite of challenges, especially during the pandemic period, has proven to be a relatively stable currency compared to its trading partners, if assessed over longer periods; the Georgian banking system is resilient and credible; and the NBG is recognized as one of the most transparent central banks.
Q. To what extent have the conditions for consumer and mortgage loans improved compared to in the previous period? What achievements would you highlight in this regard?
A. In January 2019, the Retail Lending Directive was enacted for all loan-issuing organizations, which increased the effectiveness of supervisory measures. In April 2020, the revised Retail Lending Directive was enacted. The scope of the directive covers loans to individuals including sole proprietors. The directive is based on the principle of responsible lending. All loan-issuing organizations are required to do the proper creditworthiness assessment before disbursing the loan. Mortgage, consumer and other retail loan borrowers have to comply with the Payment-to-Income (PTI) and Loan to Value (LTV) ratio limit requirements set by the NBG. Maximum maturities for different types of loans were set.
The data clearly shows the positive impact of regulation on reducing household over-indebtedness and improving asset quality, while credit activity has remained stable. During the Covid-19 crisis, the PTI ratio threshold appeared to be a reasonable standard for avoiding excess risk. The pandemic created financial difficulties for a certain portion of borrowers, being especially severe for individuals who had a high loan burden.
Q. How transparent are the activities of banks today and what financial machinations are observed?
A. Commercial banks are disclosing information according to the Regulation on Disclosure requirements for commercial banks within Pillar 3, which is in line with the CRR 575/2013 and Basel principles. The templates of relevant disclosure requirements under the regulation may be found via the following link. Information disclosed by the banks under Pillar 3 is given in the following links Quarterly, Annual. The Quarterly report gives quantitative information regarding Balance Sheet (under local GAAP); Profit and Loss statement; Key Indicators – Capital, Liquidity, Profitability; Risk Weighted Assets; Mitigation Instruments; and Detailed information regarding loans (since 2021). The Annual report provides comprehensive information, both quantitative and qualitative, regarding remuneration, corporate governance, material risks faced by the bank, etc. These reports are available both in Georgian and English.
Banks are required to publish annual audited financial statements according to the regulation On Approving the Regulation on Statutory Audits of Consolidated Financial Statements of Commercial Banks and the Disclosure of Information in the Notes to the Financial Statements. The reports required under the regulation are published here both in Georgian and English.
Q. What does sustainable financing of the National Bank of Georgia mean and what are the main achievements in this regard?
A. It is widely known that sustainability, as a source of financial risk, requires regulators to pursue thorough financial stability policy as part of their mandate. The actions taken by the NBG to support the development of a sustainable finance framework are guided by the urgency of this task. The NBG has made significant progress in that regard in the last few years. Publishing the Roadmap for Sustainable Finance in Georgia, integrating ESG considerations in Corporate Governance Codes, developing ESG Reporting and Disclosure Principles, and organizing annual regional Sustainable Finance Conferences are just a few actions to name. A comprehensive overview of our policies as well as a summary of the market dynamics will be presented in the first Sustainable Finance Status Report that we plan to publish by end-October. Once finalized, the Sustainable Finance Taxonomy will be shortly available along with other scheduled resources and actions.
Q. What is the main experience of the National Bank of Georgia in managing the ‘lockdown’ caused by the pandemic and its subsequent economic impact? Did lockdown affect the Government’s fiscal position, and what impact did this have on the National Bank?
A. We took urgent response actions against the Covid-19 crisis that included an expanded toolkit to provide liquidity to the system for continued credit flow to the real economy, along with relaxed capital adequacy and other regulatory requirements.
At the onset of the crisis, we started reducing the monetary policy rate to support economic activity. However, the reduction of the monetary policy rate was very gradual (by 1 percentage point overall) as the Covid-19-induced recession proved to be more complex than other economic crises. The disinflationary pressure of the sharp reduction in aggregate demand was outweighed by sizable supply-side shocks, pushing inflationary expectations up. While the Government provided essential fiscal stimulus to partially offset the effects of the severe downturn, we remained focused on price stability and maintained a tightened monetary policy stance. We strongly believe that the benefits of our policy will show as we advance further in our actions. Keeping inflation expectations anchored promotes stable inflation, paving the way for sustainable economic growth and financial stability in the medium and long run, as financial conditions remain favourable when inflationary risks are low.
Q. Lending to small and medium-sized businesses is a major challenge worldwide. How successful have you been in increasing the financing of small and medium-sized businesses during the crisis?
A. SMEs have tended to be the most vulnerable businesses in the Covid-19 pandemic. Finally, we have sound dynamics in SME loan portfolio growth. Several initiatives are available to help them stay viable and recover fully. We have encouraged banks to provision business loans according to the forecasted recovery schedule and sectoral scenarios. This gave banks more freedom and incentive not to halt financing and continue lending.
Furthermore, we expanded the pool of eligible assets with SME loans that can be pledged by banks with the intention to access refinancing loans from the central bank. This action provided additional incentive to banks to increase SME financing.
The Government of Georgia’s programmes helped SMEs alleviate current financial difficulties and remain solvent. Other government programmes offered businesses grace periods on social and property taxes, and covered a portion of the interest payments for the most vulnerable economic sectors. The new framework of the credit-guarantee scheme was introduced with a higher budget to address the lack of collateral that hinders the SME access to finance.
The SME loan portfolio statistics can be seen in the chart below:
Q. What are the key projects implemented by the National Bank of Georgia for 2019-2021 for Georgia’s economic progress and stability?
A. As noted earlier, our new liquidity instruments launched in response to the Covid-19 crisis, helped mitigate liquidity risks in the financial system. As we continued prioritizing enhanced transparency and improved communication with the public, we took care of fine-tuning the transparency of the institution. We believe it ultimately helps us raise credibility and make our actions more predictable and effective.
We devoted considerable effort to de-dollarization of the entire economy over recent years. A major challenge to the national economy – dollarization – was managed through supplementing available tools with macro-prudential actions in 2019. To that end, we introduced LTV and PTI limits to reduce vulnerabilities of households towards foreign currency risk. We saw a clear positive impact of our policies during the Covid-19 crisis. Our steps ensured that the impairment of the public balance sheets caused by crisis-induced depreciation of the Lari was much milder than could have been expected otherwise.
The NBG has been proactive with initiatives to improve financial sector resilience and promote sustainable economic growth in recent years. Just to list a few, our responsible lending regulation reduced the over-indebtedness of households and improved quality of the loan portfolio. The countercyclical measures related to Covid-19, including provisioning of liquid funds and easing capital requirements, helped the financial sector prevent losses and continue lending to the distressed economy. Our Net Stable Funding Requirement (NSFR) incentivized banks to fund long-term assets with long-term liabilities, thus reducing risk of maturity mismatches. We created the resolution framework to promote risk management culture in the banking sector, respond to the financial crisis in a timely manner, and ensure the continuity of critical economic functions, while maintaining financial stability at the system level. Fintech initiatives, including Open Banking, are readily available to foster competition and enhance financial sector efficiency. Furthermore, as mentioned earlier, we have developed the sustainable finance framework, that requires the financial sector and capital market participants to integrate social and environmental issues in their reports to manage related risks better.
The renowned international financial institutions and credit rating agencies have repeatedly praised our policy actions, improving credit ratings assigned to the country. This, of course, makes Georgia well-positioned on the global investment map.
Q. Another vital role of the National Bank is to develop monetary policy and safeguard access to financial resources. What changes have been observed in this area?
A. As I noted earlier, access to financial resources was a major issue at the beginning of the pandemic. Liquidity risks within the financial sector showed up immediately in the wake of the crisis. As a response, commercial banks and microfinance institutions were supplied with the liquidity through a new set of liquidity instruments. We offered an emergency tool of swap operations, where NBG, over the short term, swaps local currency for foreign currency. We additionally launched a liquidity supply tool to facilitate lending to the SMEs. That allowed commercial banks to receive liquidity from the NBG in exchange for pledging an SME loan portfolio.
In terms of the monetary policy, we maintain the tightening bias as we remain vigilant, disallowing current inflationary pressures to materially affect medium- and long-term expectations. This caution is especially warranted in emerging and developing economies like Georgia, for which, once higher inflation expectations become entrenched, re-anchoring them is quite costly.
Q. How would you assess the exchange rate today, what are the currency risks and what actions are you taking to prevent it?
A. The pandemic was detrimental to tourism-dependent economies, including Georgia, because it dramatically restricted people’s mobility. The Lari exchange rate depreciated substantially, as it is an “automatic stabilizer” that had to adjust against the backdrop of the deteriorated external tourism revenues. However, the economy started recovering in Q2 of 2021, when most of the Covid restrictions were lifted, and the country received a larger number of international visitors. With positive expectations and our tightened monetary policy, the Lari appreciated by around 10 percent since April 2021 (both against the US Dollar as well as relative to trading partners on average).
Although the risks for FX market persist, much depends on how quickly we overcome the pandemic, both in Georgia and worldwide. If the economic recovery continues, the Lari may strengthen further, but the new waves or variants of Covid-19 may undermine the recovery, including that of tourism.
Q. What are your long- and short-term plans to promote the country’s economic sustainability?
A. Due to the temporary factors posed by the pandemic, the August inflation reached 12.8%, the highest since 2011. While the September figures show some deceleration down to 12.3%, inflation remains high. The NBG tends to maintain a tight monetary policy stance until we see high inflation expectations curbed and a solid downward trend in actual inflation. Also, let’s not forget, that inflation at the moment is a world phenomenon and many developing as well as developed countries are trying to address rising price levels.
At the same time, we continue efforts to address persisting challenges such as high dollarization. As dollarization poses risks to price stability, and subsequently to the macroeconomic stability, it is thus our focus to have it reduced in the long run. We took a number of decisive steps in recent years to reduce dollarization. While both loan and deposit dollarization levels have declined by about 12-13 percentage points since 2016 when we decided to follow a more active approach, they still remain at a level well above a natural rate. The natural rate of dollarization depends on a number of factors, including the country’s openness to trade, but cross-country estimates have shown that the natural level is much lower than the current actual level of dollarization in Georgia. We realize that de-dollarization, as a long process, may require us to adjust along the way, taking other/additional actions as needed. What remains unchanged is our commitment to de-dollarization and, ultimately, macro-financial stability.