Lira loans must constitute less than 25 percent of deposits

The net value of the banks’ outstanding loans to the private sector in lira must not exceed 25 percent of their customers’ deposits in the same currency, according to a recent circular issued by the Central Bank (BDL).

The banks should settle the matter by the end of 2019. Once the deadline has elapsed, an amount equivalent to the loans exceeding the 25 percent ratio must be deposited with BDL at zero-interest rate until this irregularity is resolved, according to the circular.

The average loan-to-deposit ratio for lira in the local banking sector is around 34 percent.

Banking expert Joe Sarrouh said that the decision is part of BDL’s monetary policy to manage the lira liquidity amid the current circumstances.

He said that this decision creates a balance between lending in lira and lending in foreign currencies. “This encourages lending in dollars, which is, from the borrowers’ vantage point, less costly than lira loans because the interest rate on the national currency is much higher,” he said.

According to Sarrouh, available dollar liquidity is high enough, especially amid the current economic slowdown.

Outstanding loans to the private sector stood at more than $62 billion at the end of 2017.

The banks will also seek to boost their lira deposits in order to reach the 25 percent loan-to-deposit ratio. This would increase demand for the national currency and consequently interest rate on the lira would rise further, according to a person familiar with the matter. Bank Audi is offering interest rates of up to 15 percent on lira deposits with a five year maturity.

BDL’s decision is also expected to affect the dollarization rate of deposits and loans. The dollarization rate of loans will increase while that of deposits will drop. The dollarization rate of loans has been in a downtrend in recent years. Earlier this year it fell below that of deposits for the first time. The decline in the dollarization rate of loans resulted from an increase in lira loans driven by BDL’s incentives.

The extra liquidity resulting from reducing the lira loans could be used in many ways. It could be deposited with the Central Bank, or used in interbank transactions or for buying treasury bills.