96 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform
TURKISH BANKING CRISIS AND THE DEBT
RESTRUCTURING PROCESS: ISTANBUL APPROACH
Kivilcim Metin-Ozcan* Kenan �i�ek**
ABSTRACT
Turkey experienced crises in November 2000 and February 2001, both due to the structural problems of the banking system and also international circumstances. Financial institutions were affected negatively while the real sector started having difficulty in paying debts. As a result, the balance sheets of some banks were deteriorated because of the soaring non-performing loans which inevitably required a solution. The remedy to the problem was the Istanbul Approach, a Financial Restructuring Program that was inspired by the London Approach and based on the experiences of Asian c9untries. The program was launched, even though it still suffers from the Jack of laws regarding bankruptcy and other related areas. However, once these changes take place, it is expected to be more efficient.
Key words: Turkish Banking Crisis, Debt Restructuring, London Approach, and Istanbul Approach
Jel: F34, C35
* Corresponding author, Bilkent University Department of Economics, Bilkent/Ankara, Turkey 06533, e -mail:
Kivilcim@bilkent.edu.tr
**
Banking Regulation and Supervision Agency, Atatlirk Bulv�r.1 No: 191 B Blok 06680 Kavakhdere/Ankara-TurkeyTurkish Banking Crisis a11d the Debt Restructuring Process: istanbul Approach
I. INTRODUCTION
97
Countries that were adversely affected by crises have long sought for alternatives in order to solve problems in the banking sector. After the Asian crises, countries in the region started to employ restructuring programs to enhance both real and financial sectors [see Dziobek and Pazarba�ioglu, ( 1998), Lindgren et.al.,( 1999), Pomavalai (l 999) and Mako (200 l )
J.
The high level of non-performing loans required an even more urgent solution. In such countries, public authorities assumed an important steering role in the restructuring of institutional debts. Particularly in Korea, the state took a decisive role in the restructuring process, such that new agents were established to i.ssue the general principles to be followed by all parties f (see Beck (1998 and 2000), Balino and Ubide (1999)). These agents, even though were responsible for every phase of the debt restructuring process, had no legal authority. In addition to institutional restructuring, legal encouragements and precautions were also put into effect in order to increase efficiency and competitiveness in the financial sector. Given other countries' experiences, it is possible to state that the restructuring schemes that were inspired by the London Approach have yielded positive outcomes for the banking and real sectors as well as for the economy in general (see Meyerman (2000)).When we consider the frequency and the damage of the financial crisis faced by Turkey during the last ten years, we see that the detrimental effects on the economy increased over time. Financial sectors, especially the banking sector in Turkey, experienced these crises because of international economic developments as well as inherent structural weaknesses. The contagious global financial crises of the 1990s, which were mainly caused by financial integration, caused significant losses for many countries and financial systems. It is commonly argued in the literature that the principal cause of the 1997 Asian crisis was to a large extent the prospective deficits associated with the implicit bailout guarantees given to failing banking systems. Following the Russian Economic Crisis in 1998. the
98 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform crisis in Brazil at the beginning of 1999 affected Turkish economy negatively. Moreover, the general elections in April and the devastating earthquakes in August and November of 1999 deepened the negative economic ongoing (see Sel�uk and Yeldan (2001)). As a result, the economy shrank by 6.1 %, the per capita GDP regressing from $3, 213 to $2,878. In addition, the GDP in USD decreased by 9% in the same year.
Turkey experienced two other banking sector crises in November 2000 and February 2001, both due to structural problems in the banking system as well as international influences [for details of the crises see Alper (2001), Uygur (2001), Celasun (2002), Ozatay and Sak (2002)). Consequently, financial institutions were adversely affected while the real sector started having difficulties in paying debts. The non-performing loans in turn deteriorated bank balance sheets, which then inevitably called for an immediate remedy in the form of a rehabilitation program.
The Istanbul Approach, a financial restructuring program, was proposed as a solution. The Istanbul Approach was inspired by the London Approach, which was developed to solve economic stagnations experienced by the British economy in the 1970s and I 990. Financial difficulties faced by industrial firms put their creditors, primarily commercial banks, into hardship. The Bank of England, to alleviate these financial difficulties, initiated a negotiation process. In order to cope with the negative situation in the economy, this approach, rather than enforcing legal procedures, suggested the voluntary participation of these commercial firms, banks, and the other creditors in negotiations (see, Brierly and Gertjan (1999)).
The Istanbul Approach is the application of the London Approach to the Turkish case. The principle of voluntary participation by the agents constitutes the basis of the two approaches. Due to either the different structure of the Turkish Economy or the limited functional definition of the Central Bank, the leading and advisory position of the Bank of England was not assumed by the Central Bank. Instead, the Banks Association of Turkey (TBA) played an
Turkish Banking Crisis and the Debt Restructuring Process:
istanbul Approach 99
active role in the re-structuring process. Even though the TBA solely took on this responsibility, there were occasional consultations with organizations of public and private sector, which unfortunately slowed down the implementation of the program. The program was sponsored by the World Bank with an agenda for a 500 million USD credit to be released by the end of 2002. Furthermore, it was planned to create new financial resources domestically (for detailed information see, Sim�ek (2002:p: 13-15)).
After this brief introduction, this paper analyzes the corporate debt restructuring process in Turkey with special reference to the Istanbul Approach. Although the procedure has been started, legal adjustments in the Jaws of bankruptcy and other related areas have not been made yet. We believe that the Istanbul Approach deserves further attention for its promising contributions to the survival of the firms having difficulty in payment. The organization of the paper is as follows. We first summarize the developments in the Turkish Banking System. In Section III, the 1994 financial crisis and the November 2000 and February 2001 banking crises will be analyzed. In the following section, the Istanbul approach will be discussed in terms of iils legal and institutional framework. In Section V, some suggestions will be made for making the implementation of the Istanbul Approach more efficient and finally the last Section will conclude the paper.
II. DEVELOPMENT OF THE TURKISH BANKING SECTOR
Since the 1980s, the Turkish banking sector experienced significant expansion and development regarding the number of banks, level of employment, diversification of services and t,echnological infrastructure. The number of banks increased from 43 in 1980 to 66 in 1990 and to 79 by the end of 2000. Total employment in the banking sector increased from 125,000 in 1980 to 154,000 in 1990 and to 170,000 in 2000 (see Table 1). During the last decade, the Turkish banking sector has made advances in its technological infrastructure, which manifested itself as a sharp increase in the number of automatic teller machines (ATMs), the introduction of
on-100 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform fine banking services, Electronic Funds Transfer (EFf) and SWIFT systems for payments. Banking services have also expanded, and bank card and credit card usage has increased rapidly. The number of credit card users rose from l million in 1992 to 13.6 million in March of 2001 (see Table 1). T bi 1 S a e
.
e ec e I t d I n 1ca ors m d" t . th B ki S e an ne ec or t 1980 1990 1994 1999 Number of 43 66 67 81 Banks Number of 5,954 6.560 6,087 7,691 Branches Number of..
6,938 On-Line Branches Number of 3,209 4,023 9,939 ATMs Number of..
16,135 188.957 POS Perso 125.312 154,089 139,046 173,988 nnel Emoloved Credit..
..
1,564 10,045Card Use (in thousands)
Bank
..
" 10,469 24,107Card Use (in
thousands) Cre<.lit "
..
1,273 12,410 Car<.I Volume (USD mn) 2000 79 7,837 7,523 11,991 299,950 170,401 13,408 29.560 16,413 Source: Bankmg Regulation and Supervision Agency (BRSA) and Banks Association of Turkey (TBA)Turkish Banking Crisis and the Debt Restructuring Proct'ss:
.istanbul Approach 101
Banking sector legislation and regulations were designed in line with international best practice. In particular, Banking Law No. 4398 effective as of June 1999, delegates the Banking Regulation and Supervision Agency (BRSA) as the independent authority to regulate and supervise the banking sector. The BRSA started to operate in August 2000. Despite all these positive developments, however, the Turkish banking sector has moved away from traditional banking activities. Five banks under the management of the Saving Deposit Insurance Fund (SDIF) were merged as Siimerbank bringing the number of banks to 74 by mid-May of 2001. Of these 74 banks, 56 banks are deposit money banks and 18 are investment and development banks. Of the 56 deposit money banks, 4 are state banks, 26 are private domestic banks, 18 are private foreign banks and 8 are managed by the SDIF. The number of foreign banks increased from 4 in 1980 to 18 in 2000.
In 2003, the banking sector is composed of 3 public, 18 private, 14 foreign and investment, and 2 SDIF banks in Turkey. Although Ziraat Bankasi (Agriculture Bank) and Halk Bankasi (Peoples Bank) were established in order to support farmers and tradesmen, these banks do not function differently from private banks. Investment and development banking also exists in the sector. The Turkish banking sector does not include any specialized banks. Cpmmercial deposit banking is the basis of the system. In 2003, the number of banks and branches decreased while the number of personnel remained almost the same. The number of banks operating in the Turkish banking sector decreased from 54 at the end of 2002 to 50 as of the end of November 2003. Thirty-six of of these are deposit banks and 14 are development and investment banks. Besides the decrease in the number of banks, the number of branches was also reduced by 139 to 6,077. The reason for this decline is the decrease in the number of private banks, mainly due to Imarbank. The number of employees did not change much and was realized as 123,929 in November 2003 when compared to the end of 2002. Data shows a considerable decrease in the number of employees of state banks and SDIF banks
102 Emerging Markets in Financial Crisis: Capital· Flow, Saving, Debt and Banking Reform (see for the details BRSA-Banking Sector Evaluation Repon (2004 p. 2) and www.TBA/Statistics/Bank,Branches and Employees/December 2004).
The regulation published on the 271h of June 2001 in the Official Gazette determined the essence of establishment and activities of banks. This regulation covers the organizational structure of banks, lending principles and procedures, definitions of indirect shareholding, indirect credit and indirect participation, and ratios of non-cash credits taken into account in calculation of credit limits [see BRSA, Banking Sector Refonn: progress report (2001 p:8)]. In the fifth article of the regulation, founders of a bank, real or legal persons, must prove with a document obtained from the Trade Court that they have not bankrupted . The same article says that they must prove that they did not have more than a 10% share in a financial institution that was liquidated. This kind of articles limits the establishment of a bank. On the other hand, the capital of a newly established bank cannot be less than 50 trillion Turkish Lira, so the founders are required to be financially powerful.
There have been important financial developments regarding bank balance sheets since the 1980s. The total assets of the banking sector increased from USD20.8bn (28.6% of <3NP) in 1980 to USD58.2bn (38.2% of GNP) in 1990 and to USDI55bn (76.9% of GNP) in 2000 {see Table 2). Deposit mobilization also increased sharply with saving deposits increasing from USD4.3bn in 1980 to USD64.4bn in 2000. In particular, there has been a marked increase in foreign currency deposits since the mid- l 980s, with the share of foreign currency deposits in the total saving deposits increasing to 58.6% in 2000. Since the second half of the 1990s, there has been a noticeable increase in the repo operations of non-bank clients, which reached a figure as large as 15% of savings deposits by the end of 2000. Banks· off-balance sheet operations also expanded sharply during most of the 1990s as a result of the increase in repo operations and foreign exchange hedging instruments. The ratio of off-balance
Turkish Banking Crisis and the Debt Restructuring Process:
jstanbul Approach 103
sheet operations to total assets increased from 50% in 1994 to 100.8% at the end of 2000 (see Table 2).
T bi 2 B nki S a e a n2 ector: F. manc1a . I I d. n 1cators USDmn unless stated 1980 1990 1994 1999
otherwise Total Assets 20,785 58,171 52,552 133,533 Total Credits 1 1 ,168 27,342 20,559 40,206 Securities Portfolio 1,339 5,997 5,955 22,955 Total Denosits 10,188 32,564 33,191 89,361 Savings Deoosits 4,288 19,343 24,190 58,807 -TL 4,288 1 1 ,914 8,612 24,701 -FX
..
7,429 15,578 34,106 Non-deposit fundinl! 1,289 1 1,760 9,019 22,934 -Foreign banks.
.
3,460 2,675 12,073 Networth+Profits 1,147 5,903 4,409 7,840 Total Assets/GNP (%) 28.6 38.2 40.3 71.7 Total Credits/GNP(%) 15.4 17.9 15.8 21.6 Securities 1.8 3.9 4.6 12.3 Portfolio/GNP (%) Savings Deposits 5.9 12.7 18.5 31.6 /GNP (%)State Bank Assets/ Total 44.1 44.6 39.6 34.9 Sector Assets (%)
Off-balance Sheet
..
..
49.5 103.501Derations/ Total Assets <%)
Source: TBA, BRSA.
2000 155,237 50,931 17,848 101,884 64,352 26,628 37,724 29,435 16,284 1 1 ,367 76.9 25.2 8.8 31.9 34.2 100.8
104 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform
III. The Crises in 1994, November 2000 and February
2001 and Their Impact on the Banking Sector
The Turkish banking sector was severely affected in the aftermath of the 1994 financial crisis-the Turkish lira depreciated by more than 50% and interest rates rose sharply. This was not a banking crisis and the damage on banking sector was relatively small. During the 1990-93 period, the growth rate of the economy was 5.2%. The same period also witnessed an increase in the real cost of labor, over valuation of the exchange rate and rolling over of the foreign debts, which unavoidably induced a crisis (for further information see Arslan and Celasun (1995), Yeldan (1998), Sel�uk and Ertugrul (2001)). The stock of foreign debt increased from 42 billion in 1989 to 67 billion dollar in 1993. The outflow of hot money was an important factor for the panic in the economy. The banks faced liquidity problems as a result of a major run on deposits. Three small banks started the liquidation process in April 1994, which triggered further deposit withdrawals. The government had to introduce 100 percent guarantee on savings deposits and provide liquidity support to the banks that were facing difficulty. After the crisis, banks continued to make profits based on their open position and the state banks fnanced the real sector.
Except for the three small banks that were liquidated, the banking sector proved to be resilient and a banking crisis was avoided. These developments highlight the fact that the Turkish banking sector is highly segmented, with a group of efficient and profitable banks at the core and other smaller banks at the margin. The banking sector recovered rapidly from the 1994 financial crisis and posted an average annual growth rate of 18% in the post-1995 period. However, the East Asia and Russian crises of 1997-98 and the two devastating earthquakes of 1999 had a negative impact on the Turkish economy and the banking sector (see Sel�uk and Yeldan (2001)).
Turkey adopted a comprehensive disinflation program at the beginning of 2000. The main aims of the program were tight fiscal
'Turkish Banking Crisis and the Debt Restructuring Process:
Istanbul Approach 105
and monetary policies, structural reforms and the use of a pre determined exchange rate path as a nominal anchor. The disinflation program had a major impact on banks' balance sheets (for further information of the disinflation program on the structure of the Turkish Banking Sector (see Alper et.al. (2001) and Inan (2001)). First. with the initial sharp decline in market interest rates and the expectation of a further drop in these rates. the banks reduced deposit and lending rates. The banks also increased their exposure to fixed rate treasury securities during this period. In addition, the pre-announced exchange rate path and the real appreciation of the Turkish lira meant a lower cost of funding for foreign currency liabilities. As a result, a number of banks borrowed in short-term foreign currency terms and lent in Turkish lira for longer terms. This led to a sharp increase in maturity mismatch and a foreign currency open position in the private banks.
The composition of the asset structure of the banking sector changed significantly during 2000 with an increase in the share of moans and a decline in liquid assets. Consumer loans quadrupled during 2000. Unlike the change in the currency composition of deposits, the currency composition of loans increased in favour of the Turkish lira. As a result of these changes, the exposure of the banking sector to liquidity. interest rate and exchange rate risks increased during 2000. At the end of 2000, the Turkish Banking System was considerably affected by the increasing interest, exchange rate, and credit risks because of the short term- maturity structure of financial resources used in the sector, open positions, and increasing credits [(see Alper et.al. (2001) and Erse! (2001)]. Declining trust of foreign investors in the economic recovery program created a tendency toward capital outflow from the country. The net capital flow in 2000 shows a 9.6 billion dollar inflow, whereas in 2001, this figure changed to an outflow of 19.9 billion dollars. In the 2000-2001 period, data obtained from the omission/error item of the balance of payments indicates that there was a deficit of 2.8 billion dollars in 2000 and 2.3 billion dollars in 2001. Thus we can say that in the 2000-2001 period, a 5 billion dollar net capital transfer abroad was made. When all of the items are
106 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform considered, a 16.2 (13.9 net capital outflow plus the 2.3 billion dollar omission/ error item of the balance of payments) billion dollar capital outflow is observed in 200 l (Celasun, 200 l : 19).
The outflow of foreign funds from Turkey and the sharp increase in T-bill rates led to financing difficulties by some private and state banks. The subsequent November 2000 crisis led to a significant erosion of the capital base of the banking sector and revealed the fragility of the system. In particular, the financial health of the state and SDIF banks that relied heavily on overnight funding deteriorated sharply. The loss of credibility of the exchange rate regime and finally the abolition of the exchange rate peg in February 2001 further hit the already weak banking sector. The gross foreign currency open position (excluding future contracts) of the banking sector declined from USO 18.2bn in September 2000 to USO 12.2 bn in March 2001 (see Table 3). The net foreign currency open position (including future contracts) declined from USD874 mn to USD479 mn during the same period. As of March 2001, the private domestic banks' gross foreign currency open position was USD6.2bn while the net foreign currency open position stood at USD429 mn. A significant part of the banking sector open position was due to the exposure of the SDIF banks while the state banks carried a very marginal open position. The open position exposure of the SDIF banks was reduced to regulatory requirements as a result of the issuance of foreign currency denominated papers to these banks by the Turkish Treasury (this operation was concluded on May 14, 2001). The market value of the banks' domestic securities portfolio declined sharply as a result of the increase in secondary market interest r:ates during the crisis period. However, after the second half of March, the secondary market rates started a declining trend, limiting the losses of the banks' securities holdings (see Table 4). The replacement of the securities held by the State and SDIF banks with floating rate securities and foreign currency denominated papers limited the market losses of these banks (see BRSA, 200 l , 2002).
Turkish Banking Crisis and the Debt Restructuring Process:
istanbul Approach 107
The government adopted a new program "Transition to a Strong Economy" in order to eliminate the confidence crisis and financial instability (the program is available in the following web site: www.tcmb.gov.tr). The strategy is strongly based on market orientation and openness to the world economy. An important pillar of the program consists of a renewed effort to eliminate structural weaknesses that had not been fully tackled by the 2000 program, particularly by stronger governance and good economic management. The key elements in the area of banking include: a deep financial restructuring of state and SDIF banks; measures to facilitate the participation of private capital in the strengthening of the private banking system and a further improvement in banking regulation and supervision [for criticism of the program, see Yeldan
(2001)
and Yeldan and Ertugrul(2003)].108 Emerging Markets in Financial Crisis: Capital
Flow, Saving, Debt and Banking Reform
Table 3 Banking Sector Net Foreign Currency Open Position Developments (USDmn)
January 2000 September 2000 (1) State Banks -177 Private -6,061 Domestic Banks SDIF Banks -5,345 Foreign -1.20 l Banks Development - 2 and Investment Banks (2) -19 l -773 -2,684 -60 9 1 (1) (2) -1 -22 -9,637 -847 -6,271 -4,910 -2,112 -78 -168 33 -3,617 -18.189 -5,824 Total 12,786 Total -7,441 -933 -11,918 (Excluding SDIF Banks) -914 March2001 (1) -66 -6,185 -4,552 -1,131 -226 (2) - 2 5 -429 -4,670 4 -29 -5,149 12,160 - 7 ,608 -479
(1) Gross Foreign Currency Open Position (Excluding
Future Contracts) (2) Net Foreign Currency Open Position (Including Future Contracts); the regulations limit net foreign currency open position to 20% of capital.
Turkish Banking Crisis and the Debt Restructuring Process: 109
isranbul Approach
Table 4 Developments in Banks' Domestic Debt Stock
Portfolio (TL trillion) *
December Septembe December
1999 r 2000 2000
Total Share in Total Share Total Share Dom. total Dom. in total Dom. in total Securities assets Securiti assets Securities assets
Portfolio (%) es (%) Portfolio (%) Portfoli 0 State 4,490 17,8 7,151 22.4 7,977 22.3 banks Private 8,202 26,5 9,074 20.3 9,621 20.0 domestic banks Foreign 1,866 36,2 2,219 34.8 2,053 29.8 banks SDIF 4,075 55,4 5,249 60.7 8,018 90.5 banks Developm 235 6,88 423 10.l 391 8.4 ent & Investmen t banks Total 18,868 26,2 24,115 25.l 28,060 26.9 Source: BRSA
*
Securities portfolio is the sum total of on balance sheet1 10 IV.
Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform The Istanbul Approach
In this section, the general and legal process of the Istanbul Approach and its application process will be discussed.
IV.I. General Process
After the two consecutive crises in November 2000 and February 2001, the non-performing Joans of the banking sector increased to a massive amount (TL 13.9 quadrillion at the end of 2001), which eventually required the restructuring of the institutional debts. The financial system and the real sector, which were mainly the two most severely affected sectors, came together for a resolution of non-performing loans. The Finance, Production· and Advisory Authority (FPAA), which was established as a first step towards resolution, gathered the representatives of the public, real and the financial sectors.
On the 21st of August 2001, the FPAA met in Ankara, where they discussed the firms facing hardship but still having a chance for a survival, due to the general state of the economy, public sector deficits and financial resource problems. They argued that with the London Approach those firms could be restructured without recourse to the legal system. They coordinated with the Banking Regulation and Supervision Agency (BRSA) and started working with the Banks Association of Turkey (TBA) and hence the Financial Restructuring Program also known as the Istanbul approach was developed.
IV .2.
Legal ProcessAct No: 4737, which was prepared by BRSA, on the Restructuring of the Debts to the Financial Sector was approved on. 31st of January, 2002. It was stated that this act aimed to save these firms from bankruptcy, those firms that are creating value added and to increase their reimbursement capacity. This act also arranged the framework agreement and tax exemptions. The approval for and the principles of application of this act were announced by the Regulation
Turkish Banking Crisis and the Debt Restructuring Process:
istanbul Approach 1 1 1
of the Approval, Consent and Application Concerning the Financial Restructuring Framework Agreement on April 1 1th, 2002.
Based on this regulation, the Banks Association of Turkey (TBA) started to construct the Financial Restructuring Framework Agreement (FRFA)which would actuate the Istanbul Approach. The Framework Agreement was prepared by TBA and on May 24rd, 2002 was signed by 25 banks, 1 7 non-bank financial institutions, the Savings Deposits Insurance Fund (SDIF) and Emlak Bankasi which was on clearance (see Table 5). It was officially accepted by BRSA on June 4th, 2002. The Union of Chambers of Commerce and Commodity Exchanges of Turkey and the Turkish Industrialists' and Businessmen's Association representing the real sector, and Private Financial Institutions, representing the financial sector, were the institutions supporting the Framework Agreement.
It was announced that the funding for those firms covered by the Istanbul Approach would be provided by the World Bank and that 500 million USD would be granted at the end of 2002 as stated by the World Bank officials. However, since the implementation of the program started in June, the World Bank provided no credit, which negatively affected the program's success (see Bilge et.al. 2004: 14).
112 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform
Table 5 Participant Institutions at the Financial Restructuring Framework Agreement
SANKS
1 • Zlraat Bank 7 • Garanti Bank 13. Teklenbank 19· E>dmbank 2· Halk Bank 8· Pamukbank 14· Flba Bank 20-T. tnvestment Bank 3· Vaklllar Bank 9· OyaJcbank 15· Den1%bank 21 ·NuroNnvestment
Bank
4· It Bank 10· Tekatilbank 16- Olfbank 22· National Aydin Bank
5 -Yap, Kredi Bank 1 1 • Flnans Bank 17- lmar Bank 23· TOrl<bank 6-Akbank 12· �el<erbank 18- Turi< Ekonoml Bank 24· T oprakbank
25- Bax1nd1rbank
NON-BANK FINANCIAL INSTITUTIONS
1 • GatanU Faclollng 5Vak�O.nlZFlnanclali..aeJ 8-0atanUFlnanclalleaetng. 13· Valul Financial no
2· It Genei Financial 6-lmarFlnanclal i..as1ng 10-Yapi Kredl Factoring Leasing
3· Ulus Factoring 7· Aktlf Flnardal Leaalng 11 FlnansFlnanclal leasing.
4· Ztrut Ftn111e1a1 9· 12·Vak11Defllz Factoring. Leasing Vap, KrediFlnancialleaalng
1 • Emlak Bank {on clearance) 2· Savings Deposits Insurance Fund
Source: BRSA
OTHERS
Leasing.
14· o,, Tlcaret Factoring 1s lfTicaretFlnanclalLeaslng. 16- Aaya 1nsu1utkwls Flnans 17· Afbaraka T01k Fin.Ins ..
Turkish Banking Crisis and the Debt Restructuring Process:
istanbul Approach 113
IV .3. The Firms Covered by Financial Restructuring Program, Definition of the Application Process, DeveloFments in the later period
The finns covered by the restructuring program were classified into two groups: "Large Scale Enterprises" and "Small and Medium Scale Enterprises"(see TBA (2002)). By the end of 2001, those firms i) which employ at least 100 full-time employees, ii) whose total annual exports exceed 15 million USD iii) whose total annual return exceeds 25 trillion TL iv) who have assets of more than 15 trillion TL in their audited balance, are considered as "large scale enterprises". Firms that meet at least two of the above criteria and have a debt exceeding 10 million USD are considered "small and medium scale enterprises". The Restructuring Program will have different implications for large scale enterprises and small-medium scale enterprises.
The process for the Large Scale Enterprises can start upon the request of one of the three largest creditor banks. It is started when the debtor firm submits the application and registration letter to one of the banks. Other creditor banks that have 25 % of the total credit can apply to the largest creditor in order to initiate the process. If there is no bank among the creditors, one of the three creditor institutions can initiate the process. During the negotiations, if the firm does not agree, no financial restructuring can be done.
The process for the Small and Medium Scale Enterprises (SMEs) requires that at least two banks or private financial institutions, which have 51 % of the total credit, come together. The debtor firm submits the application and registration letter to the largest creditor institution and hence the process starts. The rest of the procedure is almost the same as for large scale enterprises. After the agreement is signed, the firm is monitored to check whether it fulfils its responsibility defined in the agreement. The TBA authorities analyze the firm and reserve the right to regulate its accounting department.
114 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform By July 2002, 80 firms (53 large scale and 27 small scale) were covered by the Financial Restructuring Program. An agreement to restructure the debts of 2 1 firms was signed. The restructured debt totaled 261,3 million USD (80,7 millions USD for large scale, 180,6 for SMEs). These companies had total assets of 1.482 trillions TL, total revenues of 557 trillions TL, total exports of 213 millions USO and total employment of 12774. Many of them are situated in the Marmara region and mainly operate as food industries (See Table 6).
Turkish Banking Crisis and the Debt Restructuring Process:
istanbul Approach 115
Table 6. Information about the Firms covered by the Financial Restructuring Framework Agreement (FRFA)
PANEL A Number of
firms covered with FRF A 80
a) Large Scale Firms (8 Groups) 53
b) Small Scale Firms 27
PANEL B The Geographical distribution of the Firms under FRFA
Mediterranean 2
Eastern Anatolia 8
Aegean 15
South Eastern Anatolia 5
Central Anatolia 10
Black Sea 6
Marmara 34
PANEL C The Sectoral distribution of the Firms under FRF A Packing, Paper and
�ardboard Products 5
Cement, Concrete
rroduction 9
Other Production and
Management Activities 3
Foreign Trade Capital
116 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform Electronics
onsumer Goods Leasing
and
Ship and Boa
anufacturing
Food and Animal roduces
Holding Companies anagement Activities
Construction Land Transport
Metal Products and
rocessed Metal Products
Motorized Vehicles Retailing Plastic Produc anufacturing Ceramic Faienc anufacturing Transporting, Stocking, ommunication
Textiles and Textil roducts Wholesale Tourism 2 15 5 5 9 2 9 5
Turkish Banking Crisis and the Debt Restructuring Process: istanbul Approach
by FRFA
By 31.12.2000 a) Large Scale Firms
Total Employment 8.628 Total Exports (Milliom
USD) 175
Total Revenue (Trillions
TL) 415
Total Assets (Trilliom
TL) 1.388
b) Small Scale Firms
Total Employment 4.146
Total Exports (Millions
µso)
38Total Revenue (Trillions
rrL) 143
Total Assets (Trillions
rrL)
94Total
Total Employment 12.774 Total Exports (Millions
�SD) 213
Total Revenue (Trillions
[I'L) 557
Total Assets (Trilliom
TL)
1.481118 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform
PANEL F Number of Firms covered by FRFA whosE
aereement were contracted
a) Large Scale Firms (1 group) lO
b) Small Scale Firms 1 1
Total 21
PANEL G Total Debt Restructured with FRFA (Million
USD)
a) Large Scale Firms 80,7
b) Small Scale Firms 180,6
Total 261,3
PANEL H Applications �o the Panel of Arbitration l
Source: TBA
V. Some Suggestions for the Improvement of the
Implementation of Istanbul Approach
In the following Section V.l, the institutional suggestions for the improvement of the implementation of the Istanbul Approach will be discussed by using Malaysian restructuring program. Then, there wi II be some suggestions about how these policies can be more effectively implemented in Sections V.2-V.6.
V.1. Institutional Suggestions
After the Asian' Crisis, Southeast Asian countries exhibiting good economic growth performance in the long run faced serious economic difficulties. In order to restructure the institutional debts, many countries had established committees. Malaysia is one of the Asian countries that put economic recovery programs into practice in order to deal with the detrimental effects of the crisis. In June 1998, Malaysia passed new regulations and laws to rehabilitate the real and
Turkish Banking Crisis and the Debt Restructuring Process:
Istanbul Approach 119
financial sectors. The government established the National Economic Activity Council (NEAC) and National Economic Rehabilitation Program (NERP) in January 1998. NEAC, to set and maintain stability in the financial sector, founded the National Wealth Management Company, Danaharta, on June 1998, which required the establishment of Danamodal to strengthen the capital structure of the banking system and Corporate Debt R,estructuring Committee (CDRC) to re-structure the corporat<><iebts (see Meesook et.al. 2001). The Malaysian solution included either direct government intervention or the principle of voluntary participation. These two structures worked dependently and supported each other mutually. The establishment of Danaharta was the government side of the solution. Danaharta had restructured or approved the restructuring of 9.4 billion dollar in corporate debts by the end of the 2000 and the rate of uncollectible receivables was 6%. The optimistic economic trend in Malaysia after the Crisis increased the positive expectations regarding the country.
In " the Istanbul Approach", the authority and responsibility were given to the TBA. The secretariat was perfonned by Industrial Development Bank of Turkey (IDBI) while BRSA was informed about the developments. However, TBA is a professional banking organization that does not represent the public or the real sector. In this process of restructuring, no representative from either public or real sector exists. Real sector organizations such as The Union of Chambers of Commerce and Commodity Exchanges of Turkey (TOBB) and Turkish Industrialists' and Businessmen's Association (TUSIAD) contributed at an advisory level. It would have been better to have public organizations like BDDK or the Central Bank of the Republic of Turkey (CBRT) responsible for the whole process in order to increase success since confidence vested in these organizations is an important detern:iinant of the success. Although this is not one of the responsibilities of these organizations, they could have assumed a similar role to that taken up by Bank of England as seen in the London Approach. It is recommended that all those
120 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform institutions be united into one public organization like BRSA or Central Bank.
The presence of many organizations will surely increase bureaucracy resulting in a decrease in the speed of implementation of the program. Although TBA seems to be the only authority, the process is dispersed among many organizations. At the beginning of the program, a separate organization representing all sectors involved would result in faster participation in the program, better appropriation, increased confidence, and fewer bureaucratic difficulties. For instance, by narrowing its content, FP AA could function in the way described above.
V.2. Legal Suggestions:
The primary rule in the restructuring program is to prepare a legal environment where creditors feel safe and confident. Since participation in the program is volunta1y, the creditors should be willing to participate. To secure this, their rights should be guaranteed by laws.
It is generally observed that in addition to institutional regulations, Execution and Bankruptcy Laws are amended together with restructuring debts. Implementing amendments in these laws to make the creditors feel better before starting the process of restructuring debts would have been ·more appropriate to have increased the number of participants. ·
In Turkey, the liquidation process takes a few years, during which the credit becomes worthless which creates a new negative environment toward legislation. In order to make Istanbul Approach operate successfully, the necessary changes controlling the duration of liquidation and bankruptcy of ··firms should be done. The Execution and Bankruptcy Law should be adjusted so that liquidation can be completed in a maximum of 6 months.
Actual developments include a modification in Execution and Bankruptcy Law before March 2003. Although the Istanbul Approach
Turkish Banking Crisis and the Debt Restructuring Process:
Istanbul Approach 121
was put into effect in June 2002, it seems that the changes in the concerned act will take longer. In order not to lose confidence in the program, those regulations should be changed as soon as possible.
V .3. Suggestions Concerning the Legal Process: The establishment of Bankruptcy Courts in cities like Istanbul, Ankara and Izmir would surely decrease the bankruptcy duration, increase expertise and alleviate the burden on the judicial system. In addition, pre-packaged bankruptcy institutions can be founded. A bankruptcy plan signed by shareholders and creditors would be presented to the Bankruptcy Court.
V.4. Suggestions Regarding the Application:
According to the Framework Agreement, all the creditors have the option of not signing, but greater participation results in better implementation of the program. All of the foreign banks and a few national banks declined to sign the agreement, having adverse effects on the plan. In a hypothetical example, firm X has 7 creditors, 5 of' which signed the framework agreement. After the evaluations, the debt to the 5 creditors are restructured and the debt to the other 2 remains the same. When the debt is restructured, the legal prosecution ends. However the 2 creditors who did not sign the agreement still have the right to sue the debtor. This may negatively affect firms that have chance to survive. At that point, the state can intervene and encourage banks to participate in the program. TBA is expected to force its own members to sign. More importantly, the participation of · the foreign banks will increase confidence in the soundness of the
program.
According to the Framework Agreement, the authority to determine whether a debtor firm is to be restructured is its creditors. However, this may cause some problems. First of all, a bank's organization is considerably different from a firm's organization. Having experts in the firm's organization are essential. Second, the relationship between debtors and creditors is important. A creditor on
t22 Emerging Markets in Financial Crisis: Capital Flow, Saving. Debt and Banking Reform good relations with the debtor may not want to. file for bankruptcy or vice versa, �hereas a larger· creditor may·· want to take possession of the smaller debtor. Third, firm X may have important position in the country's business life by creating employment, value, exports. What happens .if the creditor does not want to restructure its· debts? According to the F�amework Agreement, nothing can be done, the firm will go bankrupt. Firm X's imp�rtance tQ the domestic economy is not taken 'into consideratior:i. Such problems can be over�ome by th_e state's gui(Jance and the esta.blishment 9f an· in�titut1on where both I?arties are equ.�lly .represented. · · · ·
According to the Framework Agreement, creditors can agree among themselves about the whole process .. However, the ._principles of the intra-creditors agreement have· to be defined at the beginning. During the process, a possible disagreement among the creditors may not be easily resolved .if a binding agreement does not exist.
V.S. Suggestions for generating resources:
It was announced that the necessity for resources which may arise during the implementation of the Istanbul Approach would be compensated . for · by World Bank credit. The Bank's. officials announced that a 500 million USO loan would be released by the end of 2002. Furthermore, additional funding will be provided by national
resources.
Anoth�r suggesti<;m· wa�· to ·1a�nch a different furn;I cati�.d "Co'mpany Restructuring Fund" which woulcl accel�rate a company's debt restructutjng scheme. The main par:ttcipanis · would be the financial institutions. Real sector representatives such as TUSIAD.and TOBB would participate less, while the state, being short of resources, would not participate in the fund. This fund, supporting the companies financially as well as operationally,. could •sewe· as a financial source or help to restructure the debts. The fund could buy company's shares or tum the short-term debts into two -year or· longer, debts. The Company Restructuring Fund would only.serve those-firms that create
Turkish Banking Crisis and the Debt Restrueturit1g Process:
istanbul Approach,. 123
must � made ,by the debtor
fi�
'or \he lender bank' 'after being approv.e<i, �y the TBA.V .6. Other- suggestions
Restructuring debts to the creditor is not sufficient in itself. The most . importimt problem of the debtor firms is the inadequacy of capital. Thejr debts .to the st�te should also be restructure'd .. According toi the 48th article· of Act no: (>183 on The Pr�edure for the Collection of Pub.lie .R�ven'µe, fines for tax or. t�.x ·1ike. deb� can b.e P<?Siponed. J:he.same. �ct.·can be. applied
�o
the firms . . Iri a. p�e·-fixed plan, .theinter�st Qrt debts could. be cancelled or,pos�poned. ,In ad�_i.tion, . d.ebts to th«? S�ial Security .Associ�tions should b.� restructu·red: How.ever, Ql}IY. the debt which occurred when-tlle firm was i"n difficulty would_ be considered in' this context. The Ministry of Finance could coordinate
th�se ap.pli��tions . .' · · · · ·
The group companies of banks· transferred to BRSA should not be• covered by the Istanbul Approach. This .approuch is strictly reserved for those companies with capital shortages due to the recent .crisis. The ones that have been transferred to-the Fund. are companies whose. investors. have use9 . .the capital (or their own purposes, and which h�ve. no .. urg�ot capital deficit.. In that. sense,. i'nc�uding thqse
companies' would weaken the confidence to Is�nb�l Approach. . As stated above, one reason why problematic, loans appear ·is the · structure of the · firm, · so the firms covered by the .Istanbul Approacti ·have to be restructured as well; Family ,management must be'replaced by professional· managers. Unnecessary costs should be eltmin·ated. These measures ease company's· debt payments.and also iricrease c6inpetiti veness . ..
. ,:· . . · On� .,met�od fo� restructuring debts. is·, t9, 'ch��g�· ·tJte. fi;.nfs
adrrµnistration,:.cr�ditors are inclined to appoint ind1yidual.s from the
.finanGe. �ector. This may' . no.t pr.ove . ef(ecttv� sine�. de�pite
commonalities, firms' are different from financial 'institutions. . : . . . . ! •," ...
124 Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform In the media, there are rumours that the Istanbul Approach serves only the big firms and hence the public is misinformed. The Banks Association of Turkey must disseminate more information about the pro.cess, which will' increase confidence.
VI. Conclusions
Increases in interest rates, costs and risk premiums after a banking crisis cause an increase in total costs and lead to deterioration in the balance sheets of banks. Due to this increase in total costs, companies in the real sector face insolvency and go bankrupt. In cases where the banks cannot get their credit back, their problematic assets and, in particular, their non-performing loans increase. A company at any time can be in a difficult position with respect to its payments. However. 1p times of crisis, many firms face the same situation, which turns into an institutional debt problem for the entire economy. The rise in unrequited loans, which increase the cost of the economic crisis, prevents banks from performing their essential functions, leads to inefficient use of the resources and adversely affects economic activities.
Turkey has experienced crises at different times due to both the banking system's structural problems and international influences. The crises in November 2000 and February 2001 were particularly damaging to the economy. However, these crises also helped to pinpoint problems in the financial and real sectors. Financial institutions were affected adversely while the real sector started having difficulties in paying off debts. The balance sheets of many banks deteriorated due to the soaring non-performing loans which made it necessary to solve the problem. The solution was the Istanbul Approach, which is a Financial Restructuring Program inspired by the London Approach and the experiences of the Asian countries. The Turkish Banking Association, which assumed both the authority and the responsibility for the implementation of the Istanbul Approach, put forward the general principles and procedure to be followed as well as the time table. As in the examples from other countries, a separate
Turkish Banking Crisis and the Debt Restructuring Process:
foanbul Approach 125
agency was not established to implement the process. The Istanbul Approach was put into effect as of June 2002 and by July 80 firms were already included in the program for restructuring. In 2001, the total amount of the unpaid credit portfolio for 25 commercial banks was 5.4 billion dollars. The total amount of applications to the Istanbul Approach for restructuring debts was 6.2 billion dollars. As of April 2004, 5,6 billion dollars of this amount was restructured by agreements, which indicates a 90 percent success rate [(see Bilge et.al. (2004 p.18)]. Although the procedure has already started, legal adjustments in the laws for bankruptcy and other related areas have not yet been made. Initiating certain changes which take into account the problems in application will enhance the efficiency of the approach and lead to positive outcomes.
126
APPENDIX I
Emerging Markets in Financial Crisis: Capital Flow, Saving, Debt and Banking Reform
List of Abbreviations ;,···
AT:rti: A�tom.atic Tell.er.Ma<;�ine
BRSA: .Banking Regulation and Supervision Agency (BRSA) (CB�T): The, Ce�fral Bank'<:>f the Republic or'Tur�ey FPAA: Finance Production and Advisory Authority
FRFA: Firianc:°ial Restructuring Framew.ork Agree�ent
'
; •
I.
+ I
� • ' '
IDBT : Industrial Development Bank of Turkey SDIF: Saving Deposit Insurance Fund
TBA: Banks Association of Turkey
TOBB: The Union of Chambers of Commerce and Commodity Exchanges of Turkey
TUSiAD: Turkish Industrialists' and Businessmen's Association
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