Turkish central bank’s credit drive penalises reluctant lenders

Turkey’s central bank this week announced a new measure that aims to encourage banks to turn on the credit taps. But banking sector insiders fear the new regulation, which pins reserve ratio requirements to the amount of credit provided by banks, could tip the playing field in favour of high-lending public banks that have the support of the Treasury.

The central bank’s introduction of a 'credit volume criteria' with the new regulation could put pressure on private banks to provide loans even if this is not appropriate for their equity, financial structure and balance sheets.

Experts are saying that the move will reward public banks that can freely distribute credit with government backing, while the private banks, who must be more cautious with their loans, will effectively be punished.

With the decision, the growth in banks’ credit volume will be the main criterion for the required reserve ratio and for the interest rate paid by the central bank for these reserves.

The new measure states that banks may set aside two percent of the value of deposits of up to 3-month maturity if they maintain loan growth at between 10 percent and 20 percent, as opposed to previous reserve requirement of 7 percent. It has also lowered the reserve ratio to 2 percent from 4 percent for deposits of up to 6 months.

The current 13-percent interest rate applied to the required reserves held at the central bank in Turkish lira has also been changed. The new interest rate will be set at 15 percent for banks which have a credit growth between 10 percent and 20 percent and just 5 percent for the banks which can not achieve the expected credit growth. Inflation in Turkey stands at 16.7 percent. 

In other words, the central bank awards banks which have 10-20 percent growth in loan volumes with 2 percent reserve requirement. However, it is effectively imposing a penalty on banks that do not meet this target by imposing the seven percent reserve requirement – five points higher than the requirement for other banks.

Likewise, those that fail to meet the requirement will see the interest paid to them by the central bank cut to five percent from 13 percent, while the other banks will receive 15 percent.

The central bank has announced that, with the new arrangement, 5.4 billion Turkish liras ($937 million) and $2.9 billion in cash injections will be freed up for possible lending.

There has been a serious decline in the amount of credit provided by Turkey’s banking sector in recent years, with the total amount slumping to a negative level last year. In other words, banks, weighed down already by bad debt and risky receivables, have preferred to steer well clear of further lending.

Private banks have refrained from participating in the low-interest loan package campaigns that the government has initiated under various guises during the many election campaigns of recent years. That is why the government has mainly focused on three public banks with this new measure: Ziraat Bank, Vakıfbank and Halkbank.

Earlier, just before the March 31 local elections, Treasury and Finance Minister Berat Albayrak announced a loan package amounting to 25 billion Turkish liras to be distributed by Halkbank for small and medium-sized firms. Later, a second credit incentive package for high-tech investments was announced in June.

In 2017, 10 private banks participated in the low-interest loan campaign run by Turkey's Treasury-backed Credit Guarantee Fund, which aimed to stimulate the economy by guaranteeing loans to small and medium-sized firms.

Many of the loans provided by the banks during the campaign have not been repaid. Consequently, the banks’ balance sheets started became packed with non-performing loans, many of which were either reclassified as risky or became the subject of debt recovery action.

These non-performing loans led the banks to experience a shortage of equity, while they also saw their own sources of borrowing narrow.

The dispute between Turkish President Recep Tayyip Erdoğan, who has consistently pushed to slash interest rates, and the former central bank administration that sought to keep rates high, was the final straw for most banks, which cut their credit supply.

Immediately after Erdoğan replaced the central bank chief in July and its new governor implemented a 425-base-point interest rate cut the same month, public banks took part in a government campaign to reduce mortgage interest rates to less than 1 percent monthly. Private banks did not participate in the campaign, preferring not to rush to cut their interest rates.

Despite the slash in interest rates on mortgage repayments, the latest data from the Turkish Statistical Institute shows that Turkish house sales have continued to decline, falling by 17 percent in July.

So, when Albayrak announced that there had been more than 34,000 applications for public banks' low-interest housing loans in one week, with loan demand reaching 5.1 billion Turkish liras, the figures appear to have been deceptive. The number of applicants who have actually been granted credit has not been announced.

The resources and capital held by public banks have evaporated because of their involvement in the government's various low-interest credit campaigns. This is why the Treasury had to inject fresh capital into three public banks after the local elections, handing 28 billion Turkish liras to the banks and funding this by issuing bonds worth 3.3 billion euros.

Thus, there are currently three public banks which, together with their two interest-free affiliates, Islamic banks Vakıf and Ziraat Participation Bank, have been pushed to provide loans. Apart from these, almost every bank has resisted giving credit.

According to the last weekly report by the Banking Regulation and Supervision Agency, the sector's credit volume decreased in the first week of August by 9.2 billion Turkish liras.

Total deposits in the banking sector increased by 14.1 billion Turkish liras in the same week and have reached 2.3 trillion liras, while distributed loans decreased by 9 billion liras. That is, the increase in the deposits was not used for loans.

Similarly,  according to the Banking Regulation and Supervision Agency (BDDK) data, the amount of consumer loans decreased by 669 million liras to 401.6 billion in the same week, while the amount of installment commercial loans decreased by 2.9 billion liras, dropping to 379 billion liras.

However, non-performing loans in the banking sector, as of August 9, increased by 0.07 percent compared to the previous week, rising to 120 billion liras.

The latest data by the BDDK shows that the credit volume of banks has continued to fall sharply, while the rate of non-performing loans continues growing, and the reserves of banks continue to shrink. In other words, the deterioration in the financial structure of the banks is accelerating.

Despite all this, the central bank’s announcement that it will index required reserves according to credit volume effectively penalises banks that do not provide new loans – a way of blackmailing the private banks to provide credit. This is accompanied by the measure to encourage banks to grant loans by promising to pay 2 more points (15 percent) interest for the required reserves.

It will be extremely difficult for private banks to benefit from the Turkish central bank's new measure, unlike public banks, which have been able to distribute low-interest loans with backing from the Treasury. The public banks have the privilege of compensation by the Treasury for their outstanding loans and losses due to the forced interest rate cuts. The private banks do not have this advantage.

As for the private and foreign banks, which are still awaiting payment for a large number of earlier loans, it will be extremely difficult to respond to the central bank’s call to stimulate the economy.

In an economic environment where companies are increasingly failing to repay their loans and where a growing number have been forced to declare bankruptcy, it is difficult to get results by forcing banks to grant new loans.

Besides, the possibility of unfair competition between public banks and private banks created by this latest move will elicit critical reactions from the banking sector, and could lead to tighter criteria for loans, despite the political pressure.