I have good news. We just saw that Turkey has the ability to be proactive. The first right step to tackle the crisis is taken. Banking Regulation and Supervision Agency (BRSA) has broadened the framework of the Reserves Regulation. First of all, it is the first time a public authority takes an action oriented towards the real problem. Secondly, Turkey has for the first time introduced a pro-active measure. This measure, though necessary, is also not sufficient. Now, it is time to take rapid new steps towards the required direction. If you are wondering what we are talking about, please keep on reading.
BRSA has broadened the framework of the Reserves Regulation. As the risk involved for the credits offered by banks increases, the banks have to keep a higher amount of deposits as reserves. As the credit moves from being risk-free to risky, the amount of deposits that the bank has to keep as a warranty for possible losses rises. Under this framework, banks classify the credits they offer under five categories. The 1st category consists of risk-free credits, payment for which is in line with the predetermined schedule. The 2nd category includes the credits for which payment problems have recently been emerging and beginning to prove problematic. As the category moves from 1 to 5, the amount of deposits to be kept by the banks as required reserve ratio goes up. In addition, the regulation administers the main principles considering the restructuring of the credits classified under the abovementioned categories.
With the new regulation, BRSA, introduced an important change for the banks to take proactive measures, by taking the current course of affairs: By means of the new regulation, it will be possible to immediately restructure credits including the ones that seem to be risk-free for the time being. Before the regulation, banks had to wait for fulfillment of the obligations related to the credits to be delayed for more than 90 days. Now, banks are able to restructure credits even if there is no delay in the fulfillment of obligations. This is such a favorable development ceasing a senseless procedure. This is the first time Turkey is taking a proactive measure to tackle the problem.
Current credit payment conditions reflected the situation of a company that, for example, planned the cash inflow estimating that it will sell 100 cars per day. Today, we all are aware that that company cannot manage to sell 100 cars, even in a month. Under these circumstances, we all have to know that, that company will not be able to make the credit payment when it is due. Yes, we are aware of this, but what are we doing about it? We are waiting. We are waiting so that, as provided by the related regulation, payments will be delayed for more than 90 days and the credit will be added under the risky credits category and then a solution will be looked for. Thanks to the new BRSA regulation, this self-deception process ended.
With the new BRSA regulation, the cash management problem the corporate sector faces is for the first time taken into consideration by the public sector. Let us underpin one point: The cash management problem corporate sector is faced with due to changing domestic and foreign demand conditions is the major problem of Turkey and countries like Turkey. This is how the crisis will affect Turkey no matter how the crisis affected the US. In the US, crisis moved from the financial sector to the real sector. Here in Turkey, it will move from the real sector to the balance sheets of the financial sector. Concrete outcomes of such movement will be clarified in a few months. And what has to be done is not about solely injecting liquidity to the system. Cash outflow from the corporate sector during 2009 should be lowered by reconstructing and transferred to 2010. If we can do this on a regular basis, we can manage the process, which otherwise will dominate us. The BRSA, with the regulation introduced, put forth that it is aware of the problem and the danger. BRSA is the first public agency taking such a step and it deserves a big praise.
Then, why is this only a first step and not sufficient? There are a few simple reasons. Let me list them. First of all, in a milieu where domestic and foreign demand conditions have changed radically, the process of credit restructuring cannot be undertaken by the banking sector alone. The existing collective action problem cannot be solved by individual banks. In that case, the process of restructuring will take a long time to happen. The second reason is that, the cost of the restructuring process cannot be taken up solely by the banking sector since it will be a great burden. The objective cannot be met in the absence of a form of government guarantees. If you cannot see the link, please think further on the example above. Third reason is; the only issue is not debt reconstructing. Current cash balances that inevitably change requires the restructuring of all kinds of debt until 2010. A package that does not include receivables of the public sector and provide fresh working capital sources cannot be successful. The fourth reason is that, the Central Bank shall link the banks' access to liquidity with their credit market activities and take the rediscount rates into consideration. Fifth, Turkey immediately needs to introduce an enlarged version of the Istanbul Approach Code of 2001.
We have to try to act proactively, while keeping in mind that it is highly challenging to be proactive in these times. We have never been faced with such a problem so far. In 2001, things were much easier: The problem was just to ensure that banks start offering credits to the corporate sector. The thing that has to be accomplished now is to enable banks to take the corporate sector as a serious party. The second reason why things are harder today is that, the IMF and other international agencies involved are not prepared yet for the issue of proactive measures. But do not worry, everyone will "become" the expert of the issue soon. This is a learning process for everyone.
The third reason why things are harder today is that the period in which the restructuring of 2001 took place and the current period are quite different. In 2001, there existed an economic program acknowledged by all parties involved, foreign demand was favorable to increase exports and global liquidity conditions were able to accelerate capital inflow into Turkey. Today, however, almost none of these exist. Therefore, the existing problem is not one that banks can solve individually.
This is the problem.
I would like to congratulate BRSA for taking the lead and hope that other related parties would come to acknowledge the problem, in a similar way.
This commentary was published in Referans daily on 27.01.2009
