The Bank system of Georgia is ten years old

Ambrosy Grishikashvili

Post soviet bank system has passed an original way of development. The Central Bank and state sectoral bank have been formed long before the country gained independence though they still continued their operation ? crediting the branches of national economy by means of traditional, planned methods.

At this time, the commercial banks were formed in the conditions of the legislative sphere of economy. Commercial banks were formed both via privatization and government furnished facilities.
Both natural and legal persons could obtain license for bank operation. In all post-soviet countries minimization of authorized capital stock promoted the formation of new commercial banks. As a rule, the increase in the number of banks was caused by the degradation of their work.
Economic reforms aimed at the macroeconomic stability were at first performed in the fiscal sphere. National currency was adopted in Georgia; measures were taken to stabilize its exchange rate and to decrease inflation level. All this promoted the improvement and reorganization of bank system. Commercial banks could no longer receive cheap purpose loans from the National Bank. The scale of refinancing fell considerably.
At the same time, most of credits designed for the enterprises turned out to be “hopeless”. First of all, major state banks and new commercial banks had to face this problem.
Concurrently a department of bank supervision was formed. Its main purpose was regulation of situation in bank sector. This agency was designed to increase the volume of minimal authorized capital and to develop norms for the safe operation of commercial banks.
In 1995-96 weak points of the bank system became quite obvious in the background of economic reforms. Great mistakes were made during the formation of new banks. At the same time no one cared to clear out where these funds came from. Little attention was given to the professional preparation of managers and to the bank statute.
Let me remind you: at first, the authorized capital was supposed to make up 500 million coupons that equaled 700 thousand US dollars. As a result of inflation in 1994 this sum equaled 500 dollars.
Therefore, in 1995 a license was obtained by 250 banks that represented the so called “pocket banks”. They were formed by 3-4 people. The number of its customers was the same. The authorized capital of such banks made up 5000 dollars. Ever since the inflation process of national currency (at first coupon, then lari) was arrested, the chances of small and large commercial banks decreased due to humble authorized capital, small number of deposits and a high risk of credit activity. As a result of it, commercial banks preferred active operations to passive ones.
The increase in the legislative activity of bank system took place in this period, too. In 1995, the Georgian Parliament passed law “On the National Bank of Georgia”. The law meets the international requirements. It guarantees that the National Bank of Georgia will be independent during the development of finance-and-credit policy of the country. Though, we should also point out that amendments were made in the law as a result of which the prerogative for the implementation of financial-and-credit and financial policy went over to the Parliament. Therefore, the NBG develops the policy in this sphere and authorizes the Parliament to realize it. In its decrees the Parliament determines the main directions of this policy, namely, the inflation level, the volume of currency reserves, quantity of credits, interest rate, mechanisms of finance-and-credit regulation, principles of monetary policy.
As a result of this amendment, the number of the NBG rose from 7 to 9 people. The law on the Central Bank accentuates the independence of the NBG from legislative and executive bodies.
As far as its relations with the Commercial Banks are concerned, the NBG is entitled either to grant license or to regain it. It sets norms of currency reserves for the Commercial Banks as well as defines the size of penalty provision. The National Bank grants credits to the Commercial Banks. In addition, it determines their discount or interest rate.
The NBG fulfills the role of an advisor and financial agent in its relations with the government. It is responsible for providing consultations to the President and minister of finance on the functioning of bank system and budgeting. The NBG also deals with the matters of home and foreign debts in state sector. The law “On the National Bank” forbids budget deficiency payment by means of currency issue. The NBG grants credit to the Minister of Finance for the maximum period of 6 months. These kinds of credits must be vouched by government bonds.
Much has been done for the bank system of Georgia for the last time. Let us refer to figures in order to visualize the work performed.
One of the most important functions of the National Bank is provision of economic branches with monetary symbol.
At the same time this process must not become inconvertible. Otherwise, it will bring to inflation and will deteriorate the exchange rate of national currency. Besides, both economists and citizens believe that the NBG promotes the deficit of monetary symbol. We can hardly agree to it. During the whole length of 1995 the NBG put 391,1 million GEL into circulation. Since 1995 this index grew thrice (1995 ? 131,4 million GEL, till 2000, so for the last six years ? 391,1 million GEL. Approximately 65 million a year). As we see, the tempo of currency issue exceeds that of domestic product. We think that the increase of currency issue by the NBG would lead to negative processes.
One of the positive consequences in the national economy is the trust of population in the bank system. F.e. in 1995 the population invested 78,7 million GEL in banks; in the Y2000 this index exceeded 300 million GEL.
In spite of the fact that the NBG does not intervene in the financial market with the purpose of the stabilization of GEL, we cannot but say that the national exchange rate is left adrift. A definite part of foreign credits goes on the cover of negative credit balance.
Another positive feature in the work of the NBG is that bankruptcy of such major banks as “Tbilcredit Bank”, “Ivertbanks” and “Absolute bank” did not influence the bank system of the country. This testifies to the fact that the bank system of the country is quite stable. This is, of course, a merit of the NBG authorities.
For the past period the efforts of the NBG were aimed at the preservations of such banks that would be able to perform their functions of classic bank establishments. With this purpose, the NBG demanded that the authorized capital should rise to 5 million dollars. This was the reason why 30 banks were closed.
The growth of financial assets (deposits) enables the commercial banks to perform active operation on the crediting of legal and natural persons and to decrease interest rates.
There are positive changes as far as the interest rate is concerned. The interest rate for 1 month credits fell from 35% to 21%, that of 3-6 months credits fell from 25% to 19%,etc.
It is also noteworthy that the interest rate for credits that were granted to priority branches decreases. Yet, it is still high.
To conclude, I would like to say that in spite of many negative events in the bank system of Georgia, it develops in the right direction, moreover, positive moments exceed negative ones. This is, first of all, the NGB’s merit. We congratulate this major enterprise on its ten years and wish it still greater success in the future.