Turkey’s banking watchdog BDDK on September 17 instructed banks to write off Turkish lira (TRY) 46bn ($8.1bn) of loans by year end and set aside loss reserves. The markets will take it as a big move against fallout from the currency crisis that has punished Turkey’s economy.
The regulation is directed mostly at loans made to the shaken energy and construction sectors, once debt-fuelled darlings of the country’s boom years. It is anticipated that it will widen lenders’ non-performing loan (NPL) ratio to 6.3% from 4.6%, the BDDK said.
Moves led mostly by banks to clean up some $20bn in bad debt have failed to make the hoped for progress in recent months. Initial plans have been rejected or shelved. A person familiar with the Treasury’s plans was quoted by Reuters as saying on September 18 that the government has grown impatient with the lack of progress on bad debt, clogged credit channels and an unwillingness by banks to write off loans. It planned to take a more aggressive stance on the matter, the person added.
The BDDK said Turkish banks’ capital adequacy ratio (CAR) would slip by 50 bp to a still high 17.7%. That would be due in part to the instruction on NPLs, according to what the regulator described as a “prudent” analysis based on July data.
In a statement, the watchdog added that lenders have raised cash over the last year, with core and secondary capital rising by TRY49bn.
“Studies conducted show that the industry as a whole maintains its healthy and strong structure and the standing capital structure is at a level that can easily manage asset quality-based risks,” it said.
The BDDK previously estimated that the banking sector’s NPL ratio could rise to 6% by the end of 2019, Some analysts have calculated higher estimates.
Turkey’s currency crisis caused inflation and interest rates to soar and pushed the economy into recession. The TRY weakened by almost 30% against the USD last year. It is down another 7.8% this year to date. With inflation officially falling, the central bank has embarked on an aggressive easing cycle. It has cut its benchmark rate by 750 bp in the past two months.