Page 32 - GEORptFeb20

8.1​ Bank sector overview
Dollarisation and households’ high indebtedness main risks to Georgia’s financial system says think tank
Georgia’s high level of dollarisation and excessive debt faced by households remain vulnerabilities of the country’s financial system and constrain its monetary and exchange rate policies,​ ​according to a report from the Berlin Economics think tank.​ The report also highlights the ongoing enactment of institutional improvements in Georgia’s banking and capital markets.
Berlin Economics also drew attention to the highly concentrated banking system, with just two banks controlling 73% of sector assets. In principle, such concentration may undermine incentives for sound risk management.
Georgia’s banking sector is seen as having expanded rapidly and as highly profitable, meaning it is highly capitalised—but a low level of bad loans is typical for banking at this stage of development and potential problems with credit quality would only surface later, the think tank cautioned. Berlin Economics further speaks of a recent expansion of bank credit that resulted in credit to the real sector (65% of GDP) exceeding levels seen in Central and Eastern Europe. The situation forced the central bank to enforce a "responsible regulation act" in January.
The report draws attention to a large number of very small individual loans in default which were transferred from Georgia’s banks to a private foundation. It is a reference to the transfer of small-sized bad loans to the Cartu Foundation of Bidzina Ivanishvili, the oligarch who chairs the country’s ruling Georgia Dream party. Cartu reached a deal with the banks to absorb the loans in advance of last year’s presidential election. It allowed relieved households to enter into fresh borrowing.
Corporate leverage in Georgia has also increased, according to Berlin Economics. Some 56% of enterprise loans are denominated in foreign currency. They are clearly vulnerable to a further depreciation of the local currency, the Georgian lari. The insolvency law that has been introduced in parliament would allow a more orderly restructuring of overly indebted firms.
Encouraging developments are seen in relation to capital markets and private pensions, set to closely develop following the passing of certain regulations. The pensions fund became operational this year. It may support liquidity in local markets.
The central bank has, meanwhile, put in place a stronger framework for capital markets. An investment funds law has moved close to parliamentary approval and a law on derivatives, crucial for hedging, has been tabled in the legislature.
Berlin Economics identified three key policy initiatives likely to strengthen the resilience of Georgia’s financial sector over coming years. Firstly, this month, legal amendments which would strengthen the powers of the central bank in conducting bank resolutions, are on track for approval. Secondly, the central bank is continuing with its de-dollarisation policy.
Finally, the report noted that capital markets development will expand the options for local currency funding by banks. The government is in the process
32​ GEORGIA Country Report​ February 2020 ​ ​www.intellinews.com