02 Jan

Last week, the CEO of one of the best know Turkish Banks finally went out publicly to declare that the year 2014 will probably be the toughest one of the last ten years for the Turkish Banking sector. Such an expectation is no surprise for any emerging economy since the uncertainties and concerns over a possible Fed decision to cut monetary expansion continues. But the Turkish banking sector has additional concerns other than such an apprehension over Fed`s decision that is almost shared by every other economy, emerging and developed alike.

During the last decade Turkey has witnessed almost an economic miracle. The GDP growth in unprecedented levels, macro-economic reforms, a booming purchasing power parity, dramatic reduction of interest rates alongside the inflation rates coupled with reforms that regulated the banking sector along sound and stable lines, all combined to create a very conducive environment for the banking sector in Turkey to record high growth rates. However some structural problems still continue to haunt the Turkish economy. The current account deficit which had exceeded USD$ 60 billion in the last 12 months continues to pose a serious problem for the Turkish economy. What is more alarming is that a sizable portion of this deficit is generated by Turkey’s energy needs which are not going to wither away in short term. Add to this the historically low rate of national savings that stand around only at 12% of the GDP, and the volatile exchange rates, one can better understand the danger that the current account deficit poses to the country’s economy.

Limitations for the Credit Card Installments

In line with the concerns for high current account deficit and low level of savings, the authorities have recently taken action to cut the spending rates. A recent regulation has been adopted to limit the number of installments for the credit cards. For the food and fuel purchases there shall be no installments. The same regulation which will be in effect on February 2014 restricts the number of installments for consumer electronics and for the subscriptions for tele-commucation and internet services to 9 months which is currently going up until 24 months. This is a drastic reduction of spending capability on the part of the consumers.

The same regulation deals with the down payment rates as well. For automobile purchases, the down payment rates have been redefined. For the cars which’s price does not exceed 50.000 TL, the new regulation requires 30% of the total price to be paid by the buyer as the down payment and only the rest of the amount can be supplied by the banks as a credit. For the cars which’s price exceeds 50.000 TL the down payment rate goes up to 50% of the total price which means that the buyer can only approach the banks for a credit for the remaining half of the sum. Moreover in both cases payback period is restricted; the credit has to be paid back in 48 months.

Implications for the Banking Sector

Obviously such a regulation that aimed at cutting the consumer spending is not very good news for the Banking sector. Short installment periods and the higher levels of down payments might lead to a shrinkage in credit market. But a possible upside for the banking sector might be the emergence of a more solid consumer basis with a higher capacity to pay the credit back. Especially the more stringent the rules for credit paybacks the more choosy the banks have to be before they land the credit to the consumers. And such banking prudence which have already been developing in Turkey after the banking regulations of 2002, might serve to prevent banking related economic crisis that results from bad landing practices.

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