Turkey to Turn Credit Switch Back On With Tweak in Reserve Rules

(Bloomberg) -- Turkey’s government is preparing to provide a boost to the economy through faster credit growth by tweaking some reserve rules for commercial lenders, according to an official with direct knowledge of the matter.

Authorities will set required reserves depending on how much banks lend, pushing through the changes in an omnibus economy bill that’s being discussed in parliament, said the person, who asked not to be identified. The legislation also allows the central bank to determine mandatory reserves for all balance-sheet assets and liabilities, including derivative products such as swaps, the official said.

Instead of reining in credit growth after controversial elections last month, Turkey is forging ahead by trying to unlock new financing for an economy at risk of a double-dip recession. Hobbled by political uncertainty, annualized lending growth has almost stopped at the end of June after months of expansion, when adjusted for foreign-currency fluctuations.

Days after the ouster of Governor Murat Cetinkaya, President Recep Tayyip Erdogan urged lower interest rates and said the central bank will provide more support for the government’s policies. State banks stand to benefit the most from the changes because they’ve been at the forefront of government efforts to extend cheap loans.

“The details will be crucial, such as how painful it will be if lenders don’t extend loans,” said Bloomberg Intelligence analyst Tomasz Noetzel. “My concern is they want to push banks to extend credit at lower rates, which is not ideal from commercial perspective.”

Tweaking Rules

The proposed law, called an omnibus bill for the wide range of changes it includes, was submitted to parliament by the governing party earlier this week and allows the central bank more freedom in setting rules for mandatory reserves by taking into account changes in balance sheet items. With the proposal, the requirements will be kept lower for banks that lend more and higher for those that lend less, said the official.

The central bank will decide on the mandatory ratios when needed, depending on market conditions. It’s repeatedly used the instrument in the past to support the lira and to try to revive lending.

Within the current framework, required reserves are effectively an insurance against bank liabilities -- such as deposits and participation funds. With the proposed change, Turkey is turning the rules into an incentive to get credit flowing again.

The bill is being discussed at the Parliamentary Planning and Budget Commission and will later be sent to the General Assembly for approval. Its introductory part broadly says the aim is to resolve financial difficulties that might arise, without elaborating.

When asked to explain the reasoning behind the changes, the central bank said there wasn’t anything to add to what was in the draft bill. A spokesperson for the Treasury and Finance Ministry wasn’t available for comment.

--With assistance from Asli Kandemir.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Vernon Wessels

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