https://doi.org/10.56079/20222/7

At the current stage, one of the pivotal challenges to the financial stability of Georgia’s economy has been the excessive debt burden of the private sector and its rapid concurrent growth. For years, granting loans without submitting the proof of income has been the main reason for this problem. Excessive indebtedness, as is known, significantly increases the borrower's solvency risks which, in turn, remarkably foster the borrower's default risk as well as the likelihood of a financial crisis entirely for the country.

In response to the challenges of excessive indebtedness of private individuals, in 2019 the National Bank of Georgia launched a responsible lending framework which aims to subjugate all licensed lenders to unified credit granting rules in terms of consumer rights and credit standards. Considering the current reality, this provision was simplified and refined in 2020. The further changes are planned for 2022.

The article reviews and analyzes the regulations provided by the Regulation on Responsible Lending of the National Bank of Georgia, their impact on the country’s financial stability, the level of debt burden of the private sector and draws inferences on further refinement of some of the regulations.

The analysis of the post-implementation period of the responsible lending framework reveals that the regulations have yielded significant positive results, specifically: household excessive indebtedness have been reduced; the quality of assets have been improved; excessive growth of private individuals’ debt burden has slowed down; credit activity remains stable; the default level on loans grunted according to the new standard have been significantly reduced and is within acceptable limits.

Simultaneously, it should be noted that during the regulation period, the access to loans has not been reduced, the portfolio quality has improved significantly, the borrowers have become more informed about their creditworthiness and solvency, which enables them to minimize potential risks in the event of various shocks in the future.

The National Bank has taken consequential steps to mitigate the economic shock caused by the pandemic and to maintain the solvency of household; particularly, the borrowers have been offered to restructure their loans (especially mortgages) so that standard risk measures such as defaults, overdue payments have been less recorded.

Although the offer of a grace period for loan servicing at the early stages of the pandemic allowed households to relieve their financial stress, due to the severity of the shock, the aggravated solvency was followed by the increase in the share of non-performing loans. It should also be noted that the negative impact of the pandemic was found to be particularly severe for private individuals whose debt service loads were relatively higher than their income.

The responsible lending framework, taking into account the existing reality, is undergoing changes in 2022 too, namely, the loan requirements for a part of the borrowers will turn stringent. The changes are caused by the following factors: The initial estimation of the Loan Service Ratio (PTI) thresholds was based on 2017 statistics, after this a number of nominal economic indicators increased significantly, due to the changes in the macro-financial environment and shocks. Accordingly, new limits on the Loan Service Ratio (PTI) have been set to maintain the shock absorption capacity of borrowers and are in line with FSAP recommendations.

Despite the above-mentioned positive effects of implementing responsible lending regulations, we think that some articles of the regulation are controversial and need further refinement, particularly:

• According to the regulations, the financial institution has the right of anticipation of income on the basis of internal procedures. This increases the risks in terms of accuracy of anticipation of income and requires special care on the part of the bank.
• Based on the responsible lending framework, the loan-to-value ratio (LTV) has been increased, which means that at present property of lower value is needed to secure the same loan than it was before the regulations. We think it is profitable for the borrowers, but it bears risks for the banking institution because the client puts less valuable property as collateral which therefore considerably increases the probable incapability to repay the loan.
• It should also be noted that the provision does not apply to the individuals with total loan debt exceeding GEL 1,000,000 or to those who meet the criteria of a "knowledgeable investor", which means that lending to such individuals may be accomplished beyond the frame. We think that approval of this exception is a high risk carrier and it becomes entirely dependent on the internal policy of the bank, which increases the degree of the bank subjectivity and in case of improper procedures it creates a real basis for incurring losses. The fact that the client already has this marginal debt indicates that prior to the lending process, the principles of revenue and expenditure have already been identified which permitted the provision of funds. But in a changeable economic environment and the current pandemic and post-pandemic conditions lending to a person without further examination of his financial situation carries a high risk.

     Regardless of the aforesaid, the responsible lending framework developed by the National Bank of Georgia proved to be relatively effective and played an important role in mitigating the economic shock. All of these issues are one of the most significant factors contributing to the country's financial stability. 

Keywords: National Bank of Georgia; Responsible lending framework; Private sector debt burden; Loan Securing Ratio (LTV); Loan Service Ratio (PTI).

JEL Codes: G20, G21, H81