EXCLUSIVE Flurry of new regulations sees Turkish banks having difficulty lending - sources

EXCLUSIVE Flurry of new regulations sees Turkish banks having difficulty lending – sources

  • Erdogan government promotes credit in preferred sectors
  • Some banks are slashing loans as costs and risks rise
  • Rules to Support Rate Cuts
  • Politics triggered lira crisis and inflationary spiral

ISTANBUL, September 12 (Reuters) – Some Turkish banks are cutting corporate lending after the latest package of government regulations increased their spending and forced many to cut their balance sheet exposure, five banking and private sector sources told Reuters.

The new rules, part of President Tayyip Erdogan’s unorthodox economic management, have had a particularly negative impact on long-term lending. The owner of one medium-sized manufacturer said accessing the necessary credit is “more and more difficult every day.”

The sources, who spoke on condition of anonymity, said the lending and collateral rules put in place in recent months have caused confusion and many questions from banks.

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“This is a very difficult task for the bank,” one source at the bank said. “Each bank is trying to manage its own balance sheet due to the additional liabilities that may come with government regulations and that scares the banks.”

The rules mean cheaper loans will continue to be made available to the sometimes riskier smaller borrowers favored by the government, while overall lending in the large emerging economy is likely to cool, the sources say.

The data shows that overall credit growth, based on a 13-week foreign exchange-adjusted figure, rose 20% year-over-year at the end of August, up from 50% when a slew of rules began in April.

The stakes are high for Erdogan and his conservative AKP ahead of a tight election next year, which polls suggest he could lose largely due to the soaring cost of living and other economic problems.

Its economic program prioritizes growth, employment, investment and exports, driven by a series of interest rate cuts that triggered a currency crisis and an inflationary spiral late last year. read more

The central bank continues to cut interest rates despite inflation reaching 80%. In recent months, he has adopted several new rules to channel cheap credit to net-exporting companies and sectors to alleviate Turkey’s large current account deficit.

Last month, the bank ordered lenders to hold long-term fixed-coupon bonds as collateral for some loans that are not seen as stimulating investment or exports.

But some lenders say holding long-term, illiquid bonds to support short-term loans is too risky. Others have asked clients to close some loans instead of renewing them, leaving the companies free to use their own capital, another source at the bank told Reuters.

CONFUSION

Central bank regulation last month pushed lenders to cut rates on commercial loans and required those who don’t to have larger lira deposits, sparking a wave of Treasury bond purchases. read more

The central bank’s message to the financial sector was to provide cheap credit to net exporters and small and medium-sized enterprises (SMEs) or efficiently return funding to the government by holding bonds, the bankers said.

In response, lenders sent the central bank dozens of questions and concerns about how to conduct business under the new rules, according to a letter seen by Reuters. These included how the rules apply to factoring and leasing firms, long-term project loans, and mergers and acquisitions.

The central bank told Reuters it answered all those questions in an official circular last week.

“Steps are being taken to change the structure of loans in the country. There will be more if needed to direct loans to targeted sectors,” said an official close to the matter.

The official added that the share of SME loans funded by the central bank has risen to 25% from 5% at the beginning of the year and should continue to rise.

On Friday, the central bank rejected banks’ request to hold foreign currency instead of long-term lira bonds.

Loans for small and medium-sized businesses, traders and exporters, and for investment and agriculture are largely excluded from the tough new rules.

Banks see SMEs as riskier but more likely to expand investment and hire, while exporters help smooth the country’s trade imbalance and replenish the central bank’s depleted foreign exchange reserves.

Businesses complained that the rules favored some sectors over others and slowed down lending at a time when high inflation reduced their net worth, making credit even more important. read more

As inflation soared to a 24-year high, the lira lost more than half its value against the dollar in two years, largely due to lower interest rates and mismanagement, according to most economists.

The production chief, who asked not to be named, said his company’s equity requirements have quadrupled in lira and commodity prices have doubled in currency terms over the past two years.

“How can a company use its capital to close its debt to banks in these circumstances,” he said.

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Edited by Jonathan Spicer and Emilia Sithole-Matariz

Our standards: Thomson Reuters Trust Principles.

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