In July, the Georgian Parliament debated a controversial draft law which, if enacted, would expand the authority of the National Bureau of Enforcement to register and monitor loans.
Under provisions of the draft law, beginning in September, the competencies of the Enforcement Bureau would include the right to register a loan agreement and thereafter to supervise the parties’ compliance with terms of that agreement. The use of this service would be compulsory only if both the borrower and the lender agree to its use.
According to authors of the draft law, such an alternative service is especially advantageous for borrowers who cannot secure their loans with mortgage collateral. Hence, monitoring would only apply to loan agreements not secured by immovable or movable property, including a car or residential house, apartment or land plot.
If an agreement is violated, the Chairman of the National Bureau of Enforcement would be required to issue an order to the debtor. The debtor would then be entitled to challenge the decision of the Bureau by any existing rule.
If a debtor decides not to appeal, the debtor would have at least fifteen days to comply with the decision of the Bureau. That fifteen-day minimum period could be extended upon agreement of the parties. The parties would also be able to avail themselves of all rights existing under the Civil Code, including the right to write off and to negotiate debts.
Before an enforcement proceeding could be commenced, the National Bureau of Enforcement would have to issue another notification to the debtor, seven days prior to expiration of the statutory term, once again instructing the debtor to fulfill his/her obligations under the agreement.
The authors of the draft law contend that using the alternative service of the National Bureau of Enforcement will save parties to an unsecured loan agreement costs by not having to pursue notary procedures or to litigate loan disputes in courts. The alternative service would save the parties’ time as well. Moreover, authors of the draft law maintain that credit risks would also decrease because, in the authors’ view, they are counteracted with high interest rates in the banking sector of Georgia. In fact, the authors of the draft law believe that the involvement of the National Bureau of Enforcement could become a prerequisite for decreasing interest rates in Georgia.
Many other people have expressed doubts about the new legal initiative, however. For the majority of them, establishing a precedent for a third party to intervene between a borrower and lender is itself a negative phenomenon. As they see it, loans and the degree of savings should be established by the free market, which should also identify the risks accompanying that process.
Interest rates best regulate the economy in the sense that they help businessmen correctly to determine the level of investments. Any attempt to reduce interest rates artificially could lead to non-profitable investments in such projects.
Interference in the free market could distort an accurate evaluation of capital left in the economy by those people who, in accordance with their interests, have decided to scrimp and save more today in order to be able to consume more and to receive higher benefits tomorrow. If credit becomes cheaper artificially, demand for money will increase and, consequently, the cost of money will rise and lead to higher inflation.
The illusion that there is more money in the form of capital than really exists could prompt investors to invest in longer-term projects and to take on unjustified risks.
Risks are best managed by commercial banks because they are well aware of the degree of market demand.
This article first appeared in Tabula Georgian Issue # 108, published 9 July 2012.