Executive Summary
There is growing consensus between all sides of the Georgian political spectrum that the issue of household and individual indebtedness has to be addressed. The problem is overwhelming and often under-discussed – around 45% of people admit in surveys to carrying debt. This may even understate the problem as other macroeconomic indicators suggest the number could be closer to 70%.
Exponential growth of indebtedness can be traced to growing financialization from the beginning of the 2000s and the deregulation of the economy in the second part of the 2000s. In combination, this led to a 23-fold increase in consumer loans from 2002 until 2019. At the same time, the 2010s saw an increase in microfinance and online loans, with interest rates often over 100%. This led to an increase of insolvent debtors, personal indebtedness, home repossession and despair.
Starting from 2017, the National Bank of Georgia (NBG) began a series of measures aimed at creating a more responsible credit environment. The most important of these changes included the creation of an effective interest cap for all loans that were registered in entities under NBG control. The cap at first was 100% and later halved to 50% in 2018. Next, the bank capped maximum daily penalties for non-paying loans, also in two stages. NBG also introduced loan-to-value (LTV) and Payment to Income (PTI) indices for commercial financial institutions and limited foreign currency lending–first at 200,000 GEL and later 100,000 GEL.
In parallel to these regulations, NBG started to regulate non-bank entities as well–microfinance organizations and Loan Issuing Entities (LIEs), the so-called usurers. The LIEs now had to register with the NBG, pay a license fee and since 2018, individual LIEs (usurers) are not allowed to guarantee loans they issue with real estate.
All of this resulted in cutting some of the most egregious types of loan practices and stabilizing parts of the loan giving system. Problems however persist: on the one hand, a large number of people with outstanding loans remain outside the economy and hindered from performing economic activity. Loopholes in the system remain and questionable practices, such as “contracts with right of redemption”, are rampant. Through such contract, usurers are able to charge higher than 50% interest rate in a roundabout way.
In November 2018, in the context of Georgian presidential elections, the Cartu Foundation led by Bidzina Ivanishvili bought 1.5 billion GEL worth of smaller, mostly non-performing loans – each with contracts under GEL 2,000 and relieved them. This one-time “Social Solidarity Act” allegedly annulled loans for over 600,000 people – over 20 percent of Georgia’s adult population. This action and its aftermath once again highlighted the importance for an institutional approach to individual bankruptcy and loan forgiveness, as it would set concrete legal provisions on legal debt forgiveness and limit political use of debt relief by various interested parties.
To better understand the issue of indebtedness and its salience in the years following the credit boom and recent regulations, we looked at the general picture of personal indebtedness in Georgia: both from a macroeconomic standpoint, focusing on smaller consumer loans in particular, as well as opportunities for recourse for indebted individuals. Desk research included looking at various types of macro-economic data, with 35 interviews with people from various walks of life in the People in Need’s Local Action Group Members in three communities: regular members, small business owners, local government, bank and microfinance organization employees and civil society group members. To overcome discreet and personal obstacles on talking about debt, we kept the names of some of the respondents anonymous.
Additionally, we have conducted over 30 interviews with experts representing diverse theoretical and practical knowledge of topics related to debt, including practice in court cases related to debt, banking, former practitioners of debt collection and community activists that organized social movements opposing the predatory nature of the debt systems and usury. The study was implemented under the project “Tackling Indebtedness in Georgia through Czech Innovations”. It was funded by the United Nations Development Programme (UNDP) via the Challenge Fund, with financial support from the Ministry of Foreign Affairs of Czechia. Respondents from the three interviewed communities overwhelmingly consider indebtedness to be a major issue in Georgia. When respondents were asked whether they knew someone with debt issues, one often heard an answer: “everyone around here has a problem with debt.” While this is not the case factually as there are people who have no debt, these responses allude to the omnipresence of the topic in public and private discussions and the far-reaching social tension it creates in families and local communities. Moreover, there is a general lack of knowledge on the existing types of debt–just general opinions on the high amount of indebtedness and the social malaise it creates.
Three types of debts–consumer, pension and business loans–were discussed the most. Exponential growth of consumer loans has also manifested itself in the three communities. Many respondents mentioned men taking loans to cover gambling debt but no one wished to elaborate on this sensitive topic, in addition to the cyclical and unsustainable practice of taking new loans to cover previous, unpaid loans.
While in general, women are more cautious and responsible when taking loans in Georgia and are averse to taking on unreasonable or unnecessary financial responsibilities, many of them have been deceived by husbands or significant others into taking out loans on their behalf. It is not uncommon for the individual in need of the loan to then disappear to keep the legal debtor responsible for paying off the loan. Another large but relatively under discussed issue is pension debt, a type of consumer loan which is secured against state pensions. It is used by half of all pensioners, annual interest on them in 2020 is thought to have been as high as 35 percent. Currently all pensioners receive their cards and pensions at Liberty Bank, which is also the only institution that markets these pension loans. The elderly in Georgia are vulnerable in many forms–they lack the financial literacy that many younger people possess, and as a group, they lack representation. They have very high costs for medicine, and finally, they are sold debt that has a higher interest rate than for younger people.
Research showed a dire lack of resources available for people who felt misled or badly treated by different financial institutions or loan issuing entities. While NBG offers mediation between financial institutions and clients and many law organizations offer bona fide assistance, there is no strong organized system for protecting borrowers that feel mistreated. This is especially alarming and is an area in which policy intervention would be extremely useful for Georgia’s vulnerable and indebted.
Large scale indebtedness in Georgia is not disappearing soon. While experts point to NBG’s 2017 and 2018 regulatory interventions as a good albeit belated start, a long entrenched financial system, coupled with lobbying from large private financial institutions and the state’s amorphous, contradictory and changeable ideological stance adds up to a fragile regulatory status quo. Advocacy is therefore essential for defending and expanding the existing protections, ensuring effective implementation and adding protections to fill in the existing shortcomings in the current system (e.g. further regulations on the pension debt system). A detailed breakdown for legislative and executive recommendations is presented in the following section.
