New Developments
The Regulation on Banks' Lending Transactions ("Regulation on Lending Transactions"), which regulates the procedures and principles regarding loans made by Turkish banks, and the Regulation on Determination of Risk Groups and Loan Limits ("Regulation on Risk Groups and Loan Limits", together "Regulations"), which sets out the procedures and principles for determining risk groups and calculating loan limits on consolidated and unconsolidated basis, were published in the Official Gazette dated 21 December 2023 and numbered 32406. The Regulations are a re-arrangement of the relevant provisions of the Regulation on Banks' Lending Transactions published in the Official Gazette dated 1 November 2006 and numbered 26333 ("Former Regulation") in two separate regulations and will enter into force on 1 January 2024.
What Is New?
Regulation on Risk Groups and Loan Limits
Formation of Risk Groups
Pursuant to the Regulation on Risk Groups and Loan Limits, while determining the risk group to which a bank belongs, partnerships in which participation banks and development and investment banks invest to provide interest-free financing will not be considered.
In addition, the determination of risk groups will also take into account whether there is economic dependence between loan clients.
Provided that there is no other relationship between them that requires them to be considered in the same risk group, clients that are under the control of or economically dependent on central governments, central banks or government institutions that are subject to the same risk weight application as receivables from central governments in accordance with the Regulation on Measurement and Assessment of Capital Adequacy of Banks will not be required to be considered in the same risk group only due to this relationship.
Exceptionally, provided that the bank confirms that:
- there are special circumstances or protective corporate governance practices in relation to persons who would normally be included in the same risk group, when determining (i) the risk groups to which the Bank belongs and (ii) the risk groups formed by a natural person or legal entity and related persons
- with respect to persons who would normally be in the same risk group due to economic dependence, one party will not be affected by the default or financial difficulties of the other party by finding new sources of funding or business partners.
these persons may not be considered to be in the same risk group.
Principles Regarding Economic Dependency in Determining Risk Groups
One of the most critical provisions introduced by the Regulation on Risk Groups and Credit Limits was the specification of the principles regarding economic dependency in determination of risk groups.
Accordingly, while determining the risk groups, including natural or legal persons whose calculated risk amount exceeds 5% of the bank's Tier I capital as a result of the assessment made on a consolidated and unconsolidated basis, it is necessary to analyse whether these clients are economically dependent on other clients on the basis of certain criteria.
The criteria for economic dependence are as follows:
- 50% or more of the client's annual gross revenues or annual gross expenses being generated from transactions with another client.
- The client being liable for the obligations of another client as a guarantor, surety or in another capacity, and the obligations being at a level that may result in the default of the client when required to pay.
- A significant portion of the goods or services produced by a client being sold to another client and the purchaser not being capable of being easily substituted.
- The financial difficulties experienced by a client being of such magnitude that it may prevent another client from duly fulfilling its obligations.
- The default or insolvency of a customer being capable of leading to the default or insolvency of another client.
- More than one client receiving most of their funds from the same source, there being no alternative fund provider.
- More than client receiving their funding to repay their debts to the bank from the same source, and there being no other source of funds that will enable the debts to be paid in full.
For other credit client that do not exceed the 5% limit, it will be sufficient to take these criteria into consideration when determining risk groups.
Pursuant to paragraphs (a), (b), (c), (d) and (e) above where the economic dependency is unilateral, the client will be included in the risk group of the other client on which it is economically dependent, but it will not be necessary to include the other client on which it is economically dependent in the risk group to which such client belongs, provided that there is no other relationship between them that requires them to be in the same risk group. Pursuant to paragraphs (f) and (g) of above, where the economic dependency is reciprocal, economically co-dependent client will be included in each other's risk groups.
Risk Amounts in Trading and Banking Books
The new regulation also introduces rules on the calculation of risk amounts in trading and banking books. In this context, all on-balance sheet and off-balance sheet risks monitored in trading or banking books, which are taken into account within the scope of the Regulation on Measurement and Assessment of Capital Adequacy of Banks, will be included in the calculation of loan limits according to the principles specified thereunder.
In addition, banks will be allowed to net long and short positions of securities with the same issuer, coupon payments, currency and maturity that are monitored in trading books. If there is a net short position as a result of netting long and short positions, this short position will not be included in the calculation of loan limits.
Risk Amounts of Collateralised Securities
Collateralised securities will be taken into account at 100% of their value in the calculation of the issuer's loan limits. However, this ratio will be applied as 20% for securities with collateral that meet certain conditions.
Transactions Not Subject to Credit Limits
Transactions to be determined by the Banking Regulatory and Supervisory Board ("BRSB") as not being subject to loan limits pursuant to Article 55 of the Banking Law No. 5411 ("Banking Law") are specified by the Regulation on Risk Groups and Loan Limits. As of 1 January 2024, the following transactions will not be subject to the loan limits introduced by the Banking Law and the Regulation on Risk Groups and Loan Limits:
- Receivables from central governments, central banks or government institutions subject to the same risk weight application as receivables from central governments in accordance with the Regulation on Measurement and Assessment of Capital Adequacy of Banks.
- Receivables protected by guarantees provided by central governments or securities issued by central governments provided that the conditions specified in the Communiqué on Credit Risk Mitigation Techniques are met.
- Receivables arising from settlement transactions with central counterparties performing qualified transactions within the scope of the Regulation on Measurement and Assessment of Capital Adequacy of Banks.
Reporting of Loan Limits and Non-Compliance with Limits
In the calculation of loan limits by banks, not only shareholders' equity but also the latest consolidated Tier 1 capital and shareholders' equity and unconsolidated Tier 1 capital and shareholders' equity calculated in accordance with the Regulation on Shareholders' Equity of Banks will be taken into account together. Loan limits will be calculated at the end of each month and reported to the Banking Regulatory and Supervisory Authority ("BRSA").
If the loan limits are exceeded, banks shall immediately notify the BRSA together with the reasons and the measures they plan to take. If the loan limits are exceeded due to decreases in Tier 1 capital or shareholders' equity, it will be obligatory to eliminate such excesses within six months instead of seven months, as provided by the Former Regulation.
Application for Development and Investment Banks
The Regulation on Risk Groups and Loan Limits is applied in a more flexible scope for development and investment banks. Accordingly, the provisions of the Regulation on Risk Groups and Loan Limits will be taken into consideration for development and investment banks only in relation to risk groups and the principles regarding economic dependence in determining risk groups.
Adaptation Process
The Regulation on Risk Groups and Loan Limits prohibits banks that exceeded any of the credit limits as of 1 January 2024, the effective date, from extending new loans to the relevant persons or risk groups. Accordingly, banks will ultimately have to eliminate the loan limit excess amounts by 31 December 2024 by redeeming at least 50% of them by 30 June 2024.
Regulation on Risk Groups and Loan Limits
Account Status Certificate
Unlike the Former Regulation, which exempted certain transactions from the obligation to obtain an account status certificate, the Regulation on Loan Transactions now requires banks to obtain an account status certificate from customers for all cash and non-cash loans of over TRY 5 million.
Another difference is that non-residents will now be required to submit audited financial statements prepared in accordance with their legislation as proof of account status, regardless of their total loan risk.
The Former Regulation required account status certificates to be submitted within six months following the accounting period each year, while this period will be applied as nine months under the Regulation on Loan Transactions.
Other Mandatory Documents
The Former Regulation stipulated that, in addition to the account status certificate, the most recent financial statements and independent audit reports audited by independent audit firms, the analysis table including the assurance report of the independent audit firm and the corporate governance principles compliance report should also be obtained from the customers at the loan allocation stage. The Regulation on Loan Transactions, on the other hand, clarified how these provisions will be applied for non-residents and introduced new rules regarding the submission of these documents. According to the Regulation on Loan Transactions, for non-residents abroad:
- The financial statements required to be obtained by banks will refer to financial statements prepared in accordance with international standards and independently audited.
- The assurance report of the independent audit firm will not be required to be included in the analysis table.
- The corporate governance principles compliance report will not be required.
Conclusion
The regulations aim to ensure the full harmonisation of banking legislation with Basel III standards within the scope of Turkey's G-20 commitments. In this context, more comprehensive and strict rules are included in the determination of risk groups and loan limits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
