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Resume: Under the new lending regulations which have been in force since 1 January 2019, requirements for lending to individuals became stricter which resulted in a decreased volume of issued loans. In total (the sum of all types of loans), GEL 813.7 million in loans were issued for individuals in January 2019 as a part of 785,000 contracts.[1] This is a 1.4 time less loan volume and a 1.3 time less number of contracts as compared to the same figures of January 2018. In terms of loan types, consumer loans have experienced the biggest decline. In January 2019, there were 74,500 contracts signed which is 5.7 times less as compared to the same figure of the previous year. In the same period, the total monetary amount of consumer loans decreased from GEL 368.8 million to GEL 176.1 million.

With the decrease in loans, banks are experiencing a decrease in income given that their source of income is the accrued interest rate from issued loans. Given the scale of the decrease in income, the necessity for optimising (cutting) expenses arises. This in turn might cause a cut in the number of employees or/and their salaries. Apart from the direct impact upon banks, decreased lending might negatively affect economic activity in other sectors. Decreased lending automatically means a decrease in disposable free funds which stipulates a decrease in the total local demand. In turn, decreased demand negatively affects the income of the business sector and its current and future expenses. Consequently, economic activity and the economic growth rate become slower in the short-term period.

Therefore, the MP’s statement about a substantial drop in lending and the expected negative results of the lending regulations does correspond to reality. Moreover, the figure vis-à-vis the lending decrease is exaggerated. Of note is that official figures were not yet available when the statement was made and the MP’s figure is the same as the one published in the media.

Analysis

European Georgia Movement for Freedom MP, Davit Bakradze, whilst speaking about the consequences of the new lending regulations, stated that commercial banks suffer as a result of the lending regulations which is demonstrated by the tenfold decrease in lending in January 2019 as compared to January of the previous year. The MP also clarified that decreased lending is a pre-condition for the slowing of economic growth.

Given the context of the statement, it is obvious that the MP refers to the impact of the lending regulations which have been in force since 1 January 2019. The respective legislative act (an Order of the President of the National Bank of Georgia on the Approval of Regulations for Lending to Individuals) was adopted on 24 December 2018. The order is mandatory for any institution which issues loans to an individual, including commercial banks, microfinance organisations, etc. Apart from the necessity of the solvency analysis, Article 3 requires additional conditions which include the requirement that the difference between the debtor’s net income and the loan should not be less than the subsistence minimum (currently, the subsistence minimum is GEL 176). In accordance with the same order, monthly expenses for loan service should not exceed a certain amount of the debtor’s monthly income (20-60%). See FactCheck’s research about the essence of the aforementioned legislative changes and their potential impact.

Given the context of the statement, it would be relevant to analyse the trends of changes in lending individuals because lending regulations affect only this part of the total amount of borrowers. At the same time, we have take into account the data about loan flows instead of the balance. Loan flows include new contracts signed within a certain period of time which, in our case, is the month of January. The balance also shows past loans whose repayment date has not yet passed. For instance, a ten-year loan issued in 2015 is seen in the balance and not in the flows in January 2019. Therefore, only new contracts can be affected by the new regulations and so it is not relevant to take the volume of past loans into account.

Table 1 shows the trend of changes in lending individuals. It includes the volume of issued loans in monetary form as well as the number of signed contracts (issued loans).

Table 1:Trends of Changes in Loans Issued to Individuals

Loan Purpose

January 2016

January 2017

January 2018

January 2019

Decrease in Lending

Number of Contracts

Consumer Loan

228,412

305,482

424,366

74,501

5.7

-82%

Mortgage Loan

1,118

1,813

3,230

2,035

1.6

-37%

Business Loan

123

51

76

49

1.6

-36%

Loan for Medium and Small-Sized Enterprises

11,875

9,771

15,012

15,288

1.0

2%

Transport Loan

96

110

410

225

1.8

-45%

Pawnshop Loan

31,991

25,010

20,682

15,210

1.4

-26%

Other Loan

715,899

638,844

663,845

677 918

1.0

2%

Total

989,514

981 ,81

1,127,621

785,226

1.4

-30%

Volume of Loans

(GEL Million)

Consumer Loan

182.5

251.1

368.8

176.4

2.1

-52%

Mortgage Loan

81.7

138.6

172.0

88.5

1.9

-49%

Business Loan

50.9

9.2

10.8

11.2

1.0

4%

Loan for Medium and Small-Sized Enterprises

68.9

94.5

138.8

123.6

1.1

-11%

Transport Loan

2.5

4.0

6.7

3.5

1.9

-48%

Pawnshop Loan

22.8

21.0

20.8

14.8

1.4

-29%

Other Loan

279.0

315.5

332.7

395.7

0.8

19%

Total

688.4

833.8

1,050.6

813.7

1.3

-23%

Source:National Bank of Georgia (interactive statistics)

As illustrated by the table, a total (the sum of all types of loans) of GEL 813.7 million in loans were issued for individuals in January 2019 as a part of 785,000 contracts. This is a 1.4 time less loan volume and a 1.3 time less number of contracts as compared to the same figures of January 2018. In terms of percentages, the decrease constitutes 30% and 23%, respectively. In terms of the types of loans, consumer loans have experienced the biggest decline. In January 2019, there were 74,500 contracts signed which is 5.7 times less as compared to the same figure of the previous year. In the same period, the total monetary volume of consumer loans decreased by the factor of 2.1 – from GEL 368.8 million to GEL 176.1 million. In the case of mortgage loans, the number of contracts and the volume of loans decreased by the factor of 1.6 and 1.9, respectively. In regard to the general picture, the total amount of loan contracts and the volume of loans issued in 2019 is less as compared to the figures for 2017. In terms of contracts alone, January 2019 is outperformed by January 2016 as well.

With the decrease in loans, banks (and other credit organisations) are experiencing a decrease in income given that their source of income is the accrued interest rate from issued loans. Given the scale of the decrease in income, the necessity for optimising (cutting) expenses arises. This, in turn, might cause a cut in the number of employees or/and their salaries. Apart from the direct impact upon banks, decreased lending might negatively affect economic activity in other sectors. Decreased lending automatically means a decrease in disposable free funds which further stipulates a decrease in the total local demand. In turn, a decreased demand negatively affects the income of the business sector and its current and future expenses. Consequently, economic activity and the economic growth rate become slower in the short-term period.



[1] Including overdrafts. An overdraft is a short-term, pre-approved credit which enables a consumer to receive additional funds in his credit card account in a pre-determined limit in order to cover expenses. Customers who receive their salaries through banks can use this service.