Why should I be interested in this topic?

Household over-indebtedness entails the accrual of debt to a degree that exacerbates people’s financial circumstances or quality of life. This issue is particularly problematic in countries characterized by economic instability, a neoliberal governance framework, an inadequately regulated financial sector, high interest rates, and unjust eviction practices. As a consequence, a significant part of the population becomes susceptible to financial vulnerability. Hence, it is crucial to gain insight into the underlying causes of indebtedness and seek effective measures to address these matters.

Our comment

When the financial system is inadequately regulated, the interests of creditors tend to receive greater consideration than those of citizens. At such instance, the primary objective of the state lies in strengthening the private financial sector, rather than prioritizing the welfare of its people.

Despite the tightening of the legal framework in recent years and the implementation of relatively responsible lending practices, numerous challenges persist, leaving the indebted population in a vulnerable state. For example, the state doesn’t have mechanisms to prevent eviction in cases of loan defaults, there  are no equitable eviction policies, and the government doesn’t offer adequate support for those rendered homeless under predatory lending conditions. The authorities do not prioritize social welfare and economic empowerment for its citizens. 

What does the welfare  state entail?

In a welfare state that upholds human rights, financial institutions and private moneylenders have less leverages to impose unfair terms upon borrowers, forcibly evict them, and render them homeless.

The welfare state protects the rights of both lenders and borrowers. It is in such circumstances that becomes evident where the state's priority lies: whether it is focused primarily on promoting the private sector, particularly large banking institutions, or on upholding the rights of its citizens.

What are current developments in Georgia?

In Georgia, household debt has demonstrated a consistent annual increase, both in absolute terms and relative to the Gross Domestic Product (GDP). Over-indebtedness is also a prominent issue. that is also confirmed by the Loan Service Distribution Ratio (PTI). PTI is the ratio of income to debt service, which measures the portion of disposable income that households allocate to servicing loan interest. For example, in 2022, 35% of mortgage holders found themselves allocating half of their monthly income towards fulfilling this financial obligation and this figure has increased compared to 2021.

In Georgia, loan interest rates are significantly high, primarily stemming from the country's elevated inflation levels and economic instability. For comparison, data from the World Bank of 2022 illustrates that interest rates for all forms of credit in the European Union are notably lower. For example:

Banks' profits

Despite the challenging socio-economic backdrop prevailing in the country, financial institutions in Georgia have demonstrated significant profitability. For instance, according to the data of 11 months in 2022, commercial banks reported a combined net profit of 1.97 billion GEL. Notably, a substantial portion of this profit can be attributed to two key financial institutions, specifically TBC Bank and Bank of Georgia, which respectively have recorded profits of 933.6 million GEL and 825.5 million GEL.

Even though the National Bank has tightened regulations with regard to lending to private individuals since 2018 and imposed an interest rate ceiling, these measures have proven insufficient in eliminating over-indebtedness. In 2022, amendments were introduced that reduced the term of foreign currency loans by 5 years and reduced the maximum duration of consumer loans to 3 years, as opposed to the prior 4-year limit. Consequently, both foreign currency loans and the volume of consumer loans decreased.

High interest rates, coupled with over-indebtedness and high poverty rates, may, in certain cases, result in foreclosure actions leading to subsequent evictions.

Besides, the country's eviction legislation has shortcomings, as it only protects the rights of property owners, without considering the necessity of eviction or the environmental factors that should preclude eviction under certain circumstances. 

Individuals with problematic credit histories or inadequate financial conditions often face difficulties to obtain credit from traditional banking institutions. The challenging social circumstances compels them to seek loans of necessary amount under adverse terms.

Due to this circumstances, individuals frequently turn to private lenders, given that they typically do not require proof of income for loan approval. Lenders often enter into sales agreements with a right of redemption, as recent regulations have prohibited private mortgages between individuals, save for limited exemptions. Under such conditions, the moneylenders enjoy even greater power.

What is the approach of the European Union?

The recession after 2008 led to a wave of mortgage arrears and evictions across various EU Member States. The European home loan mortgage crisis revealed gaps  in the procedural safeguards afforded to debtors, revealing significant disparities in the contractual and post-contractual positions between parties notably favoring creditors. The aforementioned developments show that the social function of mortgage law has outgrown its private law institutional setting.

To address these challenges and mitigate the risk of widespread arrears and defaults on future mortgage loans, the European Union adopted the Mortgage Credit Directive. This directive, is the first European legislation to establish a direct correlation between credit default, indebtedness, and the family home. The primary aim of this Directive is to guarantee that consumers who engage in credit agreements concerning immovable property enjoy a high level of protection.

The directive sets forth the following guarantees (which encompass both the period preceding the conclusion of a contract and the period subsequent to its finalization, including the commencement of the indebtedness):

• Providing the consumer with adequate explanations and personalized information before concluding the mortgage agreement;
• Giving the consumers sufficient  time to consider the implications of the mortgage credit;
• Introducing the the obligation towards the credit institutions to carry out fair marketing concerning the mortgage loans;
• Increasing financial literacy;
• Before concluding the mortgage contract properly assessing the creditworthiness and adequate valuation of the property;
• In case of foreign currency loans, having an appropriate regulatory framework to protect the interests of consumers (e.g. a right to convert the credit agreement into an alternative currency under specified conditions);
•  Setting forth an obligation for the credit institutions to employ adequate measures to resolve the emerging credit risk at an early stage;
• Introducing a cap on the charges on the consumer in the event of default;
• Ensuring the efforts price for the foreclosed immovable property;
• Ensuring minimum living conditions for debtors in case of foreclosure;
• Etc.

 The directive sets minimum guarantees and EU member states can establish more stringent standards of protection.

How can this issue be addressed?

Addressing the issue of over-indebtedness can serve as both a prerequisite and an outcome of a country’s economic progress. On one hand, solving over-indebtedness is a fundamental necessity for individuals to attain a decent standard of living, given that economic well-being is difficult to come by when one is heavily reliant on debt. On the other hand, the successful mitigation of the over-indebtedness problem can be perceived as an outcome resulting from economic advancement.

To accomplish this objective, the state must undertake appropriate and effective measures aimed at fostering economic growth, effectively regulate the financial sector and impose more responsibility onto this sector. Such steps may entail:

• Enhancing the role of the National Bank, that is a fundamental step for the subsequent implementation of adequate restrictions and regulations aimed at protecting individuals from excessive indebtedness;
• Lowering the interest rate through reducing the refinancing rate, constraining non-professional activities of the banking sector, and implementing rigorous oversight to ensure the integrity of operations of private lenders and micro-finance organizations, etc.;
• Bringing the eviction policy in line with international standards, that entails respecting individuals' dignity,  protecting their right to home, and controling unfair contract terms;
• Reforming homelessness policy, which entails a multifaceted approach, including the allocation of sufficient resources, the establishment of a housing fund, and the provision of support for individuals lacking permanent housing;
• Dedollarization, which will enable the National Bank to employ improved interest rate management measures. Additionally, as the level of loan dollarization decreases, fewer borrowers will be susceptible to the interest rate risk typically associated with loans denominated in foreign currencies.