The FINANCIAL -- Interview with Giorgi Tsutskiridze, Executive Director of ABG
Considering the needs of the Georgian economy, local banks have a lot of work to do, along with the Government. How can one reduce the high percentage of non-performing loans, while improving on a significant amount of SME shares in economic growth? Both can in fact be accomplished, while still maintaining profitability. Giorgi Tsutskiridze, Executive Director of ABG, discusses the challenges in the Georgian banking industry today.
Q. In your opinion, how does the future of banking look?
A. Today, the most important reform being undertaken is in the banking sector, which determines 10-15 year trends. This reform serves to mitigate risks, increase access to credit resources and end with maturity, which, ultimately, should become the base element for rapid growth of the economy.
It is noteworthy that the ongoing reform in the banking sector, which started 2 years ago, is compatible with the recommendations of the “Financial Sector Assessment Program” (FSAP) implemented by the International Monetary Fund and the World Bank’s 2014 Joint Mission, and the directives specified in the EU-Georgia Association Agreement.
The reform is underway in the process of active communications and discussion with the banking sector, which will determine the minimum capital requirement for the risk of individual banks. The liabilities and credit portfolio size and their quality, for systemic and relatively small capital banks, often require different approaches.
Q. What predictions do you have for the next few years?
A. I think that today the economic policy strategy gives more opportunities for integration with global markets. It also shows the importance and perspectives of liberalization of foreign trade and the integration of global markets for our small economy. International practice demonstrates that the export stimulus policy includes not only an effective exchange rate but also the use of all the tools that will have a positive effect on the final outcome of export growth, Besides, it should be noted that the open trade contribution in the current report is positive, indicating the potential we have in terms of export competitiveness and diversification.
Q. What are the results of Larisation?
A. The purpose of Larization is to support economic growth, stimulating demand for cash loans, which provides an increase in availability of cash resources in the final outcome as a further reduction in the maturity of the lender and further reduction of interest rates. First of all, this concerns the stimulation of business loans in Lari, which may lead to a revival of small and medium businesses and increase domestic consumption.
Today we have a sad reality where the share of big business exceeds 80% of the total output of the economy. That is one of the consequences of an undeveloped economy, high unemployment and low levels of living.
If the existing imbalance has not changed and the share of small and medium-sized enterprises has not increased significantly, at least 45% will still not be able to overcome the problem of employment, and most importantly, overall consumption will not increase, which will remain reflected in undesirable growth rates in the future.
One wrong idea is that the liability to lend up to GEL 100,000 in Lari did not provide a supply of cash resources. It should be noted that from the beginning of the year, when the larization programme started, banks have had virtually no liquidity problem. Hereby, I would like to note that in the future a special instruction will increase the liquidity indicator of the deposit certificates denominated in Lari by the banks.
Q. Can you comment please on the recent changes in Georgian banking legislation?
A. According to the statement of the President of the National Bank of Georgia, amendments to the “Decree about Credit Concentration and Large Risks in Commercial Banks” limits loans without full analysis of customer payments.
In particular, the total amount of such loans shall not exceed 25% of a bank’s supervisory capital. Establishing a limit of 25% on the loan margin capital is a norm for international banking practices, and primarily serves to reduce capital risk. Introduction of this limit will help to lower the rate of return on equity. In addition, the total amount of loans provided by immovable property shall not exceed 15% of the Bank’s Supervisory Capital and the Loan-to-Value Ratio shall not be more than 50% of the borrower without full analysis of the borrower’s ability.
Besides this novelty, as a result of new regulations, part of which is in the process of review, the difference between the borrower’s monthly net revenues and taxes should exceed the minimum wage. In addition, the loan is restricted to the borrower when the borrower pays only the accrued interest and the underlying or significant portion at the end of the term. It is desirable to pay the lower part according to the budget adjusted for the borrower’s income, which is characteristic of European countries, and today, in contrast to business loans, is less common in Georgian banking practices.
Q. Looking to the future now. What do you think are the biggest challenges facing the Georgian banking industry?
A. The main challenge is to increase credit portfolio diversification. From 2012 up till now, the credit portfolio of banks, mortgage lending and the share of loans provided to individuals has increased. Whereas business loans in 2012 amounted to 56% of the credit portfolio, by the end of 2017 its relative index fell to 45%. In contrast, the relative ratings of loans and mortgages issued to private individuals have increased by 5-6% compared with 2012
As for business loans, the problems here are not related to large businesses, but primarily related to micro and small businesses. The share of entrepreneurial private individuals, in lending to households, including mortgage loans and consumer loans, is only 6%. If we want fast economic growth and to create additional jobs, like the developed economies, the share of small and medium businesses should be 60-65% of the economy output.
If the trend continues and the share of the retail lending segment increased to even 60%, it would generate serious preconditions in terms of liquidity risk as well as systemic risks. This may also indicate a slowdown in economic growth, if economic and financial benefits in the economic growth process have less impact on the welfare and employment of the population.
Q. Please provide your analysis of SME financing and conditions offered by banks to small businesses. How competitive are they compared to other Eastern European countries?
A. According to various studies, the economic growth of developing countries hinders the informal sector and self-employment, which is primarily involved in the process of physical reproduction, not in the accumulation of capital and in the process of manufacturing reproduction. Unfortunately, this issue should be considered a main concern in our country as well. The problem is that most of the workforce, including small businesses, operate on the brink of self-preservation and cannot influence economic growth. This applies equally to the category of entrepreneurial private individuals who are registered by the applicable legislation and on the other hand private individuals who are engaged in independent practice and represent informal sectors.
The new tax reform will provide legalization of their businesses and, consequently, access to the Revenue Service’s database will ensure a possibility to assess net revenues for commercial banks. Today it is the only way to increase the client base. High credit dependence on the same class client increases the risk of solvency as well as concentration.
Q. What is your evaluation of the development of the Georgian economy?
A. If you look at the statistics for the last twenty years, we will see that our economy has been formed in double-deficit - fiscal deficit and deficit of current account balance. In the case of double deficit, state budget expenditures are directly reflected on the current account balance of the country.
In terms of economic growth, the increase in the state budget deficit, especially in the longer term, also worsens a country’s current account balance, as excessive public expenditures increase foreign debt. It should not be understood that the double-deficit model for the economy only has a negative impact. The double-deficit model is mainly functioning in developing countries, and if we analyze the fastest evolving economies of recent years, with a rate of increase of 7% or more, we’ll see that most of them except China (India, Ethiopia, Laos, Côte d’Ivoire, Cambodia, Tanzania, Bhutan, and Rwanda) have the same double-deficit model. It should be noted that some of these countries had a much higher deficit than us.
It should also be noted that the Government has implemented a significant fiscal reform since the end of 2016, part of which is a tax reform, including economic growth. It is also important to move on to the Estonian model of profit tax, in terms of further stimulating local production.
I believe that the growth of external debt should not be considered a negative macrofactor within the recommendation limits. On the contrary, our developing economy may need to attract borrowed funds to finance investment projects, in which case the present deficit of the current account may become a source of higher growth, unemployment reduction, export stimulation and savings.
It should also be noted that, according to the IMF, with the growth of the Georgian economy and the improvement of foreign position, inflation in the first half of the current year is expected to fall, which is crucial for growth of financial stabilization and investment flows.
It is also worthy of note that with the long-term forecasts of the International Monetary Fund, Georgia’s economy will be the fastest rising between 2017-2022, not only in the region, but throughout Europe, which once again confirms the positive nature of a government strategy focused on rapid economic growth.