Ordinary citizens are not exactly keen to know what is going on in financial markets. Because they deal with the payment mechanism rather than the money-credit one. They do not usually have liquidity problems unless they are struggling with credit card debt, POS device payments or having difficulty collecting their receivables.
However, there is a quiet battle between banks and those who are responsible for managing the national money. While loan rates do not decline as a result of consecutive cuts in policy rates, the fact that the regulatory authority is changing the rules or introducing new rules constantly causes troubles to banking professionals. Every day, they are faced with high costs of funding, complex operational calculations, and new parameters arising from ever-changing rules.
In fact, private banks now focus on the retail banking, where they can easily distribute the risks, rather than the commercial or corporate banking, since they are determined to be cautious until the end of the year. Banks used to call people all the time to sell various products, and now they are trying to sell money both digitally and over the phone. Even though the source of individual and commercial loans consists of mostly deposits and that of corporate loans is consortium credit lines, bankers do want to take calculable risks in an environment where the cause-and-effect relationships seem to be distorted. The cost of the loans and the way they are provided are determined by the composition of the funds, however loans offered to customers for prices that are twice as expensive vis-à-vis very low deposit rates cause private banks to experience something they have never experienced before.
Due to the currently implemented policies, the obligation of the credit institutions to compete has almost disappeared. They strive to offer loans and other products only to customers they have known and trusted for a long time. And they can also bend their rules and principles to attract other institutions’ loyal customers. If the government introduces a new CGF, some banks may even choose to close the loans they think they will not perform. In the meantime, others wait for the upcoming elections while silently watching some of their loan portfolios shake hands with their competitors.
“Relative Price Equilibrium Disrupted…”
Obviously, “waiting for the elections” should not be the solution to this situation. First of all, it is necessary to admit the existence of inflation and to liberate the money market. Before doing this, it would be nice to enhance our foreign currency reserves, but we should have faith in the floating exchange rate regime. That is to say, we cannot manage the process properly without bringing inflation rates, interest rates, and exchange rates closer to each other.
That is the reason why banks, who know that future pricing will be very different from today’s, hesitate to give out loans.
If, in a country, there is a huge gap between inflation rate, interest rates, exchange rates, and the price of energy, food and essential products, the solution must be to eliminate this situation. In Turkey, interest rates are low but neither people nor businesses can easily take out loans, government does not allow the exchange rates to go up, but institutions cannot buy currency as they wish, there is a major gap between inflation and the cost of living, and worse, businesses have given up their profits to retain their employees. All this goes to show that we need a big policy change.
The truth is, Turkey has been in economic trouble since 2018 and the government is delaying recovery by putting pressure on everything from the money market to the factor market. What the government needs to do is to lead the transformation in the industry, energy efficiency and exports, instead of dealing with the consequences all the time.
The strategy for the next process should include fundamental restructuring, and we need to be patient enough to achieve it. Continuously intervening in exchange rates, interest rates and price formations is just like tampering with the scoreboard in a match we lost. Thus, the result never changes.