Focus: Dealing with NPLs

A Loan Path

Jan. 8, 2020

Burdened by non-performing loans, the latest in a series of economic woes, Turkey's financial institutions are looking for a compromise.

As a result of the lira's sharp decline in 2018, many of Turkey's biggest corporate borrowers found themselves unable to meet their hard-currency debt obligations with their slashed lira receivables. These borrowers' loans sit on the balance sheets of Turkish banks, where they are beginning to sour. Formally known as non-performing loans (NPLs), this debt accounts for over 4% of all loans in the banking sector, and many estimates see them doubling before the end of 2019.
Throughout 2019, the Ministry of Treasury and Finance has mulled different plans to support banks' restructuring of loans to the energy and construction sectors. However, talks between banks, the government, and other stakeholders have progressed slowly. No party wants to commit itself to a drastic course of action in the hope that the economy will bounce back soon.
In such times, bankers and other concerned parties have to settle for one of two solutions—they can either sell the NPLs to an external asset management company—at a lower price than the loan's original worth—and be rid of them forever or find new repayment arrangements that work for both sides.
Bad loans—as NPLs are often informally called—are sold at prices ranging from 5% to 80% of the total sum, depending on the debtor's profile and the loan's age, among other factors. Rather counter-intuitively, certain bad loans are seen as a hot commodity in the world of finance, with more investors keen to buy them than one would imagine.
International industry players such as Goldman Sachs, Deutsche Bank, and the European Bank for Reconstruction and Development (EBRD) have shown some interest in purchasing Turkish NPLs, though it is not clear whether the Turkish side is ready to sell its bad loans in bulk. Real estate, tourism, and energy sectors typically have bad loans. Japan's Orix Corp and American equity firm Bain Capital at some point seemed to be keener than other bidders to get their hands on Turkish NPLs, though no deal with either company has been finalized so far.
There are some legal obstacles in the way of trading bad loans, too. Local laws do not allow foreign companies to directly buy NPLs, which forces potential buyers to first set up a firm in Turkey or form a partnership with Turkish financiers. This gives an advantage to EBRD, as it is a 12% shareholder and former investor in a major Turkish asset management firm, Hayat Varlik. Thus far, EBRD has offered TRY100 million to Hayat to spend on the purchase of NPL portfolios.
In June 2019, Yapı Kredi, a private bank with nationwide operations, reportedly sold over TRY917 million worth of NPL debt to Turkey-based asset management companies at a discounted price of TRY26 million. Ostensibly, although no major deal has been cut for the bulk selling of NPLs, a number of smaller deals have been signed.

Both restructuring and the reselling of loans to third parties, however, mean losing money as far as banks are concerned. However, some banks are convinced restructuring is the lesser of two evils.