Analysis Economy Turkey’s bounced cheques, loan and card defaults soar By Matt Smith October 3, 2023 Pexels/Nermin Aliyeva Small businesses in Turkey often provide informal financial support to each other by using post-dated cheques Bounced cheques of $792m in 2023 Borrowing rates up to 47% Shadow economy 31% of GDP The value of bounced cheques in Turkey is soaring as small and medium-sized enterprises grapple with resurgent inflation. Personal loan and credit card defaults are also at 2023 highs following a borrowing splurge ahead of May’s elections. Veteran leader Recep Tayyip Erdoğan had pushed state-owned banks to expand lending in the run-up to the parliamentary and presidential polls in which he and his ruling AK Party ultimately prevailed. This spending, along with negative real interest rates, fuelled inflation. Since June, a new central bank governor has nearly quadrupled the benchmark rate to 30 percent, but annual inflation nevertheless hit an eight-month high of 58.9 percent in August. Erdoğan lauds $17bn link between Turkey and Iraq Turkey hikes rates to 30% to strengthen hawkish turn Turkey begins rolling back ‘costly’ lira protection scheme In at attempt to slow credit, the central bank has lowered lenders’ maximum monthly lira-denominated commercial loan growth to 2.5 percent from 3 percent. Personal loan growth also cannot exceed 3 percent. “Many companies in Turkey depend on loans to fund their working capital so if they cannot obtain additional credit, non-performing loans will rise, along with bankruptcies and bouncing cheques,” said Arda Tunca, an independent economist based in Bodrum. In the seven months to July 31, the total value of bounced cheques in Turkey was 21.6 billion lira ($792 million), data from Turkey’s banking association shows. That compares with 16.3 billion lira for full-year 2022 and 10.3 billion lira for 2021. “The economy is struggling because of high inflation, and both domestic and export demand is falling, while SMEs [small and medium enterprises] especially face a funding problem,” said Guldem Atabay, an Izmir-based independent economist. It is likely the number of loan defaults and company failures would be far higher were it not for Turkey’s shadow financial system in which suppliers and buyers provide financial support for each other, largely through post-dated cheques, Tunca explained. Cheques remain a foundational feature of Turkey’s SME sector, which is concentrated in the AK Party heartlands of Anatolia. “SMEs are really suffering due to high inflation – their income in nominal terms is increasing, but not as fast as their costs,” said Atabay. “There’s a cash shortage, so SMEs pay each other via cheques that aren’t deposited immediately. "It’s a cultural thing outside the financial sector. When costs are rising rapidly, they delay their payments willingly, but it’s not sustainable or healthy for the economy.” Turkey’s informal economy represents 31.2 percent of GDP and is the second-largest by that metric in the Middle East and North Africa, according to World Economics. The IMF defines the informal economy as comprising activities that have market value and would add to tax revenue and GDP if they were recorded. A 2017 central bank report estimated Turkey’s shadow banking economy at $50 billion, with around two-thirds – or $32 billion – derived from finance, factoring and leasing companies. Money market fixed-income and balanced funds generated $13 billion and intermediary activities $5 billion. Loan defaults Separately, the number of retail customers with unpaid consumer loans hit an 11-month high of almost 114,000 in July, and those with unpaid credit card debts reached a 10-month peak of more than 96,000. These trends may not yet trouble Turkey’s major publicly and privately run banks. The industry’s net customer loans more than doubled from 2020 to 2022 to 5.8 trillion lira, according to data from S&P Global that shows problem loans grew more slowly. As such, the ratio of problem loans to gross loans fell to 2.7 percent in 2022 from 5.3 percent in pandemic-hit 2020, S&P estimates, although bank analysts warn that publicly owned banks in Turkey are likely to be underreporting loan defaults. Three of Turkey’s four largest banks by assets are state-run and have received a series of capital boosts from the country’s sovereign wealth fund to enable them to lend more. From the end of 2022 to August 18 2023, retail credit card borrowing nearly doubled, vehicle loans expanded by almost 75 percent, personal loans by 32 percent and commercial loans by more than 63 percent. Meanwhile, borrowing rates have soared – to 47 percent for personal loans and 31 percent for commercial loans, which could spell trouble for banks, even if rising rates expand their net interest margins. Garanti Bank, Turkey’s second-biggest privately controlled bank by assets and majority owned by Spain’s BBVA, said its non-performing loan ratio was 3.4 percent as of June 30, up 100 basis points versus March 31. Sector-wide Lira-denominated non-performing loans were just under 163 billion lira as of July 31, banking regulator data shows, up from 151 billion lira a year earlier. Banks have restructured and rolled over a sizeable chunk of their lending and so it is difficult to know the real level of non-performing loans, Atabay added.