|                                                                                                                                                             |  | GEORGIAN BANKING SECTOR MATURING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | November 1997By Bob RossThree years ago it would have been extremely risky to do business with a Georgian bank. Turmoil
and conflict in Georgia following independence had a strong effect on the country's banks.  
Accounting records were haphazard and banks were illiquid and lacked equity.  After the local
currency, the coupon failed, Georgia's banks took refuge in the U.S. dollar.  When the IMF and
National Bank of Georgia (NBG -- Georgia's central bank) took measures to reduce the supply
of coupons and stem inflation in 1994, the subsequent exchange rate move (from 4.2 million
coupons per dollar to 1.3 million coupons per dollar) resulted in heavy exchange losses for the
banks.  In addition, lax regulation and licensing led to the proliferation of small private banks,
many demanding outrageous rates of interest for dollar deposits and disappearing shortly
thereafter.  However, there are signs of a much healthier banking sector now.  Despite the
weaknesses described above, balance sheets, though small, are now robust and some larger banks
have received unconditional audit opinions.  U.S. companies doing business in Georgia can now
give stronger consideration to the possibility of doing business with a Georgian bank.The Situation Today
Since 1994 the proliferation of banks in Georgia has reversed.  From a peak of over 250 banks,
the NBG now lists 53 officially registered banks. Those remaining are much healthier. Georgia's
former state banks have all become joint stock companies. Generally, the new private banks are
very small, but relatively lean.  For the level of business conducted, most banks are adequately
capitalized and many have positive equity. Three banks  (Industrial Bank, Eximbank, and New
Georgian   formerly Savings  Bank) have merged to form the United Georgian Bank
(UGB). UGB and the Bank of Georgia are the country's largest banks, with branches throughout
the country.  Both have several million dollars of equity and have written off their bad loans.Short term lending, with relatively rigorous research into each loan applicant's background and
financial history, has been the policy for recovery among Georgian banks.  Secured lending is
common, but security is only taken if available and loans are still advanced without security.  In
addition, quality and marketability of collateral can be a problem and are rarely subject to
independent expert valuation.  Further, at only 100 - 130 percent of the value of principal, the
collateral taken is often not adequate coverage for the loan plus the very high interest rates still
charged by banks in Georgia.Reasons for the Turnaround
The NBG, with guidance from the IMF and the Federal Reserve, has developed a set of
prudential regulations and helped banks by rigorously enforcing strict adherence to such
regulations.  It has been a very difficult process for several banks to meet the standards. 
However, it has been a necessary part of gaining a banking license and compliance with these
regulations has improved the health of the banks.Further, the European Bank for Reconstruction and Development has established a credit line
for small- and medium-sized enterprises in Georgia. The EBRD's insistence on an annual
international audit as a prerequisite for commercial bank participation in its credit lines (and on
having an NBG license) has led to rigorous scrutiny of the quality of commercial bank assets and
profit performance in Georgia, as well as to the implementation of measures regarding controls
and risk management.  The EBRD has signed loans with TBC Bank, Tbilcreditbank,
Tbilcombank and Tbiluniversalbank, under this program, and has also signed a bank-to-bank
loan with Absolute Bank.Meanwhile, Georgia's economy has also improved.  Georgia achieved over 10 percent growth in
GDP in 1996 over 1995, albeit after drastic reductions from 1991-95.  The NBG, assisted by the
IMF, successfully introduced a new currency, the lari, in 1995. The lari has traded in a relatively
stable range of  1.23 - 1.27 against the dollar.  This stability has contributed greatly to the
reduction of inflation to low double digits (averaging around 12 percent) in 1996 and 1997.Finally, Georgian banks themselves have taken advice and responded well to technical assistance. 
Many Georgian banks have shortened the term of their lending, concentrated on attracting
deposits, and expanded their range of services.What Problems Still Exist?
While the delinquency rate on loans has dropped for most Georgian banks, there are still not
enough clients with adequate capitalization and sound collateral in Georgia to go around. Good
clients will continue struggling to emerge while the real cost of money remains high in Georgia. 
Few projects return the necessary 60 percent per annum in an economy where inflation is around
12 percent.For the most part, only short-term working capital loans are available to companies.  Even though
economic factors have improved, banks have not yet adopted longer-term vision and loan
programs. Although an investment bank, the Black Sea Bank -- a joint venture including the
United Georgian Bank, Commercial Bank of Greece, and the EBRD -- may soon be in a
position to offer longer term financing, it has only very recently commenced operations. 
Additionally, Georgian banks need to continue to develop their skills and their information
systems.Keep in Mind
There are further issues to be considered. For foreign individuals and the increasing number of
foreign companies wishing to do business in Georgia, it is crucial to select your banking partner
carefully.  Making payments within Georgia can be subject to delays -- even payments between
banks in Tbilisi can take three days. Further, with banks charging high fees, maintaining accounts
can be expensive.  However, several banks have sound correspondent networks, are members of
the SWIFT network (Bank of Georgia is also a regional agent for Western Union), and are
successfully handling increasing numbers of (mainly import-related) Letters of Credit.  Despite the
challenges of banking in Georgia, there are banks with which you can do business in Georgia. For more information on Georgia, see BISNIS Online, at
http://www.mac.doc.gov/bisnis/country/caucasus.htm.Bob Ross is a Director in the East European Financial Services Group for Coopers &
Lybrand.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)