Forced to provide credit to support Turkish businesses in the country’s stalled economy, Turkey’s banks risk seeing an explosion of non-performing loans, the European Bank for Reconstruction and Development (EBRD) said on Monday.
“The NPL issue is an elephant-in-the-room,” Roger Kelly, the EBRD’s Istanbul-based lead regional economist, said in an interview with Bloomberg. A boom in credit increases the risk of taking on riskier clients and means much of the debt banks hold is relatively young, he noted.
At Turkish banks, loan books have expanded 34 per cent this year through October, the EBRD said.
“Turkey’s government has sought to engineer a lending boom, led by state-run banks, to help return the economy to growth following the outbreak of COVID-19. Listed banks have also been coerced into handing out more credit to consumers and businesses by the banking regulator and the central bank, which has penalised those who do not meet loan growth targets,” analysts at Ahval point out.
The EBRD, one of the biggest lenders to Turkey over the past decade, has proposed that the authorities set up a ‘bad bank,’ a vehicle to handle bad debt, mirroring similar initiatives taken by major economies following the global financial crisis of 2008. But the proposal has not been taken up.
Instead, the central bank has changed the criteria for the classification of non-performing loans, extending the time period in which a debt may be classified as non-performing. This has permitted the statistics to show a decline to 4.1 per cent in NPLs from 5.3 per cent at the start of the year. But the reality is, of course, that their number is expanding.
More loans may be left unpaid as credit growth normalises, interest rates rise, and the government reverses stimulus measures, Kelly continued. “Monetary policy remains too loose, and the real interest rate is still negative, which is fairly unusual for a country dependent on foreign capital.”