Transcript
of a Press Briefing
by Mr. Arne B. Petersen
Advisor
Monetary and Exchange Affairs Department1
Tbilisi, Georgia
Question
Mr. Arne Petersen, as leader of the MAE missions of the IMF, you have been studying and analyzing the on-going processes in the banking system of Georgia for several years. Please give your estimation of the way the banking system has been developed for this period.
The banking system has undergone a tremendous change over the recent period. Particularly noteworthy is the growth of some of the newer banks so that Georgia now has a diversified and competitive banking system. Thus, while at the end of 1996, the three former state banks accounted for 70 percent of bank assets, by November 1, 1998 they accounted for 30 percent. This change was in part because the former state banks at the beginning of the period were saddled with a large share of non performing loans and it took them some time to work their way out of that problem. I am happy to see that they have all made very good progress, and that two of them for some time now have completely overcome their earlier problems and remain the two largest banks.
While the banking system has become more diversified, paradoxically the number of banks has declined. In 1993 and 1994 new commercial banks were licensed liberally. Many proved to be weak and were not what we would call banks today; some had very low levels of capital—as little as the equivalent of US$200 was initially required to open a bank. In order to strengthen the financial system, the system of regulation and supervision was enhanced and viable banks were identified under a certification program that reduced the number of licensed commercial banks from 225 in March 1995 to 44 in November 1998 (including one foreign bank branch). As you know, newly licensed banks are currently required to have more capital (5 million lari), and existing banks need to gradually increase their capital to that level by the end of the year 2,000. This will likely lead to some further consolidation through bank mergers in the years ahead.
Question
As a result of the fall in the exchange rate, devaluation of the national currency many countries of the CIS, among them Russia, Moldova, Kirghizstan and etc., are facing serious systemic crisis or possible collapse of the banking system. What is your opinion of the existing situation in the banking system of Georgia? Are there any signs of systemic crisis here?
I would like to make a minor correction to the question. The depreciation did not cause the banking crisis in the countries mentioned. It already existed but was of course accentuated by the depreciation, most dramatically illustrated by Russia where you had the concurrent problem of the freeze on the GKO market. Actually, before working with Georgia, I was leading missions to the Kyrgyz Republic and two years ago, they had already made significant progress in restructuring their banking system through a very courageous restructuring plan.
As to the impact on the Georgian banking system of the depreciation of the lari, our impression is that while of some concern, it will be manageable. There has been some deposit withdrawal in anticipation of the depreciation, particularly in September, but more recently the level of deposits has stabilized and we should soon see some reflows to the banking system, now that the decision by the National Bank of Georgia (NBG) to stop intervention in the foreign exchange market has been executed in a very professional manner, both by the NBG and by the banks. Thus, a major liquidity crisis appears to have been avoided.
The banking industry's net foreign asset position, including off-balance sheet items, is "long", meaning that their foreign assets exceeds their foreign liabilities. In terms of lari, the immediate impact of their depreciation is therefore an increase in profits because of the revaluation of their net foreign assets.
Some shareholders may say that the shares they hold, which are denominated in lari, have become less valuable in US dollar terms, and I believe it is a fact of life that many Georgians still measure the worth of an item in terms of foreign currency. This argument, however, does not take into account the true value of the bank, which can only be calculated by looking at its net worth measured by the difference between its assets and its liabilities. As I noted, a larger share of assets are denominated in foreign exchange, so the net worth of a bank may actually have increased, even in dollar terms.
A concern remains over the impact of the depreciation on the quality of the loan portfolio of the banks. The key issue for the banks is how the depreciation and the general state of the economy will impact on borrowers ability to repay loans. An increase in overdue loans has an immediate impact on banks profitability since they will have to make provisions and ultimately charge off such loans. In a general sense, a bank is only as healthy as its clients. In this connection, the inability of the Government to ensure timely payments of pensions and salaries is of concern, since it will ultimately have an obvious impact on the business climate.
We have met with a number of banks and they have all demonstrated a good perception of the issues and vigilance in monitoring the quality of their assets. They do not expect a significant deterioration in their loan portfolio. Even should this occur, banks in general are well capitalized. It is therefore a very clear conclusion of the mission that while some deterioration in banks capital may occur, and a few banks may incur difficulties, we are very far from Russian conditions. Indeed, at this stage, there is no evidence of a systemic crisis in Georgia.
Question
What's your evaluation of the activity of the National Bank of Georgia toward the supervision and regulation under the difficult economic conditions of this country?
During the past three years, the National Bank of Georgia has been developing a system of bank licensing, supervision, and correction. The law governing the central bank (the Law on the National Bank of Georgia) was enacted in September 1995 and amended in May 1996. Legislation controlling the creation, supervision, and resolution of commercial banks and other credit institutions was passed in February 1996 and amended the following month. Since then the Banking Supervision Department has issued various regulation covering all aspects of prudential regulations. Existing prudential regulations are generally in line with international norms and are quite well implemented. The last MAE mission reviewed and fully endorsed proposed further tightening of prudential regulations as well as a draft Framework for Supervisory Action which includes a system of prompt corrective actions to address and resolve weaknesses speedily as they arise. Both have recently been adopted by the Board of the NBG and will enter into effect on January 1, 1999. Perhaps with the exception of some further strengthening of loan loss provisions, there is no need for further strengthening of prudential regulations at this time.
During the recent events, the NBG correctly adopted a forward looking attitude, alerting the banks to potential liquidity problems and a possible deterioration in the quality of loan portfolio and proposing mediatory steps. The NBG's actions have been instrumental in averting a generalized liquidity crisis.
Question
As public has become aware under the difficult macroeconomic situation, the NBG has selected 13 commercial banks by applicable criteria. The National Bank of Georgia has intentions to formalize the memorandum of understanding with the selected banks and provide financial assistance if necessary. Your comments.
In the missions view, the agreement on memoranda of understanding (MOU) with the 13 banks, nine of which have been signed, was an important precautionary step in case urgent liquidity injections were required. I would like to stress that the MOUs were precautionary and voluntary. So far liquidity support has not proved necessary under the terms of the MOU.
One of the key functions of a central bank is to provide lender of last resort financing in case of temporary liquidity needs of commercial banks. In such a case, it is crucial for the central bank to ensure that the commercial bank in question is solvent and viable to avoid endangering its own resources. The liquidity analysis and the discussions leading to the drawing up of the MOUs has helped the NBG to get a better picture of the underlying situation of the banks concerned. That is not to say that a request for liquidity from the bank with an MOU will be approved automatically. Nor that no bank without an MOU will be able to obtain liquidity, if solvent and viable. But the MOUs have prepared the ground work for the systemically significant banks, and, I believe, have been helpful to the banks also in identifying steps that they could take to help avoid liquidity problems.
The MOUs are temporary agreements, and, with the recent evidence of a normalization in the exchange market, may not be required for too long. Obviously some aspects of the banks behavior, such as a virtually complete stop to new lending, which was appropriate in the circumstances, cannot be maintained for too long without endangering their own profitability, and, perhaps more importantly the functioning of the economy in general.
1Mr. Petersen has been heading MAE missions to Georgia over the past 2 ½
years.