Turkey’s central bank to take action to guide lending across economy (sources)


ANKARA, Reuters.

FILE PHOTO: A logo of the Central Bank of Turkey (TCMB) is pictured at the entrance to the bank’s headquarters in Ankara, Turkey, April 19, 2015. REUTERS / Umit Bektas / File Photo

The planned move, which has yet to be reported, could be one of the boldest to kick-start growth after last year’s currency crisis prompted Ankara to take sometimes unorthodox steps to defend the lira and revive loans.

As part of this plan, the central bank would strengthen the link between loans and reserve requirements and regularly adjust parameters to direct lending to sectors such as construction and energy, which remain mired in bad debts, have the sources told Reuters.

The central bank is close to approving the changes, they said, requesting anonymity due to the sensitivity of the matter.

Finance Minister Berat Albayrak and Central Bank Governor Murat Uysal have publicly hinted that they will take such a step, but the government and the bank have made no announcements.

“We are adopting a policy framework that uses (…) tools such as reserve requirements geared effectively to the rate of increase in loans, their composition and their healthy growth in terms of sector distribution,” Uysal said in Istanbul on Wednesday. . [I7N26R00M]

Albayrak signaled in September his intention to “redirect the credit to the right places”, without giving further details.

Both sources said the first step should be an adjustment to a rule passed in August, when the bank lowered reserve requirements and raised pay rates for lenders with 10-20% loan growth.

This move helped increase credit growth, so the plan is basically to double and increase the loan growth range.

A higher cap would help preserve the benefits for state banks that the government has relied on to stimulate lending, but which face losses on their aggressive credit extension.

It could also encourage more reluctant private banks close to the 10% floor to extend more credit.

“Loan extensions need to increase seriously. Most private banks have not taken the necessary initiative to grant loans so far, ”said one of the sources.

Two state-owned banks are at risk of exceeding the 20% cap and could “take a hit” if they do, so “precautions will be taken to avoid that,” the source said.

The central bank has already cut its benchmark interest rate by 10 percentage points since July to help meet the government’s ambitious 5% growth target for 2020.

The new powers could allow the central bank to channel credit to export sectors long overshadowed by imports. Turkey’s yawning current account deficit last year helped spark the crisis which, at worst, halved the value of the Turkish lira.

These lending incentives could lead to a rebound in inflation, which fell below 10% last month after climbing above 25% last year.

The move also risks exacerbating Turkey’s problem with tens of billions of dollars in bad debt still on banks’ balance sheets. The NPL ratio of lenders is expected to increase to 6.3% by the end of the year.

BASED ON THE CENTRAL BANK

Changes to reserve regulations are expected to be made over the next year, boosting lending in sectors such as construction, energy, exports and those that boost Turkey’s muted productivity, the sources said.

The central bank could prioritize sectors dependent on foreign currency income as a first step, they said.

The second source said the bank could also discourage lending from banks with high levels of loan growth to ensure financial stability. “The system is not designed unilaterally,” the source said.

“The legal infrastructure is ready today,” added the source of the plan.

Turkish lending annual growth reached around 5% from near zero in July, according to official data, in part thanks to the reserve requirement adjustment in August.

Fitch Ratings said the growth has been “largely driven by state-owned banks, leading to erosion of their capital and profit margins.” This month, he said that at over 18%, overall capital adequacy remains comfortable.

In July, weeks after President Tayyip Erdogan ousted the former central bank chief for failing to follow instructions, the bank began a series of key rate cuts to 14% from 24%.

In August, he reduced the reserve requirement ratio for deposits up to three months to 2%, against 7% for banks with loan growth of 10 to 20%.

He also set the rate these banks charge on lira-denominated reserves at 10% – and zero for lenders with loan growth of less than 10% or greater than 20%.

Eight banks benefited from the measures in October, three of which are state banks, the second source said.

The first source said the government is considering raising both the 20% cap and the 10% floor.

“Even if there is a risk of inflation, the implementation of this system seems logical at this stage (…) because there are problems of influx of foreign resources,” said the source.

Additional reporting by Ebru Tuncay and Ali Kucukgocmen in Istanbul; Editing by Jonathan Spicer and Hugh Lawson

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