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NBG temporary supervision plan for COVID-19

By Natalia Kochiashvili
Thursday, April 30
To mitigate the negative economic impact of the COVID-19 epidemic and encourage the country's economy, the National Bank of Georgia (NBG) is moving to a temporary model of banking regulation, which will reduce the existing capital and liquidity requirements for banks to free up additional financial resources for commercial banks. As a result, an additional $ 1.6 billion of capital will be released into the banking system.

According to the NBG statement, the temporary supervisory plan that has been developed by the central bank fully complies with the recommendations of the IMF, the European Central Bank and other leading financial institutions.

The country's banking sector has sufficient capital and liquidity buffers that have been gradually accumulated through the consistent supervision of the NBG. Also, the amount of inactive loans in the whole portfolio is low and in recent years the banking sector has been stable.

The statement reads that as a result of the policies of the NBG and the government, the dollarization of foreign currency loans to individuals has been reduced, “thus reducing our population's vulnerability to exchange rate fluctuations.”

Given the introduction of a responsible lending framework, today's challenges are facing less and more adequate debt.

The NBG’s action plan involves the use of banking sector capital and liquidity buffers in times of financial stress. This means reducing existing capital and liquidity requirements that will allow the banking sector to neutralize potential losses through these buffers and continue normal business operations and lending to the real economy.

Under the Supervisory Plan, commercial banks will alleviate capital requirements, including the abolition of the Capital Conservation Buffer (2.5% risk-weighted assets) and a portion of the Pillar 2 buffer (2/3 of the non-hedged credit risk buffer).

The GEL 1.6 billion of capital will be released, which can be used to offset potential losses or to lend the economy. Overall, the banking sector has a capital buffer of GEL 4 billion above the minimum requirements, which, if needed, can be fully released. The decision comes with one condition: the banks should not apply for the proceeds of it to issue management bonuses and dividends to shareholders. Also, with the aforementioned amount, banks should not finance repurchase operations of their own shares on the stock exchange.

However, despite the fact that there is no liquidity problem in the sector at this stage, the NBG expresses full readiness to provide the economy with the necessary liquidity resources. To this end, the NBG has an adequate amount of foreign currency reserves, which is expected to add to the expected foreign currency inflows from international financial institutions in the short-term. And the national currency will be delivered as needed in the form and amount the economy requires.

It is noteworthy that the NBG has significantly softened the supervisory requirements because of the offer made by commercial banks regarding the lightening of loan repayment grace period, to ensure the maximum flexibility for banks in deferment of liabilities.

NBG also announces that if the economic shock caused by COVID-19 were more severe with a significant increase in overdue loans in the banking system, the central bank would employ other tools at its disposal and take more resolute measures to secure financial stability.

Former NBG President Giorgi Kadagidze responded to the ongoing crisis, portraying the opportunities for poor countries on social media. According to him, the world trader order is changing and developed countries will seek to diversify from China and move businesses; given that “Georgia has all the prerequisites (strategic location, tax scarcity, etc.),” regional cities will be a good fit for relocating factories that previously operated from China, creating a great source of employment.

He also suggested adding to the huge fiscal stimulus of the leading countries and attracting financial resources that were previously unavailable.

“Taking advantage of these funds and pursuing our own economic development also opens up new opportunities for countries like us. (Upgraded railways and airports, roads, ports, internet everywhere, etc.).”

Kadagidze also emphasized that for many service providers, geographic location will become less important and by offering the right marketing, proper tax system and adequate legal environment, Georgia can become a very attractive place.

He also views this crisis as the unprecedented opportunity in the direction of e-government. “If so far there have been many restrictions (including international obligations), now is the best time to reform.” He reviews the cases of Estonia and Singapore, claiming that such reform will reduce costs and increase efficiency, which will directly impact investment attraction.