ISTANBUL (Reuters) – A swath of bad loans that Turkey’s seventh largest bank, Pamukbank, failed to recover from fellow group firms sparked its seizure last week, the country’s banking watchdog said in a report yesterday. The watchdog seized Pamukbank last Wednesday and took two seats on group bank Yapi Kredi’s board in the latest cleanup of Turkey’s crisis-hit banking sector. Turkey was forced to issue billions of dollars in debt to rescue its banking sector following a February 2001 financial crisis that sparked Turkey’s worst recession since 1945. «The most significant problems of the bank were the credits extended to group firms that could not be recovered,» the watchdog said in an 18-page summary of its decision. Pamukbank was majority-owned by Turkish conglomerate Cukurova Holding, a major industrial group controlling the country’s fourth largest bank Yapi Kredi and leading mobile phone operator Turkcell. It said credits extended to Cukurova Holding, chaired by prominent businessman Mehmet Emin Karamehmet, totaled 3,813 trillion lira, or 69 percent of total credits and 40.5 percent of the bank’s deposits as of December 2001. «The loans extended to the group firms were not repaid on time and their maturity period was continuously extended by the bank. The bank did not accrue interest related to the credits and did not make collections,» the watchdog said. The watchdog last week announced a capital shortfall at Pamukbank of some $2 billion after it completed an IMF-backed audit of Turkish banks seen at the heart of a financial crisis that erupted in February 2001. The Pamukbank seizure had cut short the Cukurova group’s plans to merge Yapi Kredi and Pamukbank. The watchdog said that also may have jeopardized the operations of Yapi Kredi. The price of Yapi Kredi shares, heavily weighted on the main Istanbul index, has fallen some 40 percent since the watchdog’s decision. Group lending has been cited by analysts as one of the biggest obstacles to a healthy banking sector in Turkey. Recent IMF-backed bank laws seek to reduce the practice. Banks have often been used as cost centers for group operations sparking a swath of seizures amid recent financial turmoil, analysts say. The watchdog said Pamukbank credits made up 12.7 percent of the credits of Turkey’s banking sector but would comprise just 3.9 percent of the total if loans to Cukurova Holding group companies were excluded. Some 36 percent of a total 1,665 trillion lira in non-group lending by Pamukbank was awarded to leading Turkish nut-producing cooperative Fiskobirlik, the watchdog said.