New peculiarities of country’s banking system

Ambrosi Grishikashvili

Current reforms in the banking system are estimated as positive both by foreign (IMF, the World Bank, etc.) and independent Georgian experts.

There are many positively characterised features in the bank system of the country. Banking sector (nowadays 25 commercial banks function in Georgia, the number of banks has not changed since August of previous year) has developed fast and dynamically of late years. As a result, banks have contributed to the development of Georgia’s national economy. First of all, this is reflected in the increase of banks’ financial mediation level, in wide spectre of credit service for population and entrepreneurs of different economic sectors, etc. It is clear that commercial banks would not contrive to do this if they were not economically strong. As the analysis reveals, country’s commercial banks have achieved significant success in this direction. First of all, we should mention the fact that assets of commercial banks increase annually. This indicator amounted to 1,364 million GEL according to nine months’ data of this year. The growth rate of the mentioned indicator was 22% during the period.
It is noteworthy that value of commercial banks’ total assets makes up 22,3% (6127,5 million GEL) of GDP produced for nine months of 2003. It is an impressive figure for transition economy countries.
Total assets of ten largest banks make up almost 90% of total assets of country’s banking system. The figure amounts to almost 1/5 (19,9%) of GDP produced for nine months of 2003.
We should also mention that positive changes have lately been observable in the quality of banking system assets. This especially concerns credit portfolio of commercial banks. By November 1, 2002 commercial banks provided 606,9 million laris’ standard, non-standard, problem and dead loans. Banks increased the sum of loans to 196,7 million laris in the same period of 2003. The greatest growth ? 197,9 million laris ? was observed in standard loans. At the same time, the figure of interbank loans has increased up to 9,7 million laris in the column of standard assets. By November 1 of this year the volume of securities trading appear in the column of standard assets. This was not observed in the same period of last year. The cost of commercial banks’ real and unreal estate decreased by 267,2, investments in registered capital fell by 133,645 laris while parameters of other assets fell by 2,6 million laris.
It is noteworthy that processes of financial loans concentration and accordingly, fusion and merger of the mentioned credit institutions take place almost in all transition economy countries. As a result, the number of banks in the country as well as growth rate of the largest ten banks’ funds and assets decline. For instance, 10 largest banks of Poland own 76% of the whole bank assets (see newspaper “GAZETA MSP”, October, 2002).
The volumes of deposits in both national and foreign currency have increased for 11 months of this year. The whole volume of legal and physical persons’ deposits has increased by 14,1% for ten months amounting to 13892 thousand laris by 1 November. At the same time, deposits in national currency grew in the conditions of interest rate decrease. With in average 6% charged annually to deposits in the first quarter of this year, the figure decreased to 4% in November.
It is clear that volumes of commercial banks’ deposits will especially grow after work on the formation of deposits insurance system is completed. The National Bank works on the arrangement of deposits insurance system and on the determination of main principles of functioning.
As far as we know, banking system is mainly called upon to attract financial funds and to provide credits. Commercial banks of the country gradually perform the function more and more successfully: this concerns both growth of supplied credits and decrease of interest rates. On November 1 2003 total consolidated loans of commercial banks increased by 197 million GEL compared with the same period of 2002. During the analysed period loans provided to trade and service sectors increased by 80 million laris while loans of energy sector increased by 2,5 million GEL; loans of physical persons rose by 48,6 million laris, loans of mining industry were 39 million laris up while those of construction sector were 17,7 million laris up. Despite the great risk of agricultural branch crediting, credit scales of agricultural and forestry sectors have grown. The mentioned growth was 6,1 million laris in the analysed period. Total consolidated loans looked as follows on 1 November 2003.
It is noteworthy that one of important functions of banking system, namely, of the National Bank is crediting of the government. On November 30, 2003 the Georgian Finance Minister took loans from the National Bank for financing deficit of Central Budget. The indebtedness of the Finance Minister was remitted in the amount of 808,25 million laris. In 11 months of this year, the National Bank provided 291,2 million laris’ loans with 9% interest to the government.
One of important requirements of population towards the banking system (the National Bank) is stable currency. The mentioned requirement is protected by the National Bank. If in September 2002 one American dollar equalled 2,1790 laris (monthly average), the figure was 2,1271 in September of this year, i.e. in the mentioned period lari was strengthened by 2,4% against dollar. The same concerns exchange rate of lari against rouble. If in September 2002 one lari amounted to 14,5201 roubles, the figure was 14,3857 roubles in September of this year, i.e. lari was strengthened by 0,30% against rouble.
Apart form the mentioned positive trends, there are also some drawbacks in the banking system: one of them is high interest rate on credits, which is stipulated by multitude of reasons such as high interests rates on deposits, high risks of credit repayment, unstable political and economic situation in the country. For your information: nowadays, interest rates on credits in national currency range from 17% to 22% in Georgia while interest rates on credits in foreign currency range from 19% to 29%. We should hereby mention that of transition economy countries the mentioned indicator is quite low in Czech Republic (7%) and high in Rumania (almost 45%).
High level of dollarisation is Achilles’ heel for Georgian banking system. It is true, the mentioned indicator was 85,5% by September of this year. Compared with the previous period, the figure has been increased instead of being decreased (it amounted to 85,3% in the same period of previous year), but we should say that this is not only problem of banking system, but rather the problem of the whole national economy.
One of the greatest problems of the banking system often criticised by Georgian experts is low level of money aggregates as compared with GDP. Presently, this indicator does not exceed 10%. We should also mention that the similar indicator is not high in other transition economy countries ranging from 10,1% (in Slovania) to 30% (in Estonia). It is 15% in Russia.