Turkey tells banks to set aside extra cash for $8 billion in bad debt

Turkey told its banks to set aside loss provisions for an additional 46 billion liras ($8 billion) in non-performing loans (NPLs) as it sought to clean up the industry following last year’s currency crisis.

The debt is mainly owed by companies operating in the energy and construction industries, the country’s banking regulator said in a written statement on Tuesday. The re-classification of the loans and the required provisioning must be made by the end of the year, it said.

Turkish builders and energy firms have been hit hard by the currency crisis, which sparked a surge in interest rates and inflation. Tens of billions of dollars of loans taken out in foreign currency became more costly to repay. The lira lost 28 percent of its value in 2018 and is down about 8 percent against the dollar this year.

The regulator said the re-classification of the debt meant the ratio of NPLs to total loans rose to 6.3 percent from 4.6 percent. It had previously predicted that the ratio could increase to 6 percent by the end of the year.

The government had grown impatient with progress on cleaning up bad debts in the banking industry, Reuters reported, citing an unnamed Treasury official.Investors have been calling on the government to take action since the currency turmoil peaked in August last year.

Banks and investors held meetings this year as Turkey sought to shift tens of billions of dollars of the loans into special funds, but talks had stalled over basic principles including what defined an NPL. Energy companies alone have some $50 billion in outstanding debt.

The banking regulator provided no details about whether more loans would be reclassified in its statement on Tuesday.

All of Turkey’s largest infrastructure projects, including a new mega airport in Istanbul, were financed with foreign currency loans, mainly secured from local banks. Energy companies’ profits have also suffered in recent years as the government sought to supress the prices they charge for electricity.

Ratings agency Fitch is among institutions that have warned that NPLs could worsen significantly. Analysts have warned that banks’ capital buffers were dangerously thin.

The banking regulator said the capital adequacy ratio of the banking industry, a key measure of financial strength, would fall to 17.7 percent from 18.2 percent as a result of the new provisioning. The regulator said the ratio was still more than double the 8 percent minimum set out under Basel III international banking guidelines. It did not say how it calculated the figures.