100 days in the national bank

FROM THE REDACTION

Its 100 days since the National Bank has a new head. What should Georgian business expect in credit and curenncy policy. Here we present an interview with the President of National Bank – Roman Gotsiridze.

What was the priority of your work in the first hundred days? They say that you have familiarized yourself with everything in details. Are you going to prepare a report on the bank’s past activities, and, in your opinion, is this successful institution was really forehanded or there is something that could have been done better?
I shall give you a short answer: what was good in the past will be retained and what was bad – will not be repeated.
2. In the banking sector there proceeds a process concentration, and foreign capital is
actively coming into this segment. They say that “Georgian Bank” is being prepared for selling to a solid foreign bank. Is there any positive capital movement in this sphere? What if “Vneshtorgbank» or Kazakh “Turan Alem Bank” invest their money, to whom “Georgian Bank” will be sold?
Taking into account the existing concentration in banking sphere, a considerable part of bank assets and deposits are in large banks. In particular, 84% of assets and 85% of deposits are concentrated in 6 largest “system forming banks”, they are “TBC Bank”, “Georgian Bank”, “Kartu Bank”, “Pro Credit Bank”, “United Georgian Bank”, “Bank Republic”. It is noteworthy that none of the “system forming banks” has a monopoly position on the market. The National Bank, as a conductor of the antimonopoly policy in the banking system, according to the current legislation, will not allow monopolization of the bank market by a single bank.
The interest towards Georgian banks has increased lately. This process began from 2004 in parallel with the stabilization processes that take place in the country. Mostly, commercial banks of the neighboring countries show interest in entry on the Georgian market. Russian “Vneshtorgbank” has already made investments into the authorized capital of the “United Georgian Bank” and it possesses 50% of its shares. The issue of additional emission of the bank’s shares is under consideration which will lead to increasing of the “Vneshtorgbank’s” share in the authorized capital of “The United Georgian Bank” As to Kazakh “Turam Alem Bank”, it hopes to buy 49% of shares of the authorized capital of “Silk Road Bank”. The negotiations of the parts are under way and are likely to be finished in the nearest future. The talk about the alienation of “Georgian Bank’s” shares is just an idea and real steps in this direction have not been taken yet. Penetration of foreign investments to the Georgian market will cause aggravation of competition on the Georgian market, which in its turn, will promote perfection of the financial intermediately function, raising of quality of banking services and acceleration of the consolidation process. In this respect, the process has already begun. In April a large bank “Sakartvelos Banki” purchased a medium size “Tbiluniversalbank” and in this way their joining up took place.
3. In your opinion, how much will credit resources fall in price over the next year and in what sphere the main investments are concentrated?
Over the past years Georgian banking system has been developing in a sustainable way. Presently the banking system is rather solid and is characterized by a robust structure of assets and liabilities. Trust towards the banks has increased considerably and the population more actively uses banking services and deposits money in them. At the same time, in connection to the processes of legalization of the economy, the necessity of banking system’s use by legal entities and the number of banking operations have increased considerably. All this stipulated a substantial broadening of the deposit base. During the year 2004 its volume increased by almost 45% while in 2001-2003 it was increasing by 27% on average. Besides penetration of foreign banks to the Georgian market and mastering of the new foreign credit lines promotes bringing in of comparatively cheap credit resources. Under these circumstances, commercial banks’ striving for placing the obtained funds promotes competition on the credit market. Keen competition forces the banks to have more effective administration and grant credits to consumers at lower rates. In particular, average rate on the bank loans given out in national currency dropped over the past 12 months by 4 percent points, to annual 22% (for May1, 2005). For certain term loans in GEL the rate was reduced even more (for instance, cutting of rates for 1 month, 1-3 month, 3-6 month loans made up 6 and more percent points for the same period). Also rates on bank credits in foreign currency reduced by 2 percent points in comparison to the beginning of the last year and average rate makes up 18%. I want to stress that commercial banks finance the clients with good credit history at a comparatively low annual rate within 13-14%.
A considerable part of the economy and credits falls on foreign currency, which made up 494 million USD for May 1. Last year it increased by 118 million USD, and in the four months of the current year it increased by 64 million USD.
It is also noteworthy that the volume of the credits in the national currency given out by commercial banks is increasing considerably. Over the last year it increased by 39 million GEL, and in four months of the current year it has increased by 48 million GEL. Besides the volume of credits given out in the national currency almost doubled in comparison to the beginning of the last year and it makes up 177 million GEL for May 1.
The tendency of credit cheapening will continue in future. The interest of foreign investors in Georgian banks contributes to solidity of the system and makes conditions for a keen competition. Simplification of some economic norms by the National Bank will contribute to the development of these processes.
It is noteworthy that if in January out of the credits given out by banks to legal entities more than 40% fell on trade sector, in April their share made up 30%. In parallel with that the share of credits given out to industrial companies has increased considerably, from 25% to 38%. A considerable part of credits given out in foreign currency in January-April falls on trade sector (for instance in April 38% of the implemented crediting).
All in all, 36% of the national currency crediting of legal entities falls on industry and 25% on trade (for May 1, 2005). In spite of the fact that 46% of foreign currency credit investments falls on trade, the financing of industry still plays a considerable part and makes up 24% of total crediting.
4. In Georgia the prices of many products, housing and fuel have increased. What is the real inflation dynamics in 2005 year and a forecast till the end of the year? What kind of measures the National Bank is going to implement in the nearest two months?
The prices of many goods have really increased, which naturally triggers dissatisfaction among the population and it has an effect on its purchasing capacity. For example, oil price increase on the world market was a result of crude oil price increase. Last year’s agricultural produce price increase was caused by unfavorable natural conditions that were in Georgia last year. We hope that in June-July the prices of goods of this category will go down. Besides rising in price of imported alcoholic drinks and tobacco goods contributed to a considerable to total price increase, which can be explained by excise rates rise. As a result, according to the data of the first four months of the year, consumer price index, that represents the main inflation rate index in Georgia, and in which the price dynamics of 311 goods descriptions is envisaged, increased by 3,4% since the beginning of the year and after April 2004 by 10.3%. At the same time it should be noted that the first quarter of a year is characterized by traditionally high seasonal inflation. Also last year’s sharp increase in money supply contributed to price rising too. Reasoning from these reasons, a considerably noticeable increase in prices is not expected by the end of the year. But if there appears a danger of sharp price increasing the National Bank of Georgia will take all necessary measures in order keep annual inflation rate within one-digit limits not considerably exceeding the indicators of the past years. In this respect a positive tendency can be observed – in May lowering of prices was marked and annual inflation returned to one-digit limits again and made up 8.9%.
In order to keep the inflation rate within the moderate limits the National Bank of Georgia supports the stability of the national currency by means of interventions. At the same time much attention is paid to the dynamics of monetary aggregation.
5. Treasury obligations have always been a subject for criticism. What do you think about the current tendencies, financing of the budget and its dynamics in connection to their high rates and insularity of the market?
The criticism concerning the public securities market was stipulated by high rates and wrong emission planning that existed in the past years. In the year 2000 at the auctions for treasury obligations of the Ministry of Finance the average rate that was fixed made up 42.79% and in the year 42.94%. Since the beginning of 2004 the tendencies on the market of treasury obligations changed. According to the data of 2004 annual rate made up 21.36%. According to the data of five months of 2005, the rates at the primary market of public securities were reduced still more and make up 12.01%, which, from our point of view, is an acceptable rate for the Ministry of Finance. The emission policy has also improved. In particular, in the period of existence of treasury obligations in Georgia the Ministry of Finance for the first time published the annual emission calendar. An issuer publishes beforehand the diagram of emission and in due time sends a notification to the National Bank concerning the holding of the auction.
As to the subject of insularity of the market – according to the current legislation, commercial banks and, through their mediation, residents and non-resident persons and legal entities have the right to take part in the auctions for treasury obligations. (According to “ the regulations of Georgian Finance Ministry on issuance, circulation, distribution, registration and repayment of treasury obligations”). In accordance with the statistical data of the past years in 2002 and 2003, when the volume of treasury obligations in circulation exceeded 100 million GEL, the relative share of non-banking investors exceeded that of the banking ones. Since 2004, against the background of rate reduction, the structure of the participating investors has changed and the share of non-banking investors has been reduced considerably. According to the data of the auctions held in 2005, the share of the banking sector has increased to 94%.
According to the Georgian budget law of 2004, the parameter of financing of the budget by public securities was determined at the level minus 12,4 million GEL. In the dynamics the picture was the following: in the first quarter of 2004 the index of covering of the budget deficit by treasury obligations made up 19.3 million GEL, in the second quarter – 19.5 million GEL, in the third one – 9.6 million GEL, and at the end of the fourth quarter – 8,9 million GEL. In the year 2005 the program parameter of covering of the budget deficit by treasury obligations makes up 20 million GEL. In the first quarter of the current year this indicator makes up 10.1 million GEL, and by June 1 – 16.3 million GEL.
6. In spite of the intensive supervision of the National Bank that is being carried out, on the Georgian banking market still operate the banks, and among them rather big ones, the reliability of which is doubtful. Is the new management of the National Bank going to reconsider the ratings and categories?
In spite of the doubts that exist in the society concerning small or big banks, presently the financial situation of none of them represents a threat for stability of the banking sector. One of the National Bank’s functions is supervision over the commercial banks and for this purpose it implements the appraisal of the banks’ financial situation and risk management, and establishment of the level of capital sufficiency. For appraisal of commercial banks and establishing their rating CAMEL rating system is used. This system was initially created about twenty years ago in the US and since then it has been widely used in Europe and in former USSR countries. CAMEL rating system includes the appraisal of a bank’s capital and the components its assets, management, profitability and liquidity. CAMEL rating system itself periodically undergoes changes for the purpose of its perfection, and, it is clear that the work in this direction is going on.
7. And the last thing. According to the statement of the Russian National Bank, out of total number of Russian banks, one hundred were involved in money laundering. Have any Georgian banks been involved in cooperation with them in connection to this matter?
Presently none of Georgian commercial banks are known to be involved in money laundering. Though after “the law on counteraction to legalization of illegal profits” came into the effect, there was a case when some doubts emerged in relation to “Gama-Bank” as to implementation of illegal activities, in particular participation in money laundering. Georgian Financial Monitoring Service transferred the case to the Georgian Prosecutor General’s Office and its investigation is being carried out now.