Central Bank rate cut will not increase loans
On one hand, while the high rises in the foreign exchange rates create concern, the Central Bank is still expected to continue interest rate cuts on the other. We know that the government wants the Central Bank to lower interest rates and as well decreasing loan rates, increasing the credit volume. However, the current developments in banking show that even if the Central Bank lowers rates, there will not be a rise in loans.
We knew that banks were irritated for a while with the publicity created for decreasing their profits and the steps taken by the government to that end, however, these were not voiced. Now, bank executives are openly voicing their complaints, mentioning the inadequacy of their equity capital, the stagnant growth and the decrease in their profitability.
In the general assembly of the Banks Association of Turkey held last weekend, the head of the union, Hüseyin Aydın, even though he is the general manager of a public bank, explained the situation of the sector without hiding anything. Well of course he did this through technical language, keeping the criticism dose low. However, because they were extremely quiet until now, this caused us to think that the complaints of the banks had sharply increased. Following him, İş Bank General Manager Adnan Bali gave a detailed explanation of the sector in the same framework.
Bali said the most important item consuming equity capitals was loans, thus for loans to increase, equity capitals should increase. Bali also said that equity capitals could be increased by funding from shareholders or adding operating revenues, but such operating revenue did not exist. The profitability of equity capital was down to 10 to 11 percent, in other words, below the deposit rate, he reminded, emphasizing that a new shareholder could withdraw their money and deposit it in a bank to make more profit.
The most important cause, in my opinion, of these complaints is the pressure that the new government is expected to exert on banks. It is expected that the Central Bank will continue to lower rates, and in return for that the government will say, “We are increasing investments again; banks should contribute to that and increase loans,” thus loan rates will be lowered and the loan volume will wished to be increased. Thus, I think the banks are making preparations in advance for the pressures that will come from the government. They are trying to say that even if the Central Bank lowers rates, the current equity capitals will not allow new loans. Unless profitability increases and is added to the equity capital, they will not be able to make an increase in loans.
From another point of view, it is possible to regard these complaints of the banks as a warning for macroeconomic policies to be adopted in the new term. While the U.S. Fed rate hike is close, while the inflation has not been lowered in a permanent sense, it would be wrong for the Central Bank to cut rates; however, they cannot say this openly, but they are trying to explain it indirectly. Similarly, they are trying to explain the negative effect on the macro equilibriums of the further rising of the foreign exchange rates due to interest rate cuts, while the private sector has so much foreign currency debts.