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Case Study

The document discusses the impact of the COVID-19 pandemic on the banking sector in Georgia. It describes how banks initially offered grace periods on loan payments to help borrowers but then had to increase interest rates and tighten lending standards due to higher risks of default. While deposits remained stable, banks saw increases in non-performing loans. The document analyzes changes in interest rates and loan volumes over time. It concludes that banks managed to survive the difficult period but should focus on maintaining healthy loan portfolios, increasing deposits, and avoiding unnecessary costs in order to prosper in the long run. Economic stability in the country is also important to support the banking sector.

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Joan Madu
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54 views3 pages

Case Study

The document discusses the impact of the COVID-19 pandemic on the banking sector in Georgia. It describes how banks initially offered grace periods on loan payments to help borrowers but then had to increase interest rates and tighten lending standards due to higher risks of default. While deposits remained stable, banks saw increases in non-performing loans. The document analyzes changes in interest rates and loan volumes over time. It concludes that banks managed to survive the difficult period but should focus on maintaining healthy loan portfolios, increasing deposits, and avoiding unnecessary costs in order to prosper in the long run. Economic stability in the country is also important to support the banking sector.

Uploaded by

Joan Madu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Case Study

A financial crisis occurs when information flows in financial markets experience a particularly large
disruption, with the result that financial frictions and credit spreads increase sharply and financial
markets stop functioning. Then economic activity will collapse. If we want to explore the behavior of
commercial banks in Georgia as an aftermath of COVID19 related fear and economic lockdown we
should investigate financial crisis on one stage initiation of financial crisis, nevertheless there were
not any new types of loans known as financial innovation and financial liberalization.But there took
place a deleveraging, the process when losses on loans begin to mount, and the value of the loans
falls relative to liabilities, thereby driving down the net worth (capital) of banks and other financial
institutions. With less capital, these financial institutions cut back on their lending to borrower-
spenders. Furthermore, with less capital, banks and other financial institutions become riskier,
causing lender-savers and other potential lenders to these institutions to pull out their funds. Fewer
funds means fewer loans to fund productive investments and a credit freeze.

At the begining of COVID-19, there was uncertainty and asymmetric information increased chance
of moral hazard and adverse selection. Information about the creditworthiness of borrower-spenders
disappears. Increasingly severe adverse selection and moral hazard problems in financial markets
deepen the financial crisis, causing declines in asset prices and the failure of firms throughout the
economy who lack funds for productive investment opportunities. As financial frictions increase, it is
harder for lenders to ascertain the creditworthiness of borrowers. They need to charge a higher
interest rate to protect themselves against the possibility that the borrower may not pay back the
loan, which leads to a higher credit spread.

The Banks’ first step was offering a grace period for all lenders without any criterions it was available
for all lenders as mortgage and consumer lenders as well as for credit cards holders. Of course, delay
of loans is associated with expenses because there was no interest income from loans during three
months. After first wave, economic was not stable and so many workplaces were not opened so
National bank of Georgia decided to offer the second wave of grace period. At first, grace period was
offered to state beneficiaries who was getting a state help in the form of 200 GEL every months, in
other cases, it was neccessary to approve your decreased income documentary to use grace period or
it was possible to cover only interest and insurance during the second three months and principal
payments after grace period.

From octomber the grace period is over and as we see many sectors are not begin to work yet
especially tourism, gamble and festive sectors so households have no possibilities to pay loans. Banks
can offer them restructurations but with higher rate to compensate risk and high reserves.
As for new loans, lenders can’t easily evaluate financial stability of borrowers so the process of getting
a loan is quite severe and riskier, to compensate risk of default banks increase the interest rates. Also
as we know government began a State Subsidize Programme to stimulate development and
construction sector and they pay 4% of whole bank interest rate. This process also promotes issuing
new loans from banks but only in GEL so began a process of ,,Larization’’ and also increase exchange
rates and Georgian Lari depreciated. In banks also increased a volume of ,,bad loans’’ so bad loan
reserves increased. Here we can examine changes of interest rates after pandemy for legal and
physical persons, as we see it increased from March to June and then stabilized:

GEL Legal Physical For.curr. Legal Physical

16.3 12.0 19.1 6.1 6.5 5.2


Feb-2020
16.1 11.8 20.1 6.5 6.9 4.8
Mar-2020
15.7 12.1 21.9 6.9 6.9 6.1
Apr-2020
16.9 12.3 21.6 6.8 6.8 6.5
May-2020
16.2 12.3 19.5 6.9 6.9 6.7
June-2020
15.7 11.8 18.3 6.6 6.7 6.3
Jul-2020
15.6 11.7 18.5 6.8 6.9 6.5
Aug-2020

To consider savers’ behavior, amount of all deposit didn’t change during pandemy and we can see it
in numbers:

All deposits curr accounts other dep. sum

01/03/20 3,692,106 212,197 1,461,513 2,018,396


01/04/20 3,729,088 201,471 1,556,244 1,971,373
01/05/20 3,882,071 220,418 1,659,518 2,002,135
01/06/20 3,920,643 227,555 1,586,984 2,106,104
01/07/20 4,011,323 241,491 1,596,391 2,173,441
01/08/20 4,124,524 253,350 1,650,510 2,220,664
01/09/20 4,147,416 251,518 1,663,597 2,232,301
If we look at the volume and structure of loans issued by commercial banks during the pandemic, we
see that we don’t have a importance growth rate and we maintain the same indicator:

sum sum short-term long-term sum

01/04/20 35,387,204 34,489,201 3,336,544 31,152,657 503,446


01/05/20 34,738,946 33,713,816 3,213,672 30,500,144 491,770
01/06/20 34,865,370 33,673,970 3,187,628 30,486,342 506,219
01/07/20 34,540,683 33,297,893 3,140,560 30,157,334 498,690
01/08/20 35,239,759 33,967,384 3,123,811 30,843,574 523,243
01/09/20 35,242,946 33,930,045 3,116,105 30,813,940 558,655

To sum up, I think that financial institutions managed to survive during the difficult period. The
most important steps just now are to maintain and attract healthy, stable and less risky loan
portfolios. Also banks should try to increase their deposit volume as their source of cash and reserves
to avoid a bank panic. Many financial institutions began optimizations as a form of closing their
branches and retire their employees as a result of this decreased their op.expeses. I think that they
should use their reserves to avoid this processes in the future. From long-term view, banks should
collaborate new loan promotions and discounts to attract new assets and customers. Also economic
condition in the country should support banks’ stability and prospety because the sudden rise in
prices especially for consumer goods will decrease purchasing power of people and this will impact
on banking sector as well. When inflation is high, the cost of living gets higher as well, which
ultimately leads to a deceleration in economic growth. So at first government should do their best to
promote financial stability in the country.

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