Analysis of nonperforming loans in Turkish banking sector and policy recommendations for implementation

Banks? main function is to supplied funds, which they collect from savings owners, to borrowers as credit and thus to obtain interest and commission income. There is a direct linkage between banks? expected profitability and asset quality and the rate of non-performing loans. Thus, non-performing loans, which are defined as return delay with broken return agreement between bank and borrower and probability of loss, not only decrease profitability but also damage the asset quality by decreasing assets? value. Increasing non-performing loans ratio firstly effects the bank which supplied the loans. The bank which can?t receive credits on time, can?t avoid fulfilling its liabilities on time; therefore, the bank faces with liquidity problem and all these increase the fiscal structure problems by deterioration on assets? quality and profitability. Increasing non-performing loans in banking sector causes decrease in the credits to real sector, therefore real sector firms face financial shortage. On the other hand, being taken legal proceedings against non-performing loans can cause lots of firms going bankruptcy, as a result of that unemployment numbers can increase. As it is seen, problems in the banking sector cause economic and social problems by effecting both real sector and overall economy. This study was prepared with consideration of non-performing loans? importance in banking sector. In this context, loans have been divided into two parts and then credit types and sectors which have credit risk intensively and changes in non-performing loans ratios have been studied in sub titles. Banking and sector data which is used in this study, is fundamentally suppliedd from The Banking Regulation and Supervision Board?s interactive bulletin and reports and The Banks Association of Turkey?s reports and publications. With the data obtained from the analysis in order to decrease the credit risk, measures and implementation proposals which can be taken by both banks and governmental institutions, are emphasized. On the other hand, policies to resolution of non-performing loans reserve are emphasized, because despite of the taken measures, it is impossible to get rid of credit risk at wholly and especially in the economic crises period non-performing loans ratios increase extremely high. In this framework, application proposes are given for both governmental organizations and banks. In the first chapter of this study, credit and non-performing credit concepts have been discussed. In this scope, firstly ?credit? and the basic credit types have been defined. Then, credit?s constituents and credit principles have been clarified. In the second part of the first chapter, non-performing credit concept has been explained and the reasons of its occurrence have been defined. Reasons of non-performing credit?s occurrence have been told in two separated part and the effects of non-performing credit have been explained. In this context, effects which are appeared in the creditor bank, banking sector, real sector and the country?s economy, have been briefly explained. After the explanations of non-performing loans? reasons, chief resolution methods have been mentioned. Politics which banks will be able to pursue in the situation that credit became non-performing, have been explained below three titles: continuing to work with the customer, taking legal proceedings against non-performing loans and transferring non-performing loans to asset management companies. In the second chapter, non-performing loans and banking crises have been emphasized, and non-performing loans? numbers with numerical table during the crises environment have been mentioned. In the study, ?October 2000-Februray 2001 Crises, Asian Crises and USA Mortgage Crises? have been selected as examples of crises. In this chapter, firstly, the term of risk has been described, and various risk terms have been mentioned. Within this scope, chief risk types in the banking sector have been emphasized and ?liquidity, interest rate, exchange rate and operational? risk types have been mentioned. The credit risk, which is very important for our subject, has been explained in detailed. In the explanations about credit risk, firstly definition, extent and factors which cause credit risk have been emphasized. Then, implementations for an efficient credit risk management have been mentioned. In the second chapter, lastly, non-performing loans numbers have been analyzed with the context of sample crises. In this scope, at first, banking crisis has been defined and reasons of this crisis have been explained. After that, selected crises? occurrence period and causes have been mentioned briefly, and in the crises periods non-performing loans reached values within a numerical table have been included. In the third chapter, Turkish banking sector?s selected balance sheet components have been analyzed. In this context, firstly, banking sector?s size of asset, credits? and non-performing loans? numbers have been analyzed. After that, credits have been separated into two main parts as ?corporate credits? and ?consumer credits?, then non-performing loans ratios in which credit types and sectors were above the average ratio, have been analyzed. In the analysis of corporate credits; aforementioned credit type?s development, share in the total credits, non-performing loans ratios, its share of non-performing loans and SME credit?s developments and non-performing loans? numbers in this credit type have been analyzed. Regarding the corporate credits, lastly, sectors? non-performing loans degrees and the share of these sectors? non-performing loans in the total have been analyzed. In this scope, 5 sectors which have the greatest share in non-performing loans reserve in the end of 2011 have been analyzed. ?Construction?, ?textile and textile products?, ?wholesale trade and brokering?, ?agriculture, beverage and tobacco industry? sectors are in this content of analysis. In consequence of the analysis, it has been seen that both supplied and non-performing loans? significant part had concentrated in specific sectors and the non-performing loans ratios had differed significantly among sectors. Furthermore, in the research it has been seen that non-performing loans in the specific sectors had been keeping its high degree and had been fluctuating considerably high above the mean. As to analysis of consumer credits, numbers of supplied credits and non-performing loans ratios have been examined in subtypes. In this examination, in which type of consumer credits, non-performing loans ratios had been above the mean in context of ?mortgage, vehicle credits, personal finance credits, other credits and personal credit cards?. After the analysis, it has been observed that non-performing loans ratios had been fluctuating above the mean in specific consumer credit types and non-performing loans ratios have been differentiated significantly in subtypes. Consequent of the third chapter, consumer credits have been analyzed as consumers? profile. In this context; consumer credits? distribution as consumers? income, occupation and age groups have been studied. Obtained findings have showed that consumer credits had densified on low income group and low income group had tended towards consumer credit to satisfy its consume necessities, on the other hand upper income group had used their wealth and income to satisfy its consume necessities. Moreover, in our country by December 2011, approximately half of the consumer credits have been supplied to wage earners who have obtained constant salary, however consumer credits which supplied to self employed people, have been nearly 10% degree. In the research lastly, it has been seen that approximately half of the consumer credits had been supplied to people in the range of 36-55 ages- in other words middle aged group- and consumer credits, which have been supplied to 18-25 aged young people, had constituted 5%. In the forth chapter of the study, reducing and liquidation of non-performing loans have been told and then, measures and implementation proposals which should be taken into account by both governmental institutions and banks, have been stated. Implementation proposals which have been stated in this chapter, have been prepared by using the findings of analysis in the third chapter. The forth chapter has been structured over two fundamental part and in this first part possible politics have been emphasized in order to reduce non-performing loans. Within this scope, measures and implementation proposals which can be taken by governmental institutions and banks, have been explained separately in the context of corporate credits and consumer credits. In order to reduce non-performing loan ratios, measures which can be taken by governmental institutions, have been explained within that framework of implementations as; sectoral credit limitation, diversification of reserve ratios as sectors, changing over to corporation based rating, developing and extending the scope of Credit Guaranty Fund, independent expertise firms being selected by central institution in mortgages, providing only one limit to credit cards. On the other hand in order to reduce non-performing loan ratios, measures which can be taken by banks, have been explained within that framework of implementations as; sectoral risk analysis and credit policy, analyzing non-performing risk with respect to assurance and reinforcing assurance, reducing risk of densifying in big amounted credits. In the second part, politics which can be implied by governmental institutions and banks when non-performing credits? amounts threaten the banking system, have been explained. The first implementation proposal for governmental institutions has been to found a central asset management corporation which is founded with government?s leadership in crises periods and which gives liquidation to sector by taking banks? non-performing assets. And the second implementation proposal has been to establish legal structure for gathering banks and borrowers to make an agreement for restructuring the loans. The first implementation proposal for banks has been to improve the implementation which is known as Istanbul Approach in our country and to put into practice this implementation during the crises period. The second implementation proposal has been to transfer non-performing loans reserve to established central asset management corporation, therefore banks can focus on their real functions. As to conclusion part, study has been summarized briefly, findings and implementation proposals for these findings have been evaluated.