Georgia’s household debt crisis deepens in the wake of COVID-19

Colorful residential buildings in Tbilisi, Geogia. Photo by: azazello photo studio / Shutterstock

At the time, Keti thought little of paying back the loan, noting that everyone else was taking loans when tourism was thriving in the town. Two years later, when she wanted to extend her business, she again approached the bank about another loan. This time it was TBC, Bank of Georgia’s main competitor, which offered Keti a loan on the condition that she would transfer the existing debt to them. Keti agreed, but says that somewhere in the administrative process her original loan was registered as a personal loan.

She thought nothing of the technicalities between a business and personal loan until COVID-19 struck and devastated Georgia’s tourism sector. In an effort to help struggling businesses, the government announced subsidies for the hospitality sector. An agreement between the major banks and the government allowed her to postpone payment on the principal part of her business loan and to pay 20 per cent of the monthly interest while the government would subsidise the other 80 per cent. However, her personal loan has had no such relief. With the exception of a three-month moratorium on personal loans, announced in March of 2020 at the onset of the pandemic, Keti was left with the prospect of having to make full payments at a time when the hotel had no incoming revenue.

Growing vulnerability

Keti’s struggle with mounting debt is a common narrative in Georgia and has only worsened with the pandemic. In a country that was initially lauded for its effective measures to contain the spread of COVID-19, the autumn and the winter which followed were plagued by a sharp increase in case numbers and political chaos. Following a contested election in October 2020 that resulted in opposition parties refusing to take their seats in parliament, the government announced three months of public health lockdown restrictions, including the closure of all non-essential businesses. The resulting economic fallout has increased unemployment and worsened a household debt crisis that is being largely neglected amid political infighting.

Georgia’s household debt crisis existed long before the pandemic hit but has been considerably exacerbated by the current economic situation. Following a difficult transition from a centralised economy in the 1990s, many types of personal loans, such as mortgages and student loans, first became widely available in 2007. From 2007 to 2008, the number of loans issued increased by 97.5 per cent, signalling the Georgian public’s high demand for credit. Since then, the amount of personal loans has continued to increase, multiplying 7.5 times in the last decade. According to the National Democratic Institute, 50 per cent of Georgian households are currently indebted and 30 per cent rank debt payments as their highest expense. Despite the widespread usage of loans, the credit sector is plagued with predatory conditions and a lack of regulation – that has put many vulnerable citizens in a perpetual debt cycle.

Until 2017 there was little regulation for loans, which resulted in extortionate interest rates. Microfinance organisations, known around the world for offering loans and financial training to impoverished communities, have a very different reputation in Georgia. These organisations, which are able to forego some of the regulatory requirements of a formal bank, have become notorious for offering loans without a credit or income check at outrageous interest rates, sometimes as high as 4,000 per cent. With a lack of credit or income checks, many found themselves owing an untenable amount of debt and were forced to turn to family or friends for support or take additional loans to service their original debt. Natia, a loan officer at one of Georgia’s largest microfinance organisations, says that it has become common practice to help customers “restructure” their debt. For instance, if a borrower comes in needing 800 lari (around 200 euros), he or she will often be encouraged to request that amount of debt plus two months’ payments. He or she receives the loan and immediately pays for two months. Natia says the customer often will return two months later, unable to make the next payment. Loan officers, who receive commission on the amount of debt they lend, are then encouraged to offer a new, larger loan to cover the original one. This practice, which stops the debtor from out rightly defaulting, creates a debt cycle that many are never able to escape. Most concerning, says Natia, is the frequent response she gets when she asks clients how they plan to repay the debt: “We will figure something out.”

Growing problem

For many Georgians, the burden of debt is further complicated by the stigma around it. According to Mikheil Svanidze, an analyst at GeoWel Research currently investigating household debt in Georgia, the conversation about debt is stifled by a sense of social embarrassment and unease. When a person is unable to pay a loan, he or she will often turn to family, friends, or neighbours for support. Social attitudes, which are characterised by a deep sense of community and a strong responsibility to support those in need, have contributed to the practice of informal loans. While this social net is a great asset for the community, it can also lead to a chain of indebtedness and degrade social networks when someone is unable to pay his or her debt.

Eva-Fernández Martín from the organisation People in Need, who currently manages a project called “Tackling Indebtedness in Georgia through Czech Innovations”, says the social stigma around debt is “minimising the public conversation in Georgia, which makes it harder to grasp the real impact of debt”. She notes that the stigma is “preventing people from seeking help and support” and limiting “their capacity to make informed choices to access credit in a safe and affordable way”.

With the growing availability of easy credit and a lack of regulation, the number of households facing a heavy debt burden grew to an untenable position in 2017. The National Bank of Georgia disclosed in 2018 that more than 700,000 people were overdue on their loan payments. They noted that almost 30 per cent of mortgage loans had a 50 per cent or higher payment-to-income (PTI) ratio, meaning these payers were giving more than half of their monthly income just to service their mortgage debt. Furthermore, a UNICEF report found that 17 per cent of Georgian households reported overwhelming debt as the main issue they face.

In an effort to decrease debt burden, the National Bank of Georgia introduced new regulations in 2018 to limit the availability of credit. These included newly required income and credit checks as well as the introduction of a national registry of loans. They also instituted payment-to-income (PTI) and loans-to-value (LTV) requirements to limit the amount credit borrowers could access relative to their income and assets. One key aspect of the new regulation was a constraint on the ability of banks to offer foreign currency loans, a practice that had been commonplace and left borrowers exposed to the exchange rate volatility of the Georgian lari.

This effort to increase the “larisation” of loans, in addition to an announcement by the government in 2018 that it would provide debt relief to over 600,000 Georgians “blacklisted” by banks, seemed to be a positive step in combatting the crisis. However, in a 2019 report the National Bank of Georgia cautioned that introducing credit limits only decreased the supply of loans available and did little to satiate the demand for credit. In fact, critics expressed concern that a deficiency of formal credit for borrowers of excessive debt, who are characterised as willing to “accept credit with any conditions,” could lead to a return of informal types of shadow borrowing.

Pandemic complications

According to the National Bank of Georgia’s 2019 financial stability report’s credit assessment, “the vulnerability of the household sector to changes in economic circumstances in Georgia is particularly high”. Less than a year after the report’s release, COVID-19 shuttered the domestic economy and intensified the debt epidemic within the pandemic. The economic repercussions of the pandemic have not yet been fully realised, but unemployment during the last quarter of 2020 was reported to be a staggering 20.4 per cent.

In March 2020, as borders closed and a nationwide lockdown was declared, the government announced that it was co-operating with three of the county’s largest banks to suspend personal loan payments for three months. Nino, a doctor in the western region of Imereti, says she received a text message from Liberty Bank requesting her to opt in or out of the suspended payment system. It was only three months later, when she resumed her payments, that Nino became aware that interest on her loan had been accruing during that time. She says no one from the bank reached out to explain the conditions of accepting the suspension.

For tourism businesses like Keti’s in Stepantsminda, the government has extended loan subsidies until the end of October 2021 and will continue to pay 80 per cent of her interest until then. She is fortunate to have such a great loan officer at TBC who reached out to help her find a way to restructure her personal loan. The bank has agreed to let her suspend payments on the principal part of the loan until the autumn and is offering an additional loan each month to help her pay the interest. While she is pleased that the bank is willing to work with her, she knows this arrangement will increase her debt burden in the coming years.

Keti considers herself one of the fortunate business owners in the area. She says other business owners have reached out to ask her how she is managing, noting that many feel they are operating in an “information vacuum” with no clear guidance from the banks or their loan officers. Many small guesthouse owners in the area have taken personal loans to finance their businesses so they do not qualify for COVID-19 business assistance from the government. Keti says it was only through working with People in Need’s local action group that she became informed of the benefits of registering her business, a choice that is saving it from going under like many of her neighbours’.

Eva-Fernández Martín, the project’s manager at People in Need, says that in order to combat the debt epidemic in Georgia, “it is essential to enhance consumer rights and ensure borrowers have the knowledge and resources to protect their rights”. Her project, with the support of the United Nations Development Programme’s Challenge Fund and the Czech Ministry of Foreign Affairs, aims to address consumer debt at the grassroots and policy level in Georgia. Through the creation of a debt advisory guide and training materials for local action groups, the project hopes to raise financial literacy among citizens. They also plan to formulate policy recommendations at the government level, advocating for the introduction of a financial ombudsperson and regulation of pension debt and personal bankruptcy.

In the meantime, with economic prospects stifled by the pandemic, an epidemic of debt continues to rage in Georgia. Many of the temporary unemployment benefits and government subsidies expired soon after the governing Georgian Dream party won the parliamentary elections in October. In its 2020 financial stability report, the National Bank of Georgia indicated that it expects the number of non-performing loans, or defaults, to increase dramatically this year. While it has expressed confidence that the banking sector has the necessary reserves to weather the recession, many Georgians lack such a level of self-assurance.

Mackenzie Baldinger is a contributing editor with New Eastern Europe and a political researcher focusing on political extremism and populism in Central and Eastern Europe. She has a Master’s Degree in International Relations from Central European University and a Master’s of Arts in European Politics from Leiden University.

debt crisis, Georgia