The Loan Contract and Interest
Under Article 623 of the Civil Code, under a loan contract the lender transfers money or other fungible things into the borrower’s ownership, and the borrower undertakes to return things of the same kind, quality and quantity. Under Article 625, the parties may agree on interest, but the annual effective interest rate must not exceed 50 percent — a requirement extending to every kind of loan. A mortgage-secured loan contract must state the monthly rate, which, including costs connected with the loan, must not exceed one twelfth of 2.5 times the arithmetic mean of the market rates of loans issued by commercial banks published on the National Bank’s website for the previous year, effective each 1 March. This ceiling does not apply to contracts of a commercial bank, microbank, microfinance organization or credit union.
Limits on Penalties and Sanctions
The Code limits not only interest but every other payment connected with a loan: on issuance, the amount of any commission, financial cost, penalty for breach of any contractual condition and any form of financial sanction must not exceed 0.27 percent of the remaining principal for each day. A one-time penalty of up to 20 GEL on arrears is excluded from that limit, while on each overdue event the aggregate sanction must not exceed 1.5 times the current remaining principal. On refinancing or early repayment, the early-repayment commission may not exceed 2 percent of the remaining principal. These rules also bind a cross-border lender where the loan is governed by Georgian law.
Currency and the Form of Disbursement
A loan of up to 200 000 GEL must be issued only in lari, unless the borrower’s aggregate obligations to the same lender exceed 200 000 GEL as a result; a loan linked to or indexed to a foreign currency is not treated as issued in lari. Under Article 624-1, where a loan is secured by immovable property, a vehicle or other named assets, the lender must transfer the funds to the borrower only in cashless form. In cross-border crediting, the correct choice of the contract currency, amount and form of security is therefore decisive for the contract’s validity.
Restriction on Attracting Funds
Under Article 628-1, an entrepreneur may attract repayable funds from more than 20 individuals only under the procedure established by the organic law on the National Bank. For a microfinance organization attracting funds from more than 20 persons, the amount attracted from each must not be less than 100 000 GEL; otherwise the resulting obligation must be repaid within 1 year of its arising. In planning cross-border loans, these thresholds determine which structure fits the legal framework.
Counting Extensions, Restructuring and Refinancing
In computing the sanction ceilings, the law sets precise rules: the increase of the remaining principal on extension, refinancing or restructuring is not included in the remaining principal. An arrears is not considered fully cured by restructuring, refinancing — where it is done by contract with the original lender — or extension, and such a solution is fully recognized only where the borrower has fully paid the penalty, sanctions, commission and costs charged on the arrears. The effective interest rate is defined by a legal act of the National Bank, which may also set a different method of computing the remaining principal. These details are decisive in court disputes over the legitimacy of the sanctions imposed.
In planning cross-border lending three questions decide the structure: the currency — the 200 000 lari threshold for issuing in lari; the form — the cashless disbursement of a secured loan; and the limits — the caps on interest, penalty and sanctions. For an international creditor these limits carry the same force where Georgian law applies as they do for a local one, and contractual terms cannot override the statutory caps — so the structure is built inside the limits from the start rather than corrected afterwards.
A cross-border loan that ignores these limits does not become unenforceable in one blow — but every excess component is contestable, and the borrower’s defence begins precisely with the caps. That is why the lender’s compliance check and the borrower’s review of the draft are two sides of the same statutory frame.
Frequently Asked Questions
Below are answers to the questions most often asked about cross-border lending.
What is the maximum annual effective rate?
50 percent; the requirement extends to every kind of loan.
What is the daily penalty ceiling?
0.27 percent of the remaining principal per day, and in aggregate up to 1.5 times the principal for each overdue event.
Which loan must be issued in lari?
A loan of up to 200 000 GEL, unless the borrower’s aggregate obligations to the lender exceed that amount.
How is a secured loan disbursed?
A loan secured by immovable property or a vehicle is disbursed only in cashless form.
How We Help on Legal.ge
On Legal.ge we help borrowers and lenders structure loan contracts: computing rate and sanction ceilings, choosing the currency and formalizing security. Contact our team to review loan terms before signing.