- Erdogan government pushing credit to preferred sectors
- Some banks are reduce loans as costs, risks mount
- Regulations meant to backstop rate-cutting policy
- Policy fueled lira crisis, inflationary spiral
Several Turkish lenders are reducing corporate lending after the government’s most recent batch of regulations lifted their costs and pushed many to prune their balance sheet risk, five banking and private sector sources told Reuters.
These new regulations, part of President Tayyip Erdogan’s uncommon management of the economy, have mostly restricted longer-term lending. The owner of one mid-sized manufacturer said it was “harder and harder every day” to obtain needed credit.
The sources, who spoke on condition they would not be named, said the credit and collateral regulations put in place in recent months have led to confusion and raised doubt from banks. One source stated:
“These are very difficult items to manage for a bank. Each bank is trying to manage its own balance sheet against the extra liabilities that may come after the government’s regulations and this frightens the banks.”
The regulations imply cheaper credit will continue to be pushed to sometimes riskier borrowers selected by the government, while overall credit in the biggest emerging economy is expected to cool, said the sources.
Overall credit growth, according to a 13-week foreign exchange -adjusted measure, rose 20% from a year earlier at the end of last month, in contrast to 50% when the raft of regulations were rolled out in April, data show.
The stakes are large for Erdogan and his conservative AK Party ahead of tight elections in 2023, which surveys show he could lose essentially due to surging living costs and other economic tensions.
His economic programme prioritizes employment, growth, investment, and exports, steered by a string of interest rate cuts that triggered an inflationary spiral and a currency crisis in late 2021.
The central bank has proceeded with interest rate cuts despite inflation reaching 80%. It put in place several new regulations to direct cheap loans toward net-exporting companies and sectors in recent months, seeking to ease Turkey’s major current account deficits.
In August, the bank ordered lenders to hold long-term fixed-coupon bonds as collateral for some loans that are not seen to improve investment or exports.
But several lenders say holding longer-term illiquid bonds to finance short-term loans is too risky. Others requested clients to close out some loans rather than renewing them, leaving the firms to use their own equity, another banking source told Reuters.
There IS A Lot Of Confusion
The central bank’s regulation in August forced lenders to lower rates on commercial loans and required those that do not hold bigger lira deposits, sparking a wave of Treasury bond buying.
Notably, the central bank’s message to the financial sector was to offer cheap loans to net exporters and small and medium-sized enterprises (SME), or completely return the funding to the government by holding bonds, bankers said.
In response, lenders sent the central bank dozens of concerns and queries about how to do business under the new regulations, based on a letter seen by Reuters. They included how the regulations cover factoring and leasing firms, mergers and acquisitions, and longer-term project loans.
The central bank told Reuters that it dealt with all those questions in an official circular last week. An official close to the matter said:
“Steps are being taken to change the country’s loan structure. More will come if necessary, in order to direct loans to the targeted sectors.”
The official added that the percentage of loans to SMEs backed by the central bank has increased to 25% compared to 5% at the beginning of 2022 and this should continue to rise. On Friday, the central bank declined a request from banks to hold foreign exchange rather than long-term lira bonds.
Loans to SMEs, exporters and tradesmen along with agriculture and investment are majorly excluded from the tight new regulations. SMEs are considered by banks as riskier but more likely to boost investment and hiring, while exporters help reduce the country’s trade imbalance and restore the central bank’s depleted foreign reserves.
Businesses have lodged complaints that the regulations favored some sectors over others and reduced lending at a time that soaring inflation has shrank their equity, making credit all the more essential.
As inflation has surged to a 24-year-high, the lira has lost more than half its value against the dollar in two years, mainly, most economists say, because of the interest rate cuts and economic mismanagement.
The manufacturing executive, who asked to remain unnamed, said his company’s commodity prices doubled in FX terms while equity needs had quadrupled in lira terms in the past two years.
“How can a company use its equity to close out its debt to banks under these circumstances?”