By Ebru Tuncay
ISTANBUL, Sept 17 (Reuters) - Turkey's banking watchdog (BDDK) said on Friday it will not extend a grace period on classification of troubled loans beyond Sept. 30, ending a regulation adopted at the start of the COVID-19 pandemic.
The BDDK adopted the rule under which banks delay shifting Stage 2 and other souring loans into the non-performing loan (NPL) category in early 2020, in order to help businesses struggling with cash flow.
Turkey's NPL ratio dropped to 3.7% at the end of July, from 5.36% at the end of 2019, due to the forbearance measure on loan classification and a spike in cheap credit to boost economic recovery.
One source close to the matter told Reuters before the decision was announced that the BDDK met with banks, which said they did not want to measure to be extended.
"Banks (didn't) have a request on another extension of the period. The general tendency of banks and the BDDK (was) for NPL periods not to be extended," the person said, requesting anonymity due to the sensitivity of the matter.
Eko Faktoring economist Arda Tunca said that banks did not want the measure to be extended because it obscured the problems with NPLs.
"The forbearance measures ultimately hinder credit, and they cover up the accumulated dirt," he said, adding that there had been "political will" to extend the measure until now.
Bad loans have weighed on the financial sector since the 2018 currency crisis exposed the vulnerabilities of Turkish energy and construction companies after years of leveraging up on cheap foreign credit.
Proposals to address the bad loan problem, including transferring the loans to a separate fund, establishing an asset management company, have fallen short in recent years.
Filippo Alloatti, Head of Financials at Federated Hermes, said the end of forbearance would not automatically translate to higher NPL ratios.
"Monetary policy going forward will play a role, (especially) if (the Turkish central bank) were to embark on an easing cycle," he added.
Turkey's central bank is expected to keep its one-week repo rate unchanged at 19% next week according to a Reuters poll, despite increasing concerns about possible near-term monetary easing after Governor Sahap Kavcioglu's recent comments.
(Additional reporting by Tom Arnold in London; Writing by Ali Kucukgocmen; Editing by Ece Toksabay)
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