Rapid credit expansion
There is bulk of evidence that rapid credit expansion is risky.
The pace of expansion of bank credits is really dazzling. Today I want to examine the movements in credit volume net of price movements from 2004 to present. I started the period of analysis with the year 2004 as it is the year when the credit volume of the banking sector hit severely by the 2001 crisis re-achieved the pre-crisis level in real terms.
The figure below shows the movements in the real value of overall credits and consumer loan volume as monthly figures. The latest data for overall credits was announced for September 2010 and that of consumer loans was announced for November 2010.
Pace of increase especially high for consumer loans
Pace of increase especially high for consumer loans: the increase corresponds to 562% or 6.6 times. The rate of increase for overall credits is 366 percent or 4.6 times: though high enough considered alone it becomes quite moderate compared to consumer loans. The net real increase in GDP over the same period is 36.8 percent. The figures are far from being comparable.
But despite the rapid increase in credit volume, the ratio of credit value to GDP is not that high: 46 percent. The latest financial stability report by the Central Bank compares Turkey with the European Union countries in terms of the ratio of credits to GDP. The report reveals that Turkey has the lowest credit/GDP ratio and in many countries the ratio is above 100 percent.
Rapid credit expansion is quite risky
Low credits to GDP ratio imply that consumers and firms that do not have access to foreign funds are to a large extent excluded from the credit markets. We evidently want a rise in total amount of credits; but more on the basis of the rise in domestic savings rather than through foreign funds (external debt).
But is it not contradictory that the Central Bank seeks to ease the rise in credit expansion despite the low level of credits as a ratio to the GDP. First, there is bulk of evidence that rapid credit expansion is risky. Secondly and more importantly under the current global circumstances, rapid short term foreign fund inflows are witnessed which pushes up both credit demand and credit supply. It is not healthy and safe as it is short tem.
I wish you all a happy year.
This commentary was published in Radikal daily on 30.12.2010
