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Credit guarantee mechanism is necessary but not sufficient alone
We can sure discuss whether the decision was in time or late. However, we must not be mesmerized by the passion of this discussion. At this point the only thing that matters is that a series of measures have been introduced. It is a better thing that a series of measures to tackle the crisis are introduced compared to the case where no measure is introduced. Furthermore, the portrait drawn by Ali Babacan, State Minister in Charge of Economy, in speeches he delivered since the last weekend is highly favorable. It creates a nice difference. It is good to discuss collectively a problem felt all around the country clearly and with courage. Today, let us address the measures that are being introduced. And let us begin with the credit guarantee mechanism, which in our consideration must rank the top in terms of fitting to the purpose. This measure is necessary but not sufficient in our consideration. Let us see why.
What is this credit guarantee mechanism? Basically, it is a mechanism which will restructure the credit payments that the corporate sector has troubles in making and in the meanwhile will help the corporate sector in using additional credits. It will contribute to fixing the cash balance of the corporate sector which deteriorated due to the crisis. Therefore, the mechanism is good.
How will it work? Think of a company, which assuming that it will sell 100 cars per day drummed up the business and obtained a credit assuming that it can repay it under the current conditions. Since the number of the cars sold per day fells to 35 due to the conditions posed by the crisis, the company will fail to make the credit payment in time. As cash inflows are lower than expected, the thing that must be done is to defer the contracted cash outflows. This means restructuring the credit. Credit restructuring will pose the necessity of additional guarantees. This is where the CGA steps in. a Credit Guarantee Agency (CGA) provides guarantee on behalf of the borrower company to the bank that will restructure the existing credits. As the regulation to be introduced suggests, CGA support will cover new credits as well as restructured and additional credits. Therefore, it can also be used for restructuring existing loans not deemed non-performing. The source of the guarantee provided by the CGA will be the fund allocated by the Treasury for the CGA. In that case, 65 percent of the credits restructured by banks will be covered under Treasury guarantee. And bank will undertake 35 percent credit risk. The regulation is favorable for both companies and banks.
Who will benefit from the mechanism? According to the announcement made, the regulation will be directed to SMEs. SME credits constitute 23 percent of total credit stock and one-thirds of commercial corporate credits. Therefore, the first point to be stated is: Credit guarantee mechanism does not cover the complete credits stock of banks. The second point following the first one is: rate of non-performing credits in total commercial and corporate credit stock has increased from 4.3 percent in March to 4.7 percent in May. The rate for SME credits is 6.2 percent even for March. Number of SMEs credit worthiness of which has deteriorated has increased from 125 thousand in September to 157 thousand in March. These figures imply that the tendency to become non-performing credit is higher in terms of SME credits and that the regulation is not that off-track. Third point is the requirement of a record showing that the company to be provided with guarantee does not have tax and insurance delinquency. This will reduce the number of companies to benefit from the mechanism. Nonetheless, this is a fair requirement. Public sector provides a facility for those who have fulfilled their liabilities. This way, companies carrying out registered activities are "in a sense" rewarded. Let us emphasize why such regulations are of importance nowadays after examining the public budget.
Who will decide which credits will be restructured? Of course the bank alone will decide this. This is the good aspect of the system. Rationing will be decided with a market-oriented method. It will not be easy to involve political concerns in the process. Of course it will be wise to wait and see the design of the system.
So, is this regulation sufficient? The regulation is necessary but not sufficient for two reasons: First, apart from the SME credits there are/will be other credits in balance sheets of banks that must be restructured. After all, rate of non-performing loans also increases in case of other credits. A wholesale regulation working in "it applies for this, it does not apply for this" style will eventually create a negative impact on the transparency of banks' balance sheets. I guess Banking Regulation and Supervision Agency (BRSA) will know this better than anyone else.
What do we always say? Banking sector of a country cannot perform well if the corporate sector does not perform well. Risk of non-performing credits in balance sheets will affect negatively the behaviors of banks in all areas for instance when restructuring credits. It is not possible to ensure a healthier way of thinking among banks unless a signal that the burden can be removed of the balance sheets of banks when necessary is given. Otherwise, as in the saying 'the tongue always returns to the sore tooth', banks will be bound hand and foot when making decisions. They will constantly be thinking about credits apart from SME credits. The rise in riskiness of credits apart from SME credits will always be top priority item in the agenda of banks. There is no other possibility. If you divide banks' credit portfolio into two and say "the regulation applies for this but does not apply for that", it will not be a regulation that fits to the purpose. Of course it is better than nothing, but it will not serve to the purpose completely. This is the first point.
Second point is: For a company, credit payment is not the only contracted cash outflow item that must definitely be paid. There also are payables to the public sector. It the cash that an SME has received by credit restructuring will be dispossessed in exchange for the receivables of public, the efficiency of the operation will be reduced. It will be wise to pay regard to this issue when designing the regulation.
The step being taken by the government is in parallel those taken by a number of governments all around the world. Of course these are not revolutions or reforms. There are serious steps that deserve being discussed and criticized. There lies certain though in the foundation of the step. Therefore, this is a favorable step.
This commentary was published in Referans daily on 11.06.2009