Erdogan’s Cheap-Credit Push Pays Off as Banks Turn on Taps

(Bloomberg) -- Turkey's push for cheap credit to mitigate the fallout from the coronavirus is bearing fruit, as companies and consumers take advantage of lower borrowing costs to refinance debt and shore up their finances.

Lending surged more than 60% in the 13 weeks through April 24 when annualized and adjusted for foreign-exchange fluctuations, after shrinking as much as 10% on the same basis during early 2019, according to central bank data. Commercial loans soared more than 80% and retail facilities by about 45%.

The acceleration, albeit led by state-owned lenders, is fulfilling President Recep Tayyip Erdogan's long-held desire to stoke economic growth using debt -- even before measures to contain Covid-19 brought global economies to a halt. In Turkey, that drive resulted in deep interest-rate cuts and a series of regulations aimed at forcing banks to lend, including a new asset ratio introduced last month.

“Banks have to extend loans to businesses to meet the asset ratio -- it's become an important drive to step-up lending,” said Bulent Sengonul, a banking analyst at Istanbul-based brokerage Is Investment. “It's a good opportunity to refinance existing debt at lower costs and accumulate some cash for rainy days.”

For business owners like Alper Akmaner, who makes and distributes the Cire Aseptine brand of Swiss beauty products, the support couldn't have come at a better time. He borrowed about 3 million liras ($424,000) after the start of the pandemic, around 85% of which came from state-owned lenders.

“I am borrowing to keep producing, hoping that the tide will turn positive,” he said. “Loans are renewed and payments have been deferred until the last quarter. What will happen then is a big unknown.”

To minimize the adverse effects of the coronavirus outbreak, the government unveiled a 200 billion-lira economic support package, which mostly includes loans to businesses at favorable rates.

It also reinstated a government-backed Credit Guarantee Fund in which state-owned banks extend loans at 7.5%, below the benchmark central bank rate of 8.75% and inflation of 10.9% for April. Private lenders provide loans under the program at 9.5%.

What Bloomberg Intelligence Says:

“State banks are favoring growth versus profitability; and expanding their loans books at the expense of margins. Giving away loans now, at not always commercial terms, can backfire later because of deteriorating asset quality. We haven't seen the impact on state banks' balance sheets yet as interest rates came down much sharper than expected and due to their low provisions. This may prove unsustainable, but there is very little visibility and clarity.”

-- Tomasz Noetzel, European banks analyst

State-owned institutions have been extending credit at three times the pace of their private peers since 2017, according to regulator's data. That trend hasn't changed much: lending by government-controlled banks increased 21% this year, almost double that of their private rivals.

The hesitant approach toward lending by private institutions, amid worries of deteriorating asset quality and capital levels, has irked Erdogan, who has repeatedly slammed them for failing to support companies. Representatives for the lenders recently asked the regulator to smooth tensions with the government, pointing to a lack of demand and more favorable terms offered by state banks.