On-lending is a lending instrument utilized by many developing country governments. The rationale of on-lending is to support the implementation of the important investment projects without increasing the state budget burden by servicing the external debt. Under the prudent implementation of the on-lending practices countries get the opportunity to increase the potential of economic growth.
The State Audit Office of Georgia audited the Government’s on-lending practice in the period of 2010-2015. The audit has revealed a number of deficiencies in the on-lending activities of the Government:
- Ministry of Finance of Georgia (MOF) does not have in place a comprehensive on-lending policy document setting the criteria for debtor selection and responsibilities of the entities involved in the process. Debtor selection process does not include the due diligence activities and at the moment loans are extended to the companies in financial difficulties;
- The risks related to the lending activity are not assessed, priced and taken into account in determining the terms and conditions of on-lending. The MOF did not undertake any independent credit risk assessment prior to the on-lending transactions. In addition, the MOF does not have in place a written guideline describing how credit risk should be assessed and the way corresponding loan terms should be formulated when evaluating on-lending proposals. As a result, the basis of extending (or reorganizing) the loan to the entity whose financial situation does not guarantee the loan repayment is ambiguous.
- Monitoring the performance of the lending and on-lending agreements is one of the important operations for the effective portfolio management and one of the statutory requirements. Monitoring function of the MOF is not an effective tool in detecting the threats in terms of loan recovery. An existing credit monitoring system does not provide the MOF with the sufficient information about the financial soundness of the borrower and does not ensure the identification of the potential problems in debt servicing;
- The existing practice of recording the on-lent loans does not ensure the completeness, and provided information does not reflect the real standing of the on-lending portfolio. In addition, detailed information about the current standing of portfolio is not disclosed publicly neither by means of web sources nor it is included in the budget documents. Therefore, the transparency of the data is not ensured.
Considering all the shortcomings prevailing in the management of the on-lending activities and to improve the existing on-lending practice, the State Audit Office of Georgia elaborated corresponding recommendations.
