What Caused the Rise of Interest Rates on Georgia’s Banking Market

Maka Ghaniashvili

And how are ‘Bank of Georgia’s and ‘TBC Bank’ promo actions – ‘Become a millionaire’ connected to the rise of interest rates?

Georgia’s commercial banks have increased interest rates for all types of loans with 2-3% (leaders at banking market confirm the given information). Existing problems on the world market – increased prices on monetary resources is said to be the reason of it. Ongoing world processes – economic recession of the US, increased price on oil, mortgage crisis and devaluation of USD have affected economies of bigger and more developed countries than Georgia.
Banking sectors is one of the most developed and fastest growing fields of Georgia’s economy. According to May 1 2008 data, there are about 22 commercial banks in Georgia and the volume of their total assets reach Gel 8.3 billion. Bank of Georgia holds 33.4% of total bank assets (Gel 2.76 billion), TBC Bank occupies 25.2% (Gel 2.084 billion) of total bank assets. Bank Republic comes the third with Gel 593 million and VTB Bank Georgia is the next with Gel 459 million. Net income of commercial banks in the first quarter of 2008 amounted to Gel 42.3 million. Crediting of national economy by banks have increased with 67% over last year and has exceeded Gel 4.9 billion. Total volume of loans issued to corporate clients 79,6% covers three fields – trade, industry and building. It is obvious that credit resources on these fields as well as on others become more expensive. From May 1, annual interest rate for mortgage loan has increased from 14 to 16-20%. Construction companies mainly use banking credits to finance buildings. Higher interest rates are directly connected to higher construction prices. As a result consumers get higher prices. The companies that rightly manage self price and income, together with higher banking interest rates will increase prices in any case. Higher interest rates somehow point at fewer and more expensive credit resources. Its increase in Georgia has been caused by lack of liquidity on global market. The reason of the latter is the US drawling mortgage crisis. Georgia’s banks will find it difficult to attract comparatively cheaper credit resources from abroad, as credit has become 1,5- 2 % more expensive on the world market. Georgian banks received credit resources in foreign banks with 4-6% two years ago. Although ongoing tendency on the world market has affected interest rates as well and now optimal interest rate varies between 8-10%. As credit resources are expensive, Georgian banks are not able to issue loans with less interest than they themselves receive from international banking structures.
Georgian banks are limited while attracting resources from abroad both in credit volume as well as in terms. Resources issued by foreign financial institutions to Georgian banks, mainly due to insufficient guarantees, are short term. In this case risk factor is the most important issue. Risk is caused by both: international processes as well as ongoing events in the country. In spite of a fact that large number of investment has flown into Georgian banking sector recently, still the money attracted by commercial banks is expensive. Considering low economic development and certain political events (such as events of November 7, presidential and parliamentary elections, conflict regions) Georgia remains the country of high risks while comparing with developed countries. Annual interest rate for bank loans in Baltic States is only 7-8 %. These states are viewed as lower risk countries than Georgia and their economy is much more developed than ours. If situation on global market does not improve, the tendency of rising interest rates in Georgia will probably continue. Long term credits, particularly consumer and mortgage loans have been financed based on these resources. Therefore, higher rates mainly affected this category of loans. The processes developed on the world credit market directly influences ‘Bank of Georgia’, assets of which are being sold on London stock exchange. Money has become expensive on credit market, accordingly ‘Bank of Georgia’ interest rates for all types of loans have increased – sometimes the change is slightly important, although in other cases rates have significantly increased. Mortgage loan rate has changed from 13-14% to 16-18%, as for consumer loan, interest rates vary from 16% to 36%, it even may reach 40% as according to ‘Bank of Georgia’ consumer loan is a specific type of credit and interest rate is formed individually for each client according to his/her information. Loans are expensive at TBC Bank as well. Interest rates for consumer loan begin from 16%. As for mortgage loan rates, they have increased form 13-14% to 16-19%. The above mentioned two banks are key players on Georgia’s banking sector. Therefore offering more expensive credits push other banks to the same action. ‘ProCredit Bank’ states this to be the reason of rising interest rates. The bank has grown rates with 1-2% and average annual rate begins from 17%. The growth has mainly affected small and medium loans as ProCredit Bank is directed to these types of business loans. As we have already mentioned, ProCredit Bank relates expensive credits to the situation on the country’s domestic market and increased loan rates by competitors. Local problems are added to the situation on the world credit market. National bank assists these processes to some extent. It tries to keep inflation rate by means of rising market rates on deposit certificates. Accordingly local credit resource becomes more and more expensive. In addition National Bank constantly takes certain amount of money from circulation in order to regulate Gel exchange rate. Besides, interest rates are affected by citizens’ deposits in banks as well. As a rule, one of the major financial sources of banks are term deposits. 90% of them are held by physical persons (individuals). Long-term deposit share has recently decreased from 42% to 37%. This has been caused by several reasons: first, interest rate on deposit is completely ‘taken’ by inflation, besides, unstable political situation greatly affects banking sector, famous events of November 2007 is a good example of it. These events have significantly influenced banking system. As a result people feel less confident about banking sector and they do not trust their money to banks. The situation has become so complicated that several commercial banks – ‘VTB, Basis Bank, Bank of Georgia, TBC Bank have began top promo-actions of deposits. In case of opening term deposit of Gel 500 for one year Bank of Georgia offers a chance of winning Gel one million. As for TBC bank it offers USD 1 million lottery prize. The mentioned promo-actions aim to support banks in attracting monetary resources.
Coming back to outcomes of higher interest rates – the tendency may lead to less economic efficiency in the country. It will mainly refer to unsafe and risky fields of economy, such as agro sector. Rising interest rates will significantly hamper the development of agro business as well as small and medium enterprise while economy of any developed country is based on small and medium business. Major objective of a country while implementing economic policy is a GDP growth – main indicator of economic development. Market economy is a basis of it. 30% contribution of large business and 70% share of medium enterprise is a definer in economy. Together with liberal tax code (that classifies small, medium and large enterprises, defines priorities, tax privileges etc) banking sector (issuing privileged loans) plays significant role in reaching the above mentioned condition. In spite of the fact that bank assets annually increase in Georgia, about 80% of credit amounts are related to large business. Well, it’s clear that issuing loan of several millions to a large business is less troublesome than giving loans of several thousands. Accordingly the industry that is to produce wealth does not exist. Higher interest rates may even be accompanied by certain positive issues, such as managing inflation. In fact, National Bank fights against inflation by means of high interest rates. Nominal interest rate is a sum of the expected real interest rate plus the expected inflation rate over the duration of the loan. Accordingly, the less inflation rate is, the less nominal interest rates are on loans as well as on deposits. Although, there is the other side of the coin as well – higher interest rates affect the self price of products made by borrower entrepreneur, inflation implies increased prices. So, increased interest rate’s assistance in managing inflation rate will be shown by time.
According to foreign experts, current high interest rates are not based on any real calculation, they are not even related to inflation, as it is very hard to forecast inflation rate, especially in Georgia. In their opinion, high and fixed interest rates are quite typical for commercial banks in developing countries. Banks in developed countries have freed loans from inflation risk and have formed changeable system of interest rates. Commercial banks of developing countries issue loans with fixed interest rates. In fact it is a wrong tendency. Banks in Georgia work out fixed rates and they remain the same for a long time. For example, if you borrow money from a Georgian bank for 10 years, it will not be able to raise interest rate considered by the agreement during the pointed period of time, but in case financial resource costs more to the bank, the change directly influences a new borrower and pays more for credit. Georgia within SCI states, even among the countries with developing economies, has the highest interest rates. For example, mortgage loan rates reach 16-20%, while interest rate on the same type of loan in Baku, Riga and Vilnius is only 5-6%.
Experts have some other viewpoints regarding higher interest rates – due to existing financial problems on the world market, medium and relatively small banks will face challenges and if they do not fill capital deficit even by means of deposits they will have to decrease credit portfolios. High interest rates push more and more foreign banks and financial institutions to enter Georgia’s market. Competition should logically lead to cutting interest rates. Despite a significant number of foreign banks entering Georgia, sufficient amount of financial resources have not been accumulated yet. Consequently interest rates still increase.