The National Bank of Georgia (NBG) has approved changes to the rule of extending loans to natural persons. According to the statement released by the NBG on March 17, the amendments envisage transition from the rules-based to the principles-based approach.
In particular, the novel approach entails less state intervention in credit management, which, the NBG said, would enhance the role of financial institutions in risk management, as well as improving access to funding for creditworthy population.
“The said changes will facilitate borrowing for solvent persons, cut the red tape, increase flexibility and, consequently, render the lending process more operational efficiency,” reads the statement.
As listed by the NBG, the recent amendments include the following:
- Due assessment of potential borrowers’ creditworthiness will remain mandatory, but, hereafter, financial institutions will be able to determine the rules of considering borrower’s income.
- Pre-tax income (or the debt servicing ratio, which assesses borrower’s capacity to take on a loan) limit will be abolished.
- The number of debt servicing ratio thresholds will be halved from four to two. The ratio will be different for loans in foreign currencies, which envisages safeguarding lenders and financial system from exchange rate volatility.
- Mortgage loan maturity dates will be prolonged. As for Georgian Lari, this will be increased from 15 to 20 years.
- If a borrower receives income (remittance or other sources) from abroad, the loan-to-value ratio for purchasing an apartment will be increased with 10 percentage points (from 60 % to 70 %).
- The regulation will exclude borrowers whose loan amount exceeds GEL 1 million (instead of GEL 2 million) or who meets the criteria of sophisticated investors.
- Requirements for corporate governance will be introduced for banks and micro finance institutions, according to which risk management framework will include conditions to enforce compliance with the said regulation, and distributing roles and responsibilities in line with the “three-pronged protection” principle (which involves business, risk management and internal audit).
The amendments to the rule will come into force on April 15, 2020.