NBG reduces minimum reserve requirement on foreign currency denominated funds

Since the main mandate of the National Bank is to fight inflation, the National Bank has started to take appropriate measures, - Koba Gvenetadze, the President of the National Bank of Georgia, announced yesterday. The National Bank of Georgia (NBG) reduces the minimum reserve requirement on foreign currency denominated funds by 5%. According to Gvenetadze, this frees up $ 700 million in resources of banks that will be used for crediting the country's economy.

As NBG president stated, the recent depreciation of the GEL's nominal effective exchange rate, has pressured inflation and since NBG’s main mandate is fighting inflation, they started taking appropriate measures: “As you know, we have tightened credit policy since the last two monetary policy committees and have increased our refinancing rate by 0.5%. At the same time, we have conducted interventions at the foreign exchange market,” noted Gvenetadze.

“We have decided to reduce our reserve requirements in foreign currency by five percent while providing commercial banks with some foreign currency liquidity. That means it will be possible for commercial banks to provide about $ 700 million in additional lending. Also, the interest rate on these foreign currency loans will decrease, ”said Koba Gvenetadze.

According to the President of NBG, the measures undertaken should help to change the exchange rate dynamics and reduce the pressure on inflation over time.

Gvenetadze explained that the abovementioned decision doesn’t change the larisation policy of NBG. “This process may lead to a slight slowdown in the pace of temporary larisation, though this will only be for the corporate sector and SMEs. We have very good coordination with the government, we take the measures we need, as well as the government. In the future, we will look at the situation and continue to take measures, including the use of all the instruments that are in our hands, whether it be foreign exchange interventions, reserves or other,”-commented NBG president.

However, according to him, the country remains “loyal to Larization”, that is regarded by member international organizations as a very important reform and one of the reasons that led to the increase of Georgia's international ratings.

“Individuals have a problem, as you know, they have a hard time coping with the depreciation of the GEL, and Larization of physical loans has reduced by about 16 percentage points, meaning that the number of borrowers who would now fall into a difficult situation is 16 percentage points lower. It is uniquely positive and we remain loyal to Larization, ”said Gvenetadze.

Banking Association President Alexander Dzneladze commented yesterday, if the NBG made the decision, it would be a huge boon for commercial banks, as they would have new resources to lend.

On March 13, 2019, the NBG decided to increase the minimum reserve requirement to 30% in foreign currency funds. The GEL reserve requirement remained unchanged at 5%.

What is the minimum reserve requirement? Part of your deposit in the bank is kept not directly with this bank, but with the NBG. Banks need to have some part of the total deposits in the NBG to maintain their licenses.

By increasing or decreasing the minimum reserve requirement, the NBG can influence the lending rate in the country; As reserve requirement increases, raising capital becomes more expensive for banks, which in turn is reflected in the increase in loan rates. This further leads to a decrease in lending. As the demand for reserves declines, additional resources (to lend) free up in commercial banks, therefore, lending rates drop in the country, and lending rises.

Consequently, it means that, in the case of an increase in reserve requirement, interest rates on foreign currency loans become more expensive for borrowers, which increases the competitiveness of the Lari loan on the market.