The BDDK’s move didn’t come as a surprise, as the public had been aware for some while that the amount of non-performing loans was much higher than the officially pronounced figures. Turkey’s banking regulator BDDK announced in the second half of September that bank loans of TL 46 billion ($8.1 billion) are effectively non-performing; mostly in loans made to the energy and construction sectors, and in summary, it told the banks to write off this amount. The BDDK’s move didn’t come as a surprise, as the public had been aware for some while that the amount of non-performing loans was much higher than the officially pronounced figures. Although bankers say BDDK’s move is positive in terms of transparency, many analysts — speaking off the record — also say that the real rate of non-performing loans (NPL) is likely much higher than the 6.3 percent estimated by the BDDK. This will likely be a discussion that players will be returning to as the amount of loan defaults increase in the period ahead.
Banks forced to take the losses
Economists believe that no incentives or steps taken can have any real effect unless Turkish banking cleans up bad debts. They also note that the construction and energy sectors were hardest hit by the exchange rate shock of August 2018, as revenues of the companies in these industries are in lira while their expenses are in foreign currency. Experts say that the BDDK effectively wants the banks to shoulder the cost of the debt write-off. Professor Selva Demiralp said, “If, banks could somehow sell this debt and transfer the amount to a fund, then the situation could ease up somewhat, but the worst-case scenario is banks classifying problematic loans as non-performing and then giving up all hope of any of it ever being paid back. But what’s positive here is that the BDDK changed its NPL rate estimate to the more realistic 6.3 percent from their earlier estimate of 4.6 percent, fearing negative reactions from the public.”
A former bank general manager who asked not to be named said although the NPL rate seems problematic, the announcement’s timing has been wise for the fact that cleaning up bad debt will enable banks to be more at ease in 2020 in terms of borrowing syndicated loans in international markets and enter capital markets for long-term borrowing once again, an area where borrowing had been stalled for over a year.
Issues that still beg answers
Although some have lauded the BDDK for being transparent, there is a significant number of economists who think the body should be even more transparent. The most pressing question the BDDK is expected answer is the exact distribution of the 46 million lira on a sectoral basis. Another point that begs to be illuminated pertains to BDDK’s ratings listing public banks as having half the risk with private banks in terms of problematic loans and Stage 2 loans (Closely Monitored Loans). Experts note that answering these questions is the only way to turn this initial good step into a healthy affair.