2021 October-November Analysis

What can be done about Georgia’s household debt problem

Despite the fact that more than half of Georgia’s population reports being indebted, social stigma has stifled a public discussion of how to address the issue. Recent efforts by the NBG to regulate household debt are a good start, but the country still has a long way to go.

As COVID-19 decimated the tourism industry in 2020 and pushed the unemployment rate to almost 20%, another less talked about pandemic wreaked havoc on Georgian households – debt. In an effort to ease the burden on those affected, major banks agreed to a brief moratorium on loan payments at the beginning of the crisis. However, accruing interest and exorbitant monthly payments highlighted the vulnerability of many Georgians in relation to their personal debt.

According to the National Bank of Georgia, in 2018 there were 5.6 million active loans and 2.1 million borrowers in a country of approximately 3 million adults. Data from the National Democratic Institute indicates that over 50% of Georgian households are currently indebted – many of them with multiple loans.

Household debt by itself is not problematic; on the contrary, it has fueled the country’s economic growth and allows consumers to purchase large items like houses and cars. However, the rate at which consumer debt is increasing, coupled with low financial literacy and little regulation, has created a burden on the population that is no longer tenable.

Many forms of consumer credit, like mortgages and student loans, first became widely available in Georgia in 2007. From 2007 to 2008, the volume of loans issued increased by 97.5%, signaling the Georgian public’s high demand for credit. Since their introduction, the volume of personal loans taken by Georgians have continued to increase significantly, multiplying 7.5 times in the last decade.

In 2007, the household debt to GDP ratio was just under 6%. By 2020, that figure had risen to 41.9%. While a rising household debt to GDP ratio in a developing economy is par for the course, Georgia’s level of debt is rising faster than its GDP is growing.

This trend is especially concerning considering the effect consumer debt has on a country’s long term growth. Research done by the IMF shows that a drastic increase in household debt can decrease a country’s economic growth in the long run. It can also cause higher unemployment and increase the probability of a banking crisis.

In addition to alarm about the rate at which debt is growing in Georgia is the concern about how much of a burden it is becoming on the population. UNICEF reports that 17% of all households note ‘crushing debt’ as the main problem they face, and a recent survey done by the National Democratic Institute shows that 30% of Georgians rank paying off debts among their highest household expenses. Furthermore, in 2017, the National Bank of Georgia estimated that approximately 700,000 Georgians were behind on their loan payments.

De-regulation and social stigma

Georgia’s current debt crisis can be traced back to regulatory changes instituted after the Rose Revolution of 2003. From the country’s independence in 1990 until 2007, legislation and court precedent limited interest rates on loans to ‘reasonably correspond’ with the rates provided by the National Bank. Generally, these rates ranged between 2.4 and 3% monthly.

In 2007, the United National Movement government instituted a massive campaign of de-regulation; the resulting changes to the civil code instituted a principle of ‘contractual freedom,’ meaning that any interest rate that the lender and borrower agreed upon could be charged. Interest rates well over 100% became common practice in the following years. Economic instability, easy access to loans, and low levels of financial literacy meant that many continued to borrow despite the fact that they could not afford the monthly payments.

The burden of debt and inability of many to repay loans has been further complicated by the stigma around the topic. Eva Fernández-Martín, who led the People in Need project ‘Tackling Indebtedness in Georgia through Czech Innovations,’ notes that social stigma surrounding debt is “minimizing the public conversation in Georgia, which makes it harder to grasp the real impact of debt.”

New limits on loans

In an effort to decrease the vulnerability of the financial sector, the National Bank of Georgia introduced new regulations in 2018 to limit the availability of credit. These regulations included newly required income and credit checks as well as the introduction of a national registry of loans. The NBG also capped the effective interest rate for banks at 50% and instituted payment-to-income (PTI) and loan-to-value (LTV) requirements to limit the amount of credit borrowers could access relative to their income and assets. One key aspect of the new regulation was a constraint on the ability of lenders to offer foreign currency loans, a practice that had become commonplace and left borrowers exposed to the exchange rate volatility of the Georgian lari.

This effort to increase the ‘larization’ of loans seemed to be a positive step in combating the crisis in Georgia. However, the National Bank of Georgia cautioned in a 2019 report that introducing credit limits only decreased the supply of loans available and did little to satiate the continued high demand for credit among the population. In fact, critics expressed concern that a deficiency of formal credit for many borrowers of excessive debt, who are characterized by a willingness to “accept credit with any conditions,” could lead to a return to more informal types of shadow borrowing.

Regulate or educate? Next steps in Georgia’s fight against debt

As analysts at the NBG have noted, Georgia’s debt problem requires more than just a restriction of access to credit. For many Georgians, debt has become a way of surviving everyday life. According to Mikheil Svanidze, an analyst who has looked into the issue of household debt in Georgia, education alone is also not enough to remedy this issue: “it is a bit patronizing to tell someone that cannot afford to pay for their food or medicine that understanding their loan better is the key to solving their problem.”

Instead, Svanidze recommends a combination of both education and regulation, noting that “regulation is the most important part of solving this crisis.” Svanidze’s recent study on consumer debt in Georgia provided a list of recommendations, including the introduction of a financial ombudsman to “defend the interests of the debtors…with legal and financial advice,” as well as personal bankruptcy laws and a consumer protection law, none of which the country currently has.

In the past, low levels of political will towards debt regulation have prevented draft legislation from passing; however, Georgia’s association agreement obliges the country to “approximate its consumer legislation” with EU law. Svanidze’s study notes that “While many regulations in the draft law [initiated by previous parliaments] are already in the NBG regulatory system, an overarching legal framework would help cement the structure of protection and reduce the information deficit for customers.”

For the growing number of Georgians who are already trapped in a crushing debt cycle, Svanidze suggests parliament should cooperate “with interest groups and experts to continue its work on insolvency that started in 2017.” Georgia did pass comprehensive insolvency reform for businesses in 2020; however, no such relief exists yet for individuals.

People in Need, with the support of UNDP and the Czech Ministry of Foreign Affairs, has also worked to raise awareness on the issue and provide financial tools to citizens. The organization released a debt advisory guide this year and provided training to local action groups in various regions of the country. Fernández-Martín, the project’s manager, notes that “in order to combat indebtedness, it is essential to enhance consumer protection rights and ensure borrowers have the knowledge and resources to protect their rights.”

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