February 6, 2019 / 1:31 PM / 10 days ago

Turkish banks have been unable to recoup bad loans from state fund since August -sources

ISTANBUL/ANKARA, Feb 5 (Reuters) - Turkish banks have not been receiving compensation since August for non-performing loans made to companies covered by guarantees from the state Credit Guarantee Fund (KGF), five sources familiar with the matter said.

The KGF is designed 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.

Economic development has been a cornerstone of President Tayyip Erdogan’s success during 16 years in power and he has prioritised high growth, repeatedly calling for low interest rates to boost lending.

But the economy faced severe headwinds last year when the lira plunged 30 percent to the dollar, hitting some businesses’ ability to pay off loans and leading them to seek debt restructurings or protection from creditors.

According to the credit guarantee system, if a company is unable to meet repayments, banks can demand compensation from the KGF, which can guarantee up to 90 percent 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 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 said.

In a statement to Reuters, 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 non-performing loans was not clear. According to the KGF website, its total risk exposure was 205.3 billion lira ($39.37 billion) as of Jan. 25, while the rate of bad loans was 1.38 percent.

Sources said the reason for this low rate is that the KGF has not been making payments to banks.

BANKS VIOLATING REGULATIONS?

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 said banks were depriving companies of the option to restructure KGF-guaranteed credits and choosing to deem them NPLs (non-performing loans) 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.”

Another source close to the government said the banks’ refusal to give companies restructuring options was not only a violation of regulations, but also harmful to firms.

“The real sector is going through a tough period. Going for collection at this time, instead of offering companies that can survive a restructuring, is a big injustice,” the source said.

Public banks have now “hit the brakes” on making KGF-backed loans, one source said, adding that the government wanted private banks to take up more of the burden.

$1 = 5.2140 liras Writing by Tuvan Gumrukcu; Editing by Daren Butler and Catherine Evans

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