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Banks gave the least needy Central Bank interest-free loans

Sep 16

Banks gave the least needy Central Bank interest-free loans

Ten percent of notes due got rescheduling approval

Figures published by the Central Bank (BDL) confirmed that banks have not properly complied with Circular 552 that required them to cover overdue debt payments as well as payments of salaries and operational expenses by distressed clients during the four-month period March-June 2020.

Out of $400 million interest-free loans advanced by BDL to banks, only $104 million were used to issue new loans to cover salaries and operational expenses (25 percent of the total), according to a BDL statement. The balance ($296 million) was used to replace up to four months of bank clients’ overdue notes by new interest-free debt amortized over up to five years. It is equivalent to ten percent of all debt notes that were due during the four-month period.

The original intent of the Circular was to provide coverage to all individual and business clients distressed by the impact of Covid-19. In practice, only those who were able to provide tangible guarantees were allowed to benefit from the long term interest subsidy and liquidity, clients who need it the least. According to a study published in June by InfoPro Research, banks rejected 92 percent of applications ( BDL circulars 2020.pdf ). They funneled the funds to their prime clients, who can afford to pay regular interests, thus helping them free load on public (and depositors’) funds.

Out of the loans provided by BDL to banks, 18 percent were denominated in lira and the remainder in dollar. Beneficiaries of the facilities, both individuals and companies, totaled only 29,000 out of hundreds of thousands of borrowers. The funds were disbursed as follows: Settlement of due notes 74 percent, payment of salaries 11 percent, and financing operational costs, production needs, and working capital 15 percent.

CALCULATIONS

The outstanding loans of commercial banks to the resident private sector stood at just above $40 billion at the end of February of this year, with an average maturity of 4.8 years.

This means that the average monthly due amount is around $708 million or $2.8 billion for the four-month period.

New loans ($104 million) therefore constitute a mere 0.26 percent increase in the banks’ loan portfolio, a tiny fraction of interest earnings from debts on the banks’ books.

The refinancing of maturing bills ($296 million) is equivalent to ten percent of all notes due during that four-month period ($2.8 billion).

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