Turkish Banks Now Offering Free Cash Incentives

In Turkey, the cost of commercial loans has dropped below the interest rates on lira deposits for the first time since 2019. This is due to the world's most aggressive easing cycle and new regulations, which have made loans for businesses more affordable.

In Turkey's economy, which is heavily regulated by the government, obtaining credit can be a difficult task. Despite the challenges, it is possible to secure credit if the right steps are taken.

Official data for the first week of December showed that the weighted average interest rate on commercial credit had decreased to 14%, which was one percentage point lower than the rate for one-month deposits.

This year, the Turkish central bank has lowered borrowing costs by 500 basis points, even though consumer inflation has risen to a high of 85%. To stimulate certain industries before the upcoming election of President Recep Tayyip Erdogan, lenders have been mandated to provide businesses with more affordable credit.

At its final gathering of the year on Thursday, the central bank is expected to keep its benchmark interest rate at 9%, in accordance with the guidance from last month that clearly indicated the end of its easing cycle after four rounds of cuts. Only Standard Charter Bank in a Bloomberg survey anticipates a 100-basis-point cut.

The bank's monetary policy and regulations have caused commercial loan costs to decrease for 13 consecutive weeks, and they are now lower than one-month deposit rates. This is an unusual situation for banks, as the money they receive from lending is not enough to cover the cost of obtaining customers' savings.

According to Cagdas Dogan, the research director of Tera Yatirim based in Istanbul, the average cost of commercial loans is expected to reach a low of 13.5%. When taking into account the annual consumer inflation rate of 84.4% last month, this translates to a negative rate of more than 70%.

In contrast to loan rates, deposit rates have seen a slight increase in recent weeks as banks attempt to draw in more lira savings in order to meet regulatory standards.

Data from the most recent week (Dec. 9) showed that the weighted average rate for deposits with a maturity of up to three months was 22.5%, the highest it has been since July 2019.

In October, regulators cautioned banks against increasing deposit rates, and Morgan Stanley economists suggested in a report on December 16th that this unease could eventually lead to "soft caps" on rates.

Since last year, the Turkish government has implemented a policy package, referred to as the "Turkey Economic Model" by those in support of President Erdogan, which is partially designed to move savings from the US dollar into the Turkish lira.

As of December 9th, the banking regulator's data showed that lira deposits accounted for 50% of all savings in the banking system, a significant increase from the 35% recorded at the start of the year.

Tomasz Noetzel, a senior banks analyst from Bloomberg Intelligence, noted that the combination of increasing competition for deposits and the need to reduce lending rates is a dangerous mix for the banks' core spreads in the fourth quarter and beyond into 2023.