The World Bank, within the framework of the Financial Sector Assessment Program (FSAP) has published FSA Assessment Report. The report gives positive assessment to the work of the National Bank of Georgia. It states:

• "The banking sector has remained resilient through the pandemic, underpinned by proactive policy actions. Since the last FSAP, the NBG has strengthened the legal and regulatory framework for the financial sector by implementing key Basel III standards and other prudential requirements, including for responsible lending and dollarization-related risks. The institutional framework for macroprudential policy has also been strengthened and the macroprudential toolkit is comprehensive.
  
  
• The NBG has made significant progress in modernizing the monetary policy framework and prudential measures have helped to dis-incentivize intermediation in foreign currency.
  
  
• Early during 2020, the NBG required banks to make forward-looking general provisions against expected credit losses based on macro scenarios under the Covid pandemic, restricted capital distributions, and released some of banks’ capital buffers. These regulatory measures, combined with significant fiscal and monetary support to the economy, have helped to support the resilience of the banking sector, which is confirmed by the FSAP solvency and liquidity stress testing."
  

  
  According to the World Bank report, significant progress has been made since 2017 towards implementing a risk-based supervisory framework, supported by the issuance of a Code of Corporate Governance and the introduction of a General Risk Assessment Program (GRAPE) assessment.
  
  

  NBG has taken positive steps to respond to promote fintech development, including establishing a Fintech directorate to monitor market developments, track potential risks, and initiate several Fintech-related initiatives. NBG’s “Open Regulation” approach sets out to balance innovation and risk by employing an adaptive, agile regulatory process. NBG has set up a Regulatory Laboratory to test particular products. The NBG is taking an essential step to promote e- money, which could serve as a catalyst for financial inclusion, notes the World Bank report.
  
  

  Along with the positive assessment of the development of the financial sector, the report mentions challenges related to certain areas, including those concerning financial inclusion: “A well-developed banking sector and progress on financial access in Georgia mask a lack of diversity in financial products and services and disparities in financial inclusion. Access to finance continues to be one of the major challenges to SME growth. Higher costs of SME financing are also driven by a perception of high credit risk due to information asymmetry, as well as demand-side constraints such as informality and weak financial management and business skills. Despite well-developed bank credit products, a lack of diversity of other financial products and services (such as leasing, factoring, equity financing) limits the ability of the financial sector to meet the diverse needs of firms throughout their lifecycle,” says the report.

  
  According to the World Bank report, dollarization has significant implications for both financial stability and financial development. Dollarization is an important source of financial vulnerability due to credit risk, associated with unhedged borrowing, and liquidity risk, given the limited ability of central bank to backstop systemic liquidity shocks in foreign currency. In addition, despite the progress in de-dollarization of lending in Georgia, the persistent dollarization of savings has resulted in a structural liquidity deficit and high cost of funding in local currency and a lack of demand for local currency debt and equity instruments, which hinder access to finance and market development. Despite progress in reducing dollarization, it remains a key structural feature of the economy and the financial system. At the end of 2016, the government and the NBG adopted a 10-point larization plan to mitigate the financial risks associated with high dollarization. Sustained de-dollarization underpinned by the continued strengthening of macroeconomic fundamentals will require long-term efforts. In this context, financial sector policies could help to mitigate risks to financial stability and to improve the foundations for competition, innovation and market development, which in turn could facilitate efforts for sustained market-based de-dollarization.

  
  According to the document, there has been a strong focus on the development of the capital markets in Georgia in the last few years. Well-developed domestic capital markets could contribute to Georgia’s sustainable economic growth. In the context of bank dominance in the financial sector and high dollarization, capital market development could also contribute to more effective mobilization of domestic savings, diversification in the sources of financing for the corporate and household sector, including access to debt in longer tenors.

  
  Since 2018, the NBG has made strides in improving Georgia’s capital markets legal and regulatory framework in line with international standards. The Capital Market Supervision Department at the NBG has been reorganized and the capital market legislative framework updated. The MoE and NBG, with the support of ADB and the involvement of other government entities and private sector representatives, are preparing a new capital market development strategy. Significant progress has been made in upgrading capital market legal/regulatory framework and increasing NBG’s supervisory capacity,” states the report.

   

  The full report is accessible here