The FINANCIAL -- The increasing number of unregulated non-bank financial institutions (NBFI) in Georgia could cause a credit crisis. The amount of credit issued adds up to the hundreds of millions. Pawnbrokers, online or private lending remain the only short-term help for borrowers. However, in the long-term perspective they are actually increasing the level of poverty in the country.
“One of the most important challenges facing the financial sector is the increasing size of the unregulated non-bank financial sector (pawnbrokers, instant instalment). Its issued loan portfolio amounts to the hundreds of millions. This is the most expensive product, and of course, the growth of this sector means the rising burden of debt for our people,” said Giorgi Kadagidze, President at National Bank of Georgia.
There is currently no accurate data about the number of unregulated non-banking institutions, like pawnbrokers, instalment loans or online lenders in Georgia. Even the Ministry of Finance of Georgia failed to provide The FINANCIAL with the credit portfolio and number of unregulated NBFIs in the country.
“Nowadays, the non-bank financial sector is an almost entirely unregulated area. Representatives of this sector issue loans more easily than commercial banks and MFOs,” said Nutsa Tokhadze, Economic Analyst at Society and Banks.
“In accordance with that, the terms and interest rates are much more one-sided. The number of vulnerable members of the population in Georgia is high. More and more people find it difficult to gain access to financial resources. This part of the population is less solvent and is high risk. Accordingly, commercial banks are less likely to give them loans. Therefore, NBFIs are the only place for lending for this segment of the population. And as a result, the demand for this sector remains high. Unfortunately though, their regulation is not being carried out,” said Tokhadze.
“Over 60% of the population is self-employed. Accordingly they cannot provide proof-of-salary documentation. Therefore, NBFIs are the only way for them to get access to borrowing. The credit products they offer are much more expensive. The nature of the high risk loans is what determines the high interest rates,” said Irina Guruli, Programme Manager at Economic Policy Research Center (EPRC).
“The consumers of the unregulated non-bank financial sector are largely insolvent and financially impoverished residents of the country. The chance of meeting credit responsibilities is accordingly lower. Finally, the financial situation of this population goes on to deteriorate even further (for example because of losing their homes to pay back credit owed). Therefore, the number of vulnerable members of the population and the level of poverty are increasing. Lastly, all of these factors are returned to the economy and the whole country,” said Tokhadze.
“We have the fastest growing online lending. A great percentage is made up by private lenders. There is little guarantee of protection of consumer rights in this sector,” Archil Bakuradze, Chairman of the Supervisory Board at JSC MFO Crystal, told The FINANCIAL.
“The unprofessional and irresponsible lending growth certainly involves a threat to both consumers and the economy. It may cause a credit crisis. We have less of a threat of having a mortgage crisis as there was in the USA. The economy’s financial depth in Georgia is low and mortgage lending levels are quite low. However, we do have a surplus debt problem,” said Bakuradze.
In his words, firms or individual entrepreneurs are working at a loss, due to the low level of economic activity. They therefore try to meet their liabilities by increased credit resources.
“We are closely watching whether there are surplus debt elements on the Georgian financial market. We want to establish an in-depth study practice of this issue by an independent party. Our investors are supporting us. After that, the financial sector together with the central bank will manage to prevent this market risk. The above-mentioned study will make clear how saturated the credit market is,” he added.
Nika Gabunia, Marketing Manager at online lending service vivus.ge, does not think that the increasing number of institutions in the non-banking financial sector could cause problems. However, he does see a need for increasing the financial education level of citizens and the level of awareness in general.
“We provide detailed information to our customers via our webpage. We have no hidden fees. Consumers know from the very beginning what and when they have to pay,” said Gabunia.
“The first loan on vivus.ge is free of any interest rate. This is the cheapest offer in the financial sector. Borrowers return the exact sum which they borrow. As for any further loan, we have the lowest interest rate on the online loan market. While issuing credit, we take into account various factors. We issue loans only after considering that the borrowers will not face problems with paying it back. This then rules out the possibility of financial problems for our consumers,” he explained.
In Gabunia’s words, comfort, agility and flexibility are the main advantages and reasons why our consumers decide to use our service.
Gabunia decided to keep confidential the volume of the credit portfolio and the number of overdue loans.
According to NBG, the pawnbroker segment has been getting monitored since 2013. Meanwhile, they play a major part in household lending. In this regard GeoStat conducted a study to assess the assets of pawnbrokers. The survey revealed that the total assets of pawnbrokers amounted to GEL 340 million. 91.5% has been made up by loans, 4% - existing cash at pawnbrokers, and the rest - banking funds and other assets.
The estimation of pawnbroker assets allowed the assessment of the assets of the total financial sector. In particular, the financial sector’s total assets amounted to GEL 19.0 billion. 91% is made up by commercial banks. 1.8% is made up by pawnbrokers. The ratio of the financial sector’s assets to GDP amounted to 71%. 64.4% of the GDP was made up by the assets of commercial banks. By these figures Georgia drops behind the majority of European countries. The ratio of banks’ assets to GDP exceeds 100% in these countries (the Czech Republic, Latvia, Estonia, and Hungary).
“Regulation of NBFI is a challenge in every country. Their strict regulation contributes to the emergence of a black market. Accordingly, it complicates the sustainability of the financial sector. Besides this, establishing comprehensive regulations is difficult,” said Giorgi Tsimintia, Head of the Board at the Association of Young Economists of Georgia.
In his words, the growth of unregulated NBFIs usually affects macroeconomic variables (home prices, real GDP, investments, etc.) and monetary-credit variables (nominal long-term interest rates, credit/GDP, etc.). Tsimintia thinks that making a balance sheet monitoring of NBFI is important and necessary.
“Increasing consumers’ awareness is the key issue. Informational campaigns should be arranged in this direction. As for regulations, it is hard to talk about concrete mechanisms before an accurate study of this sector and international practice is carried out. On the monetary market the UCITS framework is used in Europe and AIFMD - on the private stock market,” said Tsimintia.
“It is necessary to raise the level of the financial literacy of the population. They should be aware of the consequences of their relationship with this sector. However, in most cases, when a person is in need of financial resources they will agree to almost any kind of deal (even if they know what the consequences are). Improving the financial literacy and economic development in general is the best solution to this problem. As for the restrictions on the non-bank financial sector, this is quite a difficult issue. The restrictions will cause their reduction. As a result people in a critical financial situation will find no source for funding. These may cause even worse results: crime, suicide and more. Therefore, it is necessary to have some limitations in this sector, but it should be done with great caution,” said Tokhadze.
“The increasing demand for NBFIs is the result of the high demand on the market. Meanwhile the central bank is working on legislative institutions that aim to develop the NBFI sector and improve its regulatory norms. The main focus will be the analysis of borrower’s creditworthiness,” Guruli, EPRC, told The FINANCIAL.