The troubled Turkish credit card industry is bracing itself for a shock, as the government and central bank move to cut the country’s debt. Turkey’s banking regulator is targeting credit cards and consumer loans, in the hope of clamping down on rising debt levels, writes Ellie Chambers
A culture of high credit card limits and payment by instalments has left Turkey with high consumer debt levels. According to the Banking Regulation and Supervision Agency (BDDK), overall loan volume reached TRY1tr this September, an increase of around 46.5% since 2010.
Consumer credit card debt now totals TRY82.3bn, up 88% from 2010 figures and the BDDK says that the volume of annual payments on credit cards amounts to TRY34.6bn.
On 16 July, the first rumblings of government discontent with the cards industry were heard in forceful remarks by Turkey’s Prime Minister.
Recep Erdogan lashed out at banks, calling them insatiable and accusing them of exploiting the “poor”. He warned consumers to use cards for payments but not to treat them like loans by allowing the balance to roll over at the end of the month and accumulate interest.
He said: “Those credit cards: Don’t have them. If everybody spends as much as they banks want, they would not even be able to earn that income. They could never be satiated.”
Meanwhile, Minister of Customs and Trade Hayati Yaz?c? said on July 18 that there were 56m credit cards and 95m debit cards registered in Turkey according to official data for May.
He went on to say that credit cards accounted for the major part of consumer loans.
In August, the banking watchdog announced that it would be bringing in new regulations to restrict consumer spending on credit cards.
This was followed in early October by Reuters reporting that a source close to the government had confirmed that the new legislation was nearly at the draft stage.
He said: “The prepared draft is expected to be put on the table during the planned weekly meeting of the banking watchdog this week.”
On September 14, the Central Bank of the Republic of Turkey (CTMB) announced the first stage of the assault on credit card debt.
In a press release, the central bank announced the lowering of maximum contractual and overdue interest rates on credit card transactions in Turkish lira to 2.02% and 2.52%, respectively, while the maximum interest rates to be applied to credit card transactions in US dollar and Euro were left unchanged.
The press release said: “The monthly maximum contractual interest rate to be applied to credit card transactions are set at 2.02% for the Turkish lira, 1.70% for the US dollar and 1.64% for the Euro.
“The monthly overdue interest rates are set at 2.52% for the Turkish lira, 2.20% for the US dollar and 2.14% for the Euro, effective 1 October 2013.”
More recently, on the 26 November, the BDDK announced that it would limit the use of monthly instalments to pay off loans and increase minimum credit card repayments.
According to the current draft legislation, due to be implemented on 1 January 2014, credit card limits must not exceed twice the monthly income of cardholders in the first year of ownership, after which it will increase but with an upper limit of four times monthly income.
The legislation also stipulates that cardholders whose credit card limits are up to TRY15,000 must pay 30% of their debt as a minimum payment rather than the 25% they had to pay previously.
Cardholders whose limit is between TRY15,000 and TRY20,000 must pay 35% of their debt rather than 30%.
In terms of consumer loans, payments in instalments will be restricted to six months for electronics, jewellery and car rentals and 12 months for domestic appliances and furniture.
Payment in instalments will not be allowed for grocery store or gasoline purchases. The draft legislation also restricts consumer credit to a 36 month loan.
Commenting on the impending legislation, Finance Minister Mehmet Simsek warns the country to expect only modest growth until national debt returns to more normal levels.
Simsek says: “Turkey should continue on its path with moderate growth rates until the current account deficit is lowered permanently.
“We are now intervening more when we are making regulations, but with macro-prudential measures, which don’t limit competition.”
Meanwhile, some industry observers have criticised the government’s actions. The head of Turkey’s Consumer Association (TÜDER), Ayd?n A?ao?lu, says consumers, markets and banks will be negatively affected.
A?ao?lu claims that 88% of the existing cards in Turkey will have to be cancelled because they do not comply with the new regulations.
He says: “50m of 57m credit cards will be obliged to be cancelled from the beginning of this limit regulation. Because the consumers shopped in instalments, they obtained high limits without questioning their income documents.”
He adds that consumers, used to living with high credit card limits, will be shocked by the debt spiral without their cards and that the mass cancellation of cards will cause the markets to go into shock and stagnate.