Flurry of new rules leave Turkish banks struggling to lend

Highlights:

• Erdogan government pushing credit to preferred sectors
• Some banks are trimming loans as costs, risks rise
• Regulations meant to backstop rate-cutting policy
• Policy sparked lira crisis, inflationary spiral

Some Turkish banks are curtailing corporate lending after the government's latest raft of regulations raised their costs and forced many to cut their balance sheet risks, five banking and private sector sources told Reuters.

The new rules, part of President Tayyip Erdogan's unorthodox management of the economy, have especially depressed longer-term lending. The owner of one mid-sized manufacturer said it was "harder and harder every day" to access needed credit.

The sources, who spoke on condition of anonymity, said the credit and collateral regulations rolled out in recent months have caused confusion and raised many questions from banks.

"These are very difficult items to manage for a bank," one banking source said. "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 rules mean cheaper credit will continue to be pushed to sometimes riskier smaller borrowers preferred by the government, while overall credit in the major emerging economy is likely to cool, said the sources.

Overall credit growth, based on a 13-week foreign exchange -adjusted measure, was up 20% from a year ago at the end of August, compared to 50% when the slew of regulations began in April, data show.

The stakes are high for Erdogan and his conservative AK Party ahead of tight elections next year, which polls show he could lose due primarily to soaring living costs and other economic strains.

His economic programme prioritises growth, employment, investment and exports, driven by a series of interest rate cuts that sparked a currency crisis and inflationary spiral late last year. 

The central bank has continued cutting interest rates despite inflation hitting 80%. It adopted several new rules to direct cheap loans toward net-exporting companies and sectors in recent months, aiming to ease Turkey's big current account deficits.

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

But some lenders say holding longer-term illiquid bonds to back short-term loans is too risky. Others asked clients to close out some loans instead of renewing them, leaving the companies to use their own equity, another banking source told Reuters.

CONFUSION

The central bank's regulation last month pushed lenders to cut rates on commercial loans and required those that do not to hold larger lira deposits, prompting a flurry of treasury bond buying. 

The central bank's message to the financial sector was to extend cheap loans to net exporters and small and medium-sized enterprises (SME), or effectively return the funding to the government by holding bonds, bankers said.

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

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

"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," an official close to the matter said.

The official added that the share of loans to SMEs financed by the central bank has risen to 25% from 5% at the beginning of the year and this should continue to increase.

On Friday, the central bank refused a request from banks to hold foreign exchange instead of long-term lira bonds.

Loans to SMEs, tradesmen and exporters as well as for investment and agriculture are largely excluded from the tough new rules.

SMEs are seen by banks as riskier but more likely to expand investment and hiring, while exporters help ease the country's trade imbalance and replenish the central bank's depleted foreign reserves.

Businesses have complained that the rules favoured some sectors over others and slowed lending at a time that high inflation has diminished their equity, making credit all the more critical. 

As inflation has soared to a 24-year high, the lira has shed more than half its value versus the dollar in two years, largely, most economists say, due to the interest rate cuts and economic mismanagement.

The manufacturing executive, who requested anonymity, said his company's equity needs had quadrupled in lira terms while commodity prices doubled in FX terms in the last two years.

"How can a company use its equity to close out its debt to banks under these circumstances," he said.