Giving credit where credit is due
There was a tremendous credit boom in the banking sector in March as the Treasury’s support for the Credit Guarantee Fund (KGF) rose from 9.5 billion lira to 180 billion lira, with a surety support cap of 250 billion lira. Collateral bank loans surged by 143 billion lira in the same period.
The only reason so much credit surety was granted in such a short period is probably due to the lack of bureaucratic barriers and finalizing the process swiftly. The lion’s share of the KGF’s credit goes to public banks, mainly because the majority of their customers are small and medium-sized enterprises and they have more customers in need for reaccreditation. Public bank loans have inc- reased by 16 percent since the beginning of the year, while private banks’ loans rose 10.6 percent.
It was a right move to provide credit to the market through the KGF, where most of those loans are non-payment for one to three years, with a five-year term for working capital loans and 10 years for investment loans. However, there have to be some structural measures taken in order to avoid postponing risk for the KGF, Treasury, banks and the enterprises borrowing in the long run. Otherwise, after a while we may face riskier situations that cannot be overcome with palliative measures.
The annual rate of almost 30 percent in loan growth may have an effect on inflation. Previous loan growth took place when the markets were not as tight, interest and foreign-exchange rates were in decline generally and foreign funding inflows were on rise. Despite those favorable conditions, inflation could not be brought below 8 percent. Now it’s just opposite. The source of lending is all domestic money. Foreign-exchange-denominated loans increased by only 1.2 percent since the beginning of the year, and the only reason for this increase is the depreciation of the dollar against the euro.
In addition, part of the lira loans moved to foreign exchange. Demand for foreign exchange was mainly to pay off companies’ debts and liabilities that were denominated in foreign currencies. Until recently, because of the rise in interest rates in lira-denominated debt, there was a tendency to exit from the lira.
There was also real foreign-exchange demand due to the foreign trade deficit, where a narrowing in the gap this year seems impossible. Financial movements of money abroad may cause a contraction in the foreign-exchange supply from time to time.
As loans move to foreign-exchange, the lira loan-to-deposit rate becomes negative. This ratio was 130 percent at the beginning of the year, but it now stands at 142 percent. This ratio is more than 162 percent in foreign-capitalized banks, which makes lira deposits valuable, and therefore interest rates are on rise.