Turkey
The new regulations apply to loans that will be extended through the end of the year, and the rates band will remain linked to the official policy rate. Image Credit: Gulf News archive

Ankara: Turkey is pushing commercial lenders to slash interest rates charged on loans to companies after the central bank moved this week to stimulate the economy with a surprise rate cut.

The monetary authority on Saturday released rules that will force banks to bring commercial loan rates closer to Turkey’s benchmark policy rate, in an attempt to counter signs that the $800 billion economy might be slowing.

The regulations follow the central bank’s decision on Thursday to cut its policy rate to 13 per cent, even with inflation running at a 24-year high of 80 per cent. The intended objective is to keep relatively cheaper cash flowing to companies and generate jobs.

Banks will also need to carry more lira-denominated government bonds to adjust, a requirement that may prompt a rally in Turkish debt markets like the one that followed similar measures in June.

Penalizing banks

The monetary authority said the regulations will strengthen the so-called transmission mechanism, or its ability to influence the cost of money that banks lend to their customers.

But the bulk of the changes are aimed at lowering the cost of loans for corporate customers. Lenders that charge too much or lend too aggressively will be required to park a larger amount of lira assets at the central bank.

Lenders asking for interest rates of 22.85 per cent to 29.4 per cent on new commercial loans will be required to lock lira bonds worth 20 per cent of new credit at the monetary authority. For even higher interest rates, the ratio rises to 90 per cent.

The new regulations apply to loans that will be extended through the end of the year, and the rates band will remain linked to the official policy rate.

Why now?

There’s been a sharp divergence between Turkey’s official policy rate and the cost of loans in the banking sector in recent months. Lenders now charge more than double the central bank’s rate, which had been held at 14 per cent since December until Thursday’s cut.

The average rate for commercial loans in liras spiked to 30 per cent in July, the highest in four years. While it’s fallen slightly amid complaints from businesses about a finance crunch, it was still at 27 per cent as of August 12, according to official data.