Keeping Turkey’s NPLs Under Control

Non-performing loans are a threat to Turkey's economic health.

Fortunately for Turkey, as it pulls its economy out of recession, the health of its banking sector isn’t a major concern. Recent trends, however—such as the depreciation of the lira and a rise in dollarization—have increased pressure on banks, particularly state banks. Furthermore, the country has seen an increase in nonperforming loans (NPLs) in the wake of a regulatory ruling that $8.1 billion of bad bank debt that was accrued mainly through the construction and real estate sectors should be classified as nonperforming. The decision is expected to increase the banking sector’s NPL level from the current 5% to 6.8%.

Despite this, credit growth is starting to recover, bolstered by state banks and with consumers and households leading the way. In its just-released strategy for Turkey, the EBRD says one of its key priorities is to strengthen financial-sector resilience and support the development of capital markets as an alternative source of funds.

Investors will want to watch this development closely. “The recent pickup in lending probably has further to run, which will provide some support to the economic recovery,” says Jason Tuvey, emerging markets analyst at Capital Economics. “But the pace and composition of new lending indicates that vulnerabilities in the bank sector and the wider economy are starting to build again.”

Most observers remain confident that the sector will be able to meet its external obligations, which Tuvey puts at a total of $87 billion, with some $40 billion coming due over the next few months. One possible mitigation, suggests Roger Kelly, lead regional economist for Turkey at the EBRD, would be to allow private companies, both domestic and foreign, to purchase NPLs—as they do in Italy, for example. “Turkey needs to consider creating an NPL market to allow banks to sell these and then get on with making fresh loans,” he says.