Turkey: Banking Regulation and Supervision Agency Announces Restriction on Turkish Lira Commercial Lending for Corporate Borrowers

Introduction

The Board of Directors of the Agency for Banking Regulation and Control (“table”) announced macro-prudential measures over the weekend, consisting of (i) the Board’s decision on the prohibition of commercial loans in Turkish lira to corporate borrowers subject to independent audit dated June 24, 2022 (“Board decision”) and (ii) press release determining the scope and implementation of the Council decision dated June 26, 2022 (“Press release”). Consequently, until a new decision to the contrary is taken by the Board of Directors or the Central Bank, corporate borrowers subject to independent audit and holding foreign currency above certain thresholds will no longer be allowed to borrow business loans in turkish lira.

The Board said the above-mentioned macroprudential measures were aimed at ensuring efficient use of credit systems, preventing companies from buying foreign currencies just to preserve their foreign exchange position, and reducing and stabilizing exchange rate fluctuations. That being said, the broad scope and lengthy wording of the Board’s decision ultimately necessitated concise clarification once the financial interpretations were mixed and contradictory in nature. Thus, the press release was announced on June 26, 2022, in order to remove practical uncertainties.

II. Purpose of Board Decision

Companies that meet each of the criteria set out below will be subject to the restriction and will therefore be prohibited from borrowing commercial loans in Turkish Lira:

(i) Be subject to an independent financial audit in accordance with Executive Order Number 660 and other applicable regulations,

(ii) Holding foreign currency assets (including gold, foreign currency cash and foreign currency deposits) exceeding the corresponding amount of TRY 15,000,000 (approximately $900,000 as of June 28, 2022)

(iii) Hold foreign currency assets whose equivalent in TRY exceeds, whichever is greater, 10% of their total assets or annual net turnover.

Companies under the restriction are not allowed to obtain commercial loans in Turkish Lira from June 24, 2022 (“Date of board decision”).

III. Exclusions and Exemptions

Companies that do not meet any of the above criteria, natural persons and actual shareholders of companies (irrespective of the status of the company) are excluded from the restriction and are therefore free to borrow cash loans in Turkish Lira .

Non-cash loans such as direct debit schemes are deemed not to be affected by the restriction provided they are not converted into cash loans.

In addition, companies that are prohibited from using foreign currency loans, in accordance with Presidential Decree No. 32 on the Protection of the Value of Turkish Currency and other related regulations, may exceptionally borrow Turkish lira commercial loans limited to the amount of their three (3) month post deficit, although they meet each of the above criteria. For this, they must present an independent auditing company certifying a deficit exchange position, when the debts and commitments in foreign currencies are greater than the assets in foreign currencies, within three (3) months of their loan request.

Moreover, despite the fact that gold, hard currency and bank deposits in foreign currency should be considered as part of the foreign currency holdings of companies; securities denominated in foreign currencies, debt securities such as Eurobonds and other financial assets issued by Turkish residents are not taken into account for the calculation of foreign currency holdings. For the avoidance of doubt, instruments and share certificates issued by entities resident abroad or monetary assets such as reverse repos with those resident abroad are included in the calculation of foreign currency holdings of companies.

IV. Application and enforcement of the restriction

(i) Supporting documents and information necessary to carry out assessments by independent auditing companies

The status of the companies will be determined based on the total foreign currency assets and figures from the audited “current financial statements”. For persons required to draw up consolidated financial statements, this assessment is made through the consolidated financial statements. According to the press release, “current financial statements” refer to financial statements that have been prepared in accordance with the requirements of the Public Supervision, Accounting and Auditing Standards Authority.

(ii) Continuous Notification Obligation

Companies that are not subject to the restriction on borrowing commercial loans in Turkish lira in accordance with the restriction criteria and thresholds must (i) have their current foreign currency assets assessed in cash, the total of the assets according to their value up-to-date financial statements and net turnover for the last financial year, (ii) declare and undertake that their holdings in foreign currency in cash do not exceed 15,000,000 TRY (approximately $900,000 as of 28 June 2022) during the term of the loan borrowed or if this threshold is exceeded, the foreign currency holdings will not exceed, whichever is greater, 10% of their total assets or annual net turnover, and ( iii) submit information and data relating to cash foreign currency holdings, total assets and their net turnover for the last 12 (twelve) months from the end of the previous month following the previous month-end balance sheet to ensure a effective follow-up with the creditor financial institution within 10 (ten) working days of each month, counting from the date of the Turkish lira business loan application. In this respect, banks can request from their business customers all types of documents that they deem necessary to ensure that the financial situation of their customers is not contrary to the restriction.

Given that the above requires assessments of independent auditing companies, one could infer that the continuous reporting obligation should only apply to companies that have been independently audited but have not exceeded the thresholds. introduced.

(iii) Types of commercial lending fall under the restriction and status of current lending limits

All types of commercial loan disbursements in cash, renewing existing loans or granting additional balance in Turkish Liras for businesses meeting all the criteria as explained above through various credit operations such as revolving loans, overdraft accounts or corporate credit cards as explained above. , following the date of the board’s decision will fall under the restriction.

Turkish lira spot commercial loans which have not yet been disbursed until the date of the Board’s decision but which will be disbursed in the week of June 27, 2022, are exempt from any form of control provided that the agreements loans have already been executed.

V. Implications of the restriction and conclusion

The decision of the board of directors had a considerable impact on the Turkish financial markets, as it was not a step or an expected measure. On the other hand, the Council points out that this position will be maintained for the sake of economic stability and efficiency. Accordingly, additional measures may be introduced unless the Central Bank and the Turkish government decide to change Turkey’s economic policy.

Some companies falling within the scope of the restriction and in need of cash could fraudulently opt for changes to their financial statements. In view of this trend, the Council requires banks to warn their customers in advance, to monitor customer transactions and to keep the Banking Regulatory and Supervision Agency informed in the event of suspicious and fraudulent transactions. It is also important to note that these behaviors may lead to the crime of aggravated fraud according to Article 158/(j) of the Turkish Penal Code No. 5237 with respect to the board of directors and other relevant officers of the companies.

In light of the above, all companies subject to independent audit should review their financial condition, investment plans, existing debts and liabilities as well as short and long-term financing needs, as the restriction may limit their flexibility and their possibility of obtaining new loans and monetary resources, and must act as a prudent trader in compliance with the applicable regulations.

(First published by Mondaq on June 29, 2022)