ISTANBUL, May 12 (Reuters) - Some Turkish banks are cutting back on a cheap source of cash for retail customers, six banking sources told Reuters, as the country faces tight national elections this Sunday.
The banks' cash advance product has provided a lifeline to Turks, with its around 20% annual interest rate, a third of what borrowers will be charged on a bank loan.
People have had their purchasing power eroded under Turkey's high inflation, which hit 85% last year after a currency crisis caused by unorthodox economic policies. The inflation rate dropped to 43.7% in April.
The cash advance, which allows people to withdraw cash with a credit card, is popular in Turkey because of its lower borrowing costs and because of limits on retail loans.
"Demand is high for cash advance with instalments," a banking source said. "People want to keep cash at hand as there is uncertainty around elections ... Some banks want to limit lending from this channel as the interest rate is very low."
Banks are sometimes cutting by almost half the cash advance limits and maturities, due to uncertainty around the outcome of the elections and expectations of interest rate hikes, the sources said.
President Tayyip Erdogan will put his two-decade rule on the line on Sunday when he faces opposition challenger Kemal Kilicdaroglu in Turkey's landmark elections.
Another banker said banks are reluctant to lend by cash advance as the upper limit on interest rates for the cash advances is determined by the central bank.
"The demand skyrocketed," the second banker said. "Since the banking sector does not have the ability to set (the) interest rate of this channel they are trying to find a solution to it by cutting maturities and the number of people (that) can borrow through this channel."
