Banking regulations to soften

By Natalia Kochiashvili

Wednesday, March 18

The procedure for lending to individuals has been simplified

BAG’s statement: “As practice has shown that leading financial institutions without too stringent regulations, letting them cope with their own risk assessment and management responsibilities, is unmistakably hopeful and something we have always believed in.”

The National Bank of Georgia (NBG) has amended the loan procedure with the purpose of the changes being to ease the bureaucratic burden and simplify the process of borrowing to a solvent borrower, which the NBG hopes will help increase the flexibility and efficiency of the banking system.

The provision on lending to individuals was also amended in 2019. The regulations at the time set a strict framework for lending, with NBG arguing that its introduction was needed to overcome the excess debts in the country.

According to yesterday's announcement, the loan simplification process has several stages, which significantly change the loan obligations of the consumer and the financial institution.

The rule for studying the borrower's income is changing. There is no mandatory on-site visit to assess the borrower's financial position, which greatly simplifies the procedure for mandatory income studies for microfinance organizations and commercial banks.

Loan Service Index (PTI) limit is abolished. Until now, PTI has been calculated according to two types of calculations. It will now be counted based on only one that is, the maximum period specified in the contract. This change could have a positive impact on the borrower's financial sustainability.

The number of loan service thresholds is decreasing. When determining the coefficient from 2020, only two categories of income will be taken into account: more than 1000 GEL and less, while last year their number was 4. However, the PTI will be different for foreign currency loans, the foal of which is to secure borrowers and finance systems from the risks of wavering foreign currency exchange rate.

Mortgage loan time limit is increasing. The maximum term for mortgage loans in GEL is increased from 15 to 20 years.

The terms of loan participation are also changing. The regulation reduces loan participation from 40% to 30% if there is no proven income.

The change also simplifies borrowing for immigrants. The demand for mortgages is getting lighter. In case of income from overseas, the requirement on covering real estate loan (LTV) ratio will be reduced from 60% to 70%.

However, this amendment will not benefit borrowers who have more than a million GEL debt (instead of 2 million GEL) or that meet the knowledgeable investor criteria.

To strengthen the role of risk function for commercial banks and microfinance organizations, corporate governance requirements are introduced, according to which the risk management framework should include following of mentioned regulations, roles and responsibilities for the distribution of ‘three lines of defense’ (a line of business, risk management and internal audit function) principle.

As the banking sector expects, the regulation will increase the risk management functions of financial institutions and reduce pressure under the supervision of the NBG. The approach means less intervention in lending micromanagement that is meant to increase the role of the financial institution's risk management function as well as access to finance for the solvent population.

The changes will make it easier for clients to borrow, in addition to easing bureaucratic burdens, increasing flexibility and adding more efficiently to the lending processes. As a result of the changes, the procedure for high-income borrowers becomes more flexible, with the bank being able to assess the borrower's risk through internal procedures.

TBC Bank responded to the easing of responsible lending regulation by the NBG, welcoming that borrowing will be simpler. According to CEO Vakhtang Butskhrikidze, the shift from rules based approaches to the ones that are based on principles is very important.

The Business Association of Georgia (BAG) also welcomed the changes, pledging to continue cooperation with the NBG. The statement released by the BAG also underscored the need for further mitigation and other measures in this troublesome time for the world to further increase access to financial resources in the local market, which may also have a positive impact on the stabilization of the national currency exchange rate.