The FINANCIAL — In his interview with The FINANCIAL Zurab Gvasalia, President of Association of Banks of Georgia spoke about the performance of the banking sector in the first quarter of 2010 and 2009
“The total profit in the banking sector was 15,337 million GEL by 31 March, 2010. Practically the first time since the war. The banking sector was already generating profits in September, 2009; however, this was not of a systematic character.
Despite this, the dynamics of increasing overdue loans remain the main problem for banks. One of the reasons for showing profits in the first quarter of 2010 is an increase of loan volumes by banks.
Overcoming the economic downturn is mostly dependent on the country’s economy perspectives. Luckily the Georgian economy is recovering from the recession. Already there are positive tendencies visible. The international trade turnover increased by 25%, moreover the increase in GDP is 4% rather than the forecasted increase of 2%. This together with demand growth is proven in credit activities increase.
Yet still in September 2009, President of the National Bank of Georgia remarked that the hardest period of crisis had been overcome, which I can fully confirm. The main challenge for banks at present is that the banking sector must sustain and strengthen active crediting politics. In this direction serious steps are being put in place. Today, one of the priorities of NGB monetary-crediting politics is Larization. NBG is actively engaged in supporting the monetary market, which leads to decreasing risks, widening the base of collateral and motivating crediting in the national currency”.
Q. In your opinion, what influence has Larization had on the banking sector? What is the attitude of the population towards GEL as a firm currency?
A. For countries with transitional economies like Georgia one of the problems in the banking system is the highest share of dollarization deposits, while monetary-crediting politics primarily has an anti-inflation character. Consequently, the priority for NBG is to stimulate the market and implement modern instruments. In terms of high dollarization, when in Georgia the indicator of dollarization is 72%, monetary passives in USD have serious influence on currency and liquidity risks.
During the dollarization of deposits, to decrease loans banks are forced to balance a gap position (loans minus passives) and give loans in foreign currencies. Regarding the high indicator of USD deposits there is another problem – income for the majority of the population is in GEL, and people have to pay credits in USD, consequently, currency risks increases the price of credits.
As for the population’s attitude towards GEL, the population prefers to deposit in a foreign currency and this has psychological implications. The feeling of expected devaluation of money forces the individual to place money in profit actives or a relatively stable currency.
The USD will be the world’s leading currency for many years and as a result the natural reservation currency for many countries’ populations. As I mentioned, this is a problem for transitional economy countries, and has been proving a serious problem in Israel for years (approximately 20 years), and before adopting the EUR was a problem for almost all European countries.
Consequently, the politics of Larization are justified, which serve as increasing trust and saving from the population’s side.
Q. How realistic is it that the banking sector will reach indicators in 2010 that it last had before the war in 2008?
A. Almost all leading banks in Georgia have announced a lowering interest rate on all types of credits at the beginning of the year. The interest rates decreased by 2-3% since March. Interest rates on consumer as well as mortgage loans are approaching the pre-war period.
After the stabilization of the financial market and general economy, together with lowering risks the criteria for assessing collaterals have been simplified. Moreover, the criterion of assessing client’s ability to pay has been simplified.
It is remarkable that some banks, for example Bank of Georgia, offered mortgage loans with renewed criteria in GEL even before the crisis was over. It reached the pre-crisis period and even increased as guaranteed, as well as non-guaranteed limits and terms of loans. Whereas at the beginning of the year cooperation consisted of 40% the indicator in the crisis period equalled 20%.
Some experts believe the banking sector was quite passive in 2009. To illustrate these details they bring banking statistics according to which the volume of crediting decreased throughout the whole year, from the beginning of 2009 the crediting volume decreased from 5,859 billion GEL to 5,181 billion GEL in December. The credit portfolio has been increasing in 2010 and is continuing successfully.
When we outline a bank’s passive crediting politics we should remember that a credit boom does not happen in a crisis or post-crisis period. Comparing Georgia to America and Europe won’t be useful, as they are countries of large-scale economies and consequently excess financial resources; the purchasing behaviour of people is higher, and credit risks are lower than transitional economy countries. As well as this there is one important factor of difference. As opposed to the above mentioned countries, consequent to an undeveloped economic sector, the number of healthy and competitive companies decreases.
If in a post-crisis period economic subjects have not absorbed credit resources, if the business projects are not suitable for banks, banks can’t provide money with strength. The over liquidity in banks is probably due to this result, rather than difficult loan giving procedures, on which is placed more accent.
The decrease of the credit portfolio has its own objective reasons which started earlier, in August 2008 and especially following the September world financial crisis.
The banking sector was in dual shock conditions during this period. The slight decrease in investment flow, which was the main source of economic growth in the country caused the decrease of revenues for the population.
Some banks’ clients had had a decrease in income or even lost their jobs. The population living in the conflict regions and those juridical persons who had business in those region are another subject. All this has been directly reflected in an increase of overdue loan capacity. In the condition banks were forced to place a main accent on loan reconstruction and on less innovative products.
There has been an increase in deposits since June 2009 while during the same period there was a tendency of loan decrease. Non-banking deposits (physical and juridical persons limited deposits and deposits before demand) since June 2009 increased from 3,031 billion GEL at the end of the year to 3,950 billion GEL and reached 4,092 billion GEL at the beginning of April 2010.
The global crisis and August war had much influence on the development of the banking sector rather than those facts proved by some experts, who said that serious mistakes were made while developing crediting politics in connection with banking risks during credit boom conditions.
I believe these considerations are quite subjective as credit politics is a wider issue than financing just one direction. These claims are more understood in connection with consumer loans, in connection with an annual increase of 65% in loans. It is widely known that consumer loans carry increased credit risks, as they are referred to without collateral category and react to an economy’s worsening.
Moreover it was obvious that such high activity of banks would not be constant, despite this, if the credit management of leading banks was not accurate in general, the banks would face serious problems and even go bankrupt.
Moreover, a large part of modern banking products is oriented on customers. Today the banks adopt those schemes that were before the crisis period and this is not only in Georgia.
It is true that we have other risks like with consumer crediting instalments that are widely used for purchasing those products that are not produced in Georgia. However, if we follow this logic then this is doubtful the banking sector will ever develop.
Q. The financial crisis greatly influenced purchasing ability, as well as people’s decision to use bank products. In your view, what should be done in order to raise society’s activity in this direction?
A. The crisis affects not only the purchasing power of people, which is mostly connected with a decrease of income or loss of job, but also affects physiological mood. People as well as business entities borrow money for personal welfare or increase of productivity. When a person makes the decision to take a loan, in all cases, even for paying for a loan, they are optimistic and look with hope at the future, despite the fact that the banking loan is pricy and the individual has to pay back the principal and the percentage.
In a crisis, specially global and long-term, people are more oriented on the everyday and survival rather than on the future, people from a point of loan taking as potential investors are pessimistic and prefer not to take risks.
The increase in population activities is not only dependent on low percentage on loans, but also on future belief, that is dependent on stable political conditions and a positive change of environment, as well as on the decisions of the Government.
The global economic crisis showed that in open and integrated economic conditions, not only banks or specific fields have problems, but the whole country faces serious crises. Iceland and at present Greece’s processes and mass protests are good examples of this.
Consequently, there is much dependence on government anti-crisis economical politics. Whereas before the crisis the international idea was towards regulating the economy, at present more attention is directed to government strengthening.
Q. Representatives of the financial sector interviewed by The FINANCIAL marked that the boom of banks up until the year 2008 will not be repeated in the future. In your view, what will the role of banks in Georgia be in the next few years?
A. The reason for this question is that before the period of crisis the liberal attitude banks had towards crediting politics won’t be repeated, as this attitude was a mistake and consequently in the future, considering the costs incurred banks will conduct more intelligible politics. Consequently, there will be a much lower indicator of growth of banks’ activities.
If not for the world economic crisis, the growth of 50% in annual banking activities and 70% increase of loan portfolios, which was in the years 2006-2007, would not continue for one logic – the economy won’t develop constantly and its development is characterized by a cycle.
An annual percentage increase of banking activities is characteristic for countries like Georgia, which are transitional economies, where financial market development is in the early stages, and in parallel with developing market volume of profits and market expansion decrease. From this point of view Georgia is not an exception.
The same figures were in Moldova, Ukraine and Kazakhstan in the pre-crisis period in 2008. By comparison, in the same periods in economically developed European countries, where financial markets are particularly assimilated; banking activity’s annual growth rate was 10 times less, approximately 3-5%.
I believe that in the next few years, development of the banking system will be inevitable. An infrastructural economy that develops at high speed is mostly oriented on tourism infrastructure development, which consequently requires corresponding banking service.
During these years, the annual increase of the credit portfolio won’t reach its post-crisis figure. However we should expect not only the implementation of new banking products but also development of bank chains and service centres throughout Georgia, that will lead to serious expansion in existing banking infrastructure.