Turkish regulator aims to hasten banking sector recovery as loan market remains weak

A Turkish regulator instructed banks to write off $8.1 billion in bad debt, but analysts question whether the delayed move will suffice when it comes to reviving the nation’s troubled loan market.

al-monitor People withdraw money from an ATM at the main shopping and pedestrian street of Istiklal in central Istanbul, Jan. 30, 2016.  Photo by REUTERS/Murad Sezer.

Sep 19, 2019

This week, Turkey’s financial watchdog, the Banking Regulation and Supervision Agency, told the nation’s lenders to write off 46 billion liras ($8.1 billion) in bad loans by the end of the year to hasten a recovery in the banking sector.

The move comes more than a year after a currency crisis devalued the Turkish currency 30% against the US dollar, leaving banks with large foreign debts unable to repay obligations that have since strained the nation’s lending market. While analysts say the directive could help revive the Turkish banking sector, the delayed initiative may prove to be "too little, too late" to stimulate the nation’s lukewarm loan market.

“The move highlights, once again, that credit growth rather than a comprehensive package of structural reforms remains the government’s preferred approach to support Turkey’s ailing economy,” Wolf Piccoli, co-president and political risk analyst at Teneo Intelligence, wrote in a memo shared with Al-Monitor.

He added, “Sustained political interference in the banking sector — including pressure from the government to dismiss and/or sideline executives who are not perceived as “cooperative” — will continue to cloud the outlook for the banks for the foreseeable future.”

Throughout the economic downturn, President Recep Tayyip Erdogan’s government has attempted to speed up recovery efforts, at one point removing a central bank governor who hesitated to cut interest rates.

Piccoli said the Banking Regulation and Supervision Agency may have been frustrated by the lack of tangible progress and that the agency's announcement this week could be seen as an attempt to clear the books now that the worst stage of Turkey’s currency crisis appears to have passed.

Bloomberg reports that the reclassification of bad loans, mostly held by construction and energy companies, will bring the banking sector’s nonperforming loans rate to 6.3% this year, while reducing banks’ capital adequacy ratio to 17.7% from 18.2%.

Selva Demiralp, a professor of economics at Koc University and director of the Koc University-TUSIAD Economic Research Forum (TUSIAD is the Turkish Industry and Business Association), said the move could prove positive overall. Demiralp told Al-Monitor the new measures will aim to provide more information about the size of the problem of nonperforming loans and suggested the banking sector is strong enough to withstand the shock. 

But she said the fact that the banks did not report the nonperforming loans “on their own seems to suggest that they are facing trouble raising capital.” She said such issues may leave banks “hesitant to raise more capital and increase their lending moving forward.”

Demiralp said the significant slowdown in Turkish bank loans is likely a due to a combination of weak supply and demand, considering that consumer spending power has decreased in recent years.

“The weak growth numbers suggest that loan demand is low,” she said. It’s true that the capital adequacy ratios of Turkish banks are not binding, which is a relief." But she said that if banks don’t have an opportunity to sell their nonperforming loans "to a fund or get government support, the decline in their profits may cause deleveraging.”

On Sept. 19, Reuters reported a group of Turkish banks are in discussions to create an asset management company to hold some of their nonperforming loans, offering a potential opportunity to offload bad debt that is weighing down solvency. Details remain sparse, but Ali Riza Gungen, a political economist at Carnegie Mellon University, said Turkish banks had restructured $20 billion of loans in 2018 and the problem remains unresolved.

Gungen said he was surprised by the Banking Regulation and Supervision Agency move after months of negotiations to restructure debt and partially sell nonperforming loans to international players ended in failure.

He said the International Monetary Fund may have played a role. “It is a must for the credit channel to work again, but it took so long that one can ask, 'Why now?'” Gungen told Al-Monitor. “Some believe part of the reason is the IMF Article IV consultation process — there was the rumor that the team arrived in Turkey for regular meetings.”

He added, “One can also suggest the declining interest rates will boost credit volume in the coming months so the banking regulation and supervision agency felt it safe to order the writing off for $8 billion. … The aim is to put an end to the rumors in the banking sector.”

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