Turkey turned up heat on banks after standoff over bad loans

Ankara lost patience after months of talks, no progress

ISTANBUL/ANKARA, Sept 23, (RTRS): Turkey forced banks to take losses on $8 billion in bad loans this week to kick-start lending and boost its economic recovery after losing patience with them, bankers, senior government officials and industry advisers told Reuters.

Ankara’s most aggressive move yet to cure a hangover from Turkey’s 2018 currency crisis has left banks scrambling to meet a year-end deadline to restructure loans or ready them for sale.

Turkey’s bank watchdog had been calling bank executives in recent weeks, after three months of talks failed to deliver action, to tell them what portion of loans they should reclassify as nonperforming and to make provisions, two sources said.

On Tuesday, a year on from the darkest moments of the currency crisis, the BDDK watchdog went public with its requirement for banks to write off loans totalling 46 billion lira ($8.1 billion) as non-performing loans (NPLs).

The move was driven by the government’s desire for banks, especially more cautious private ones, to extend more credit and help meet President Tayyip Erdogan’s goal of 5% economic growth next year, five sources said.

“The government has lost patience and wants action. We knew that nothing was happening in August, so it was just a matter of who was going to lose patience first,” one of the sources, a senior banker involved in talks with the BDDK and government, told Reuters.

The banks had hoped Turkey’s Treasury Ministry would do more to shield them from losses, telling the BDDK and government officials that fiscal policies had in part led to the downturn, a senior government official and the senior banker said.

The BDDK referred Reuters to its statement on Tuesday, while the Treasury declined to comment on the BDDK move.

Among the big private banks likely to be affected by the change, analysts have highlighted Yapi Kredi and Garanti BBVA, whose shares both slipped this week.

Neither bank was immediately available to comment on NPLs.

The 2018 crisis sliced 30% off the value of the Turkish lira, ended years of a construction-driven boom fuelled by cheap foreign credit, and sent inflation and interest rates soaring.

Turkey’s $766 billion economy slipped into a recession that has stretched into 2019, leaving banks with some $20 billion of debt that construction and energy firms can no longer service.

During weeks of calls with the regulator, the banks sought broader “structural changes” and proposed merging or cancelling projects underpinning some of the loans, the government official said.

The senior banker said lenders warned against forcing them to recognise losses on such large exposures before year-end, preferring instead to spread them over several years.

But the government was not convinced.

“The focus for both the BDDK and the Treasury is for banks to have a transparent, plain balance sheet so they can start lending again,” a debt restructuring consultant involved in the private talks told Reuters on condition of anonymity.

Ankara was irritated that efforts led mostly by banks to agree a fund-offunds to mop up the bad debt had stalled over the spring and summer, Reuters reported in July.

And it was not enough that the biggest banks had in recent weeks zeroed in on a new plan for an asset management company to take on higher-quality NPLs, two sources said.

Such a plan would take time and the BDDK was not about to hold off on its NPL announcement, they said.

In group and bilateral talks between the BDDK and banks that began in June, it asked them “one last time” to restructure or convert the mostly Stage 2 loans to NPLs, the senior government official said.

A Stage 2 loan is one where the risk of nonpayment has increased significantly.

“But the expected action did not materialize, thus the (Tuesday) statement,” the official added. “Banks are being asked to extend more loans ... and of course to be more aggressive in restructuring of problem loans.”

The Treasury “thinks it is the banks’ lack of appetite for loans that is holding back the economic recovery,” said a debt restructuring consultant involved in the talks.

Turkey’s central bank, under pressure from Erdogan to do its bit to boost recovery, has cut interest rates by 750 basis points in less than two months and moved to relieve capital requirements on banks that ramp up lending.

“The government is taking the necessary steps to support growth, (and) new steps and adjustments will come, but private banks must really give stronger support,” a second government official said.

Analysts have flagged the risks of forcing credit expansion on an economy that was still contracting year-on-year in the second quarter, especially when the government has made few if any structural changes to rely less on foreign funding.