Turkey’s Credit Guarantee Fund failing to compensate banks for NPLs: report

Turkey’s Credit Guarantee Fund failing to compensate banks for NPLs: report
Last year's collapse of the Turkish lira has pushed up the NPL rates faced by lenders in Turkey.
By bne IntelliNews February 6, 2019

Turkish banks have not been receiving compensation since August for non-performing loans (NPLs) made to companies covered by guarantees from the state’s Credit Guarantee Fund (KGF), five sources familiar with the matter were reported as saying by Reuters on February 6.

The KGF was configured to stimulate the economy by guaranteeing loans to small and medium sized firms that could not otherwise obtain credit. Such loans were widely used in 2017 to boost the economy, prompting the biggest credit growth in recent years. The economy showed robust growth all the way through to the first half of 2018 before coming off the rails when credit-fuelled Turkey was hit by a currency crisis.

The severe depreciation of the Turkish lira—it lost about a third of its value against the dollar last year—hit the ability of some businesses to pay off loans and led them to request debt restructurings or protection from creditors.

The stipulations of the credit guarantee system mean that if a company is unable to meet repayments, banks can demand compensation from the KGF. It can guarantee up to 90% of loans.

But banking sources close to the matter told Reuters the KGF was making “excuses” to justify not compensating banks, prolonging the process by citing missing documents.

“A collection, normally done in one month, has not been done since August. Two months after the application, the KGF responds saying there are missing documents,” one source reportedly said.

“Even if those documents are completed, it finds other excuses and doesn’t pay the money. Even if the missing documents are completed, there is no payment,” the source added.

Opportunity to restructure
In a statement to the news agency, the KGF said lenders needed to give companies the opportunity to restructure loans before asking for compensation, as per a decree published in October.

“The compensation requests are only met when enterprises do not accept restructuring proposals,” the KGF said.

The amount of such payments which banks have been unable to collect on NPLs was not clear. According to the KGF website, its total risk exposure was Turkish lira (TRY) 205.3bn ($39.37bn) as of January 25, while the rate of bad loans was 1.38%.

Sources were cited as saying the reason for this low rate was that the KGF has not been making payments to banks.

The October 2018 decree allowed foreign currency loans and foreign currency-based credits provided by credit guarantee institutions to be restructured in lira terms. The move meant lenders could restructure and change the maturity of working capital loans and investment loans provided by credit guarantee institutions from the date the credit was opened, and suspend payments for up to 12 months.

One official familiar with the subject was reported as saying by Reuters that banks were depriving companies of the option to restructure KGF-guaranteed credits and choosing to deem them NPLs in order to collect the money quickly.

“Private banks were violating regulations by applying to collect the loan from the KGF before attempting to restructure,” the official said.

But one banking source said: “Loans which banks are classifying as NPLs, are ones which cannot possibly be restructured. But the KGF is finding other excuses and not making the payments.”

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