Can We Guarantee Growth with Cheap Financing?..

The CBRT’s decision last week did not come as a surprise to me, nor did it to everyone, I think. Considering the fact that the CBRT has not acted proactively for a very long time, the result was as expected.

As the Central Bank’s decision to continue with cheap financing is still valid, I decided to make a brief analysis The cost of loans provided within the scope of the Credit Guarantee Fund is around 16-17% per annum. We observe that private are making great efforts for the Fund, which was introduced to support SMEs. Considering that inflation may drop from 60% to 30% in the next two years, it may be a quite smart decision to take out loans at these rates.

On the other hand, companies using revolving loans are exposed to much higher interest rates and are making very high payments in absolute terms given the annual compound interest rates. The interest rates on closed-end loans and open loans offered by some banks are almost as high as the factoring interest rates, fluctuating between 21% and 25%. Companies that find today’s interest rates high and do not want to commit themselves on long-term debt actually make higher repayments in total when they take out loans at short intervals.

Speaking of factoring interest margin, I call the factoring market “the market of realities”. Because those who cannot go to the bank but want to get quick financing always tend to resort to factoring. In factoring market, the average maturity is 120 days, and the interest rate per year is around 35%. In other words, companies that constantly fund themselves from this market leave TRY 35 TL of their TRY 100 earnings here. In terms of profitability in the sector, it can be noticed that everyone is “fighting for survival”.

“Is Funding Really Cheap?..”

The issue of whether raising policy rates will cause the loan interest rates offered by financial institutions to climb higher needs to be seriously discussed.

For example, everyone wonders whether non-bank financial institutions will increase their loan interest rates if policy rates rise by 1 bps. According to most financiers, if this happens, the gap will be closed only a little bit.

As a matter of fact, everyone seems to be happy with their life. Banks do not seem to object to this policy as long as they keep making profit. Although exchange rates are calmed down by selling from reserves, the risks are ignored because there is a large number of people who are satisfied with the situation. In short, an increase in policy rates would not lead to an increase in loan rates, but it would decrease a little the profits of financial institutions. As exchange rates remain calm, the discussions about the new burden arising from the ‘foreign exchange-protected deposit accounts’ scheme will be over.

I don’t know how long this situation can be sustained. The only thing we can do is to wait and see since the “We’ll cross that bridge when we come to it” approach is unfortunately a popular approach in Turkey.