Turkish Central Bank lowers required reserve ratios for banks with high loan growth

ISTANBUL: Turkey's Central Bank said on Monday that it was reducing the required reserves ratio for banks with loan growth rates above 10% and raising the return on those reserves.

It said the move was aimed at ensuring that reserve requirements were used more flexibly and effectively.

But the lira weakened after the announcement as economists said rapid loan growth could fuel imports and swell the current account deficit, long a headache for energy import-dependent Turkey.

For banks with a loan growth rate of 10%-20%, the central bank lowered the reserve requirement ratio for deposits of up to a 3-month maturity to 2% from 7% previously. It lowered the ratio to 2% for deposits of up to a 6-month maturity from 4%.

The move marks a shift towards linking reserve requirement to growth in loans.

The new measure excludes deposits and participation funds with one year or longer maturity and other liabilities with longer than a three-year maturity, the bank said.

The central bank also said it had raised the interest rate on lira-denominated required reserves to 15% from 13% for banks with a 10-20% loan growth rate, and set it at 5% for other banks.

The lira weakened following the announcement, as investors interpreted the move as encouraging banks to speed up expansion of their loans.

It stood at 5.6560 against the dollar at 1502 GMT, weakening from around 5.5990 before the announcement. Earlier, it declined as far as 5.6640, it weakest level since July 29.

Following a currency crisis that wiped nearly 30% of the lira's value against the dollar last year, Turkey's economy tipped into a recession.

Domestic demand has weakened significantly, leading to lower loan growth in banks and a fall in imports, while exports rose. That has narrowed Turkey's current account deficit, which had previously been one of the main concerns of investors.

William Jackson, chief emerging markets economist at Capital Economics, said Monday's move worried investors because high rates of loan growth during recent Turkish economic recoveries had lead to higher imports and a widening current account deficit.

"The move essentially reduces the required reserve ratios for banks with higher loan growth. I think it is worrying, if we consider that what is needed is weak domestic demand and growth lead by exports," Jackson said.

The government has taken measures in recent months to boost loan growth in state banks.

The loan growth rate will be calculated in each reserve requirement period and banks within the 10-20% rate will be subject to the related requirements for the following three months, the central bank said.