The CBRT revised some required reserve rules for banks in order to control loan growth and encourage foreign currency conversion into local currency. According to this;
· In the statement made by the Central Bank on Saturday, it was stated that 10% required reserve will be applied to commercial loans extended in four-week periods since April 1st. The Central Bank said banks' commercial cash loans in local currency - excluding those involving small and medium enterprises and export and agricultural loans - would be subject to reserve requirements.
· Loans given to businesses that fall under the definition of SME, tradesmen loans, export and investment loans, agricultural loans, institutions and organizations listed in the tables (I), (II), (III) and (IV) in the annex of the Public Financial Management and Control Law No. 5018 and state economic enterprises and their establishments, subsidiaries and affiliates, corporate credit cards and loans to financial institutions are excluded from this application.
Other points in the central bank's reserve requirement decision;
· Required reserves were also increased for personal accounts in banks that did not meet the target of converting foreign currency accounts into lira. The central bank increased the foreign currency deposit rate by 500 basis points for banks with less than 5% and 300 basis points for banks with 5% to 10%.
· As of May 31, for banks with a loan growth rate of more than 20% compared to December 31, 2021, the difference between outstanding loan balances on those dates will be subject to a 20% reserve requirement for six months.
· The Central Bank said that the 0% RRRs of financing companies will now be determined at the same level as banks and their liabilities to domestic creditors will be included in the scope of required reserves.
· The changes will take effect from the calculation date of May 27.
The revision of reserve requirements came after the central bank kept the benchmark interest rate at 14% for the fourth month in a row, despite inflation surpassing 60%. Authorities are leaning more towards other policies that could bring in more foreign currency and increase the central bank's reserves, rather than contribute to Turkey's interest rate buffer. The Monetary Policy Committee said in its April rate decision text that it weighed the growth expectation in long-term investment loans against the need to keep the current account under control. In the last MPC, the Bank signaled a possible movement in required reserves and said, “In this context, the committee decided to strengthen its macroprudential policy set.” Therefore, the issue of macroprudential measures has been on the market for a while.
Recently, there has been a momentum in commercial loans as well, especially in these private banks. The main reason for this is the increasing need for working capital. After all, companies have to continue their business cycle. In this environment, as the costs increase so much, there is a need for more working capital in high inflation in order to continue production and this has to be obtained in a more expensive way. Concentration of the increase in loans on investment loans is not possible due to pricing uncertainties. This is particularly the case in revolving and spot loans, high inflation and uncertainty environments challenge both the banking sector and the real sector in financial planning for more than 1 year. We consider that the decision makers made this decision by excluding certain loan types, as they think that the increase in loans mostly went to foreign exchange.
There have been intensified regulations in the last 2-3 weeks, and their perspective is to help the Central Bank accumulate foreign currency in general. It is understood that the economy has a serious need for foreign currency and accordingly, the regulations of the economy management to accumulate foreign currency have come with measures to ensure the continuation of the system. If we remember the previous current regulations;
· The requirement to convert FX income on the export side into TRY at the Central Bank was increased from 25% to 40%.
· Payments in securities trading will be made in TRY, even if the contracts are in foreign currency. This is a step that will challenge companies in particular.
· The central bank also made changes regarding the amounts held by exporters abroad. A portion of the exporters' income exceeding 30K USD was brought to the country, it was not compulsory to bring the prices below this. This limit has been reduced to 15K USD. As of today, export income of more than 15 thousand dollars will be brought to the country.
Deepening trade imbalances and the world's most negative borrowing costs when adjusted for prices have made the Turkish economy increasingly fragile at a time when the Fed-led global tightening intensifies. In an environment where inflation is between 60-70%, while interest rates in the US are based on 3%, the cost of foreign borrowing is increasing due to country risk and economic imbalances. Opting for unorthodox policies has limited the central bank's coffers so far this year. Gross reserves excluding gold assets were approximately $69 billion in the week ended April 15, down about 5% from the end of 2021.
As a result; The economy management and the Central Bank seem to have taken this RR decision by excluding these certain loans, as they have seen a bit of an escape to foreign currency, depending on the severity of the momentum and acceleration in loans. Inflation is going to 70% and it is very clear that there is a loss of control. The interest rates of the loans will increase, since the said RR step will be reflected in the costs of the banks, there will be a mark-up of 2.5-3 points in the loans. This will mean that the commercial loan interest rates, which are 20-21%, will increase to around 24%. As of the week of April 15, the weighted average interest rate of commercial loans extended in TRY was 20.35% and these rates had been on a downward trend for a while. There will be an increase again.
We do not expect the momentum in loans to slow down in this environment of foreign exchange and working capital needs. There has also been a certain trend in consumer loans. On a real basis, considering the inflation rate of 60%, credit outflows may continue at more costly rates over the need and demand for foreign currency. There may be an inflation effect, as firms will reflect these working capital resources, which they obtain at more expensive rates, to the prices of goods and services sold. This reveals that under macroprudential measures, factors related to RRs or other regulation will be far from having an effect that will probably bring results in the fight against inflation.
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