In Turkey, wide-ranging procedures and principles apply to loans provided by banks
which are regulated under the Regulation on Loan Transactions of Banks. Banking
sector may rapidly be affected by economic circumstances.

I.
General
Overview

In Turkey, wide-ranging procedures and principles apply
to loans provided by banks which are regulated under the Regulation on Loan
Transactions of Banks ("Regulation"). Banking sector
may rapidly be affected by economic circumstances. Therefore, the Regulation
has been amended a number of times especially in 2019. In this article,
our aim is to present the provisions of the Regulation concerning the
obligation of the Turkish banks to obtain certain documents from their loan
customers as well as amendments introduced to this matter.

II.
What
have changed through the Regulation?

Turkish banks are obliged to obtain financial tables
from their loan customers. However, Article 8 of the Regulation lists a number
of transactions in which loan customers are not required to submit their
financial statements. These transactions are as follows:

• Transactions not exceeding TRY 2 million;

• Transactions carried out with public administrations, their
  affiliates and local administrations, excluding public economic enterprises and
  their enterprises, affiliates and subsidiaries;

• Transactions conducted with the central administrations
  and central banks of foreign countries, or performed in exchange of bonds and
  debentures issued or guaranteed by those;

• Transactions carried out in exchange of cash, cash
  equivalents and precious metals;

• Transactions performed in exchange of bonds and
  debentures issued or guaranteed by Treasury, Directorate of Privatization
  Administration or Housing Development Administration;

• Transactions carried out with Central Bank of the
  Republic of Turkey or performed at the markets in this bank;

• Trading securities obtained from securities exchanges
  or secondary market for the purpose of evaluating very short term funds'
  surpluses;

• Share certificates acquired from organized stock
  markets or due to receivables;

• Transactions between domestic banks with no maturity
  date or a maturity not exceeding 3 (three) months and sureties and guarantees
  issued on the basis of surety bonds issued by these banks;

• Transactions carried out with banks or financial
  institutions whose total loan risks do not exceed USD 5 million and whose loan ratings
  are classified as second class in accordance with the relevant laws as well as
  non-cash loans provided on the basis of surety bonds issued by these banks or
  institutions.

In addition to the financial tables, Article 11/A of the Regulation obliges
banks to request additional documents from their customers which have a total risk of TRY 100 million and more in the
banking sector. By entry into force of the Amending Regulation to the
Regulation on Credit Transactions of Banks ("Amending Regulation") on August
16, 2019, the total risk limit has been reduced from TRY 500 million to TRY 100
million in order to secure loan transactions carried out between Turkish banks
and their customers. Additionally, in light of the amendments to the
Regulation, banks must now obtain additional documents from their customers
with a total risk in the banking sector of TRY 100 million and more.

Prior to the amendments to the Regulation, banks were
required to obtain (i) consolidated financial tables from the customers who are
obliged to prepare consolidated financial tables and (ii) non-consolidated
financial tables from customers who do not have an obligation to prepare
consolidated financial tables. These financial tables must be (i) prepared in
accordance with the accounting and financial reporting standards published by the
Public Oversight, Accounting and Audit Standards Authority of Turkey and (ii)
audited by independent auditors authorized by the Public Oversight, Accounting
and Audit Standards Authority of Turkey. Following entry into force of the
Amending Regulation, the banks must also obtain the most recent consolidated
financial tables of their customers' parent companies. These consolidated tables
must be prepared in line with the abovementioned standards and audited by
independent auditors authorized by the Public Oversight, Accounting and Audit
Standards Authority of Turkey.

Loan customers residing outside of Turkey must
submit their balance sheets, profit and loss tables as well as accompanying
financial tables which are prepared in accordance with their own legislation
and include the footnotes in line with the international standards.

The Communiqué on Corporate Governance (II-17.1)
requires joint-stock companies, the shares of which are offered to public or
deemed to be offered to public, to prepare corporate governance compliance
reports. Following entry into force of the Amending Regulation, these
joint-stock companies must also submit their corporate governance compliance
reports to the banks in order to receive loans.

On the other hand, the Amending Regulation
exempts joint-stock companies that are not subject to the Communiqué
on Corporate Governance (II-17.1) from submitting their corporate
governance compliance reports prepared in accordance with all corporate
governance principles set forth in the Communiqué on Corporate Governance
(II-17.1). Accordingly, joint-stock companies that are not subject to the
Communiqué on Corporate Governance (II-17.1) must
present their corporate governance compliance reports which include the
following corporate governance principles: functions of the board of directors,
principles of the activity of the board of directors as well as financial right
to be provided to board members and senior executives. It is important to note
that the loan customers residing outside of Turkey are not required to present
a corporate governance compliance report to the banks in order for obtaining loan
from the relevant bank.

III.
Are
there any ambiguities?

Following entry into force of the amendments, Turkish
Banking Regulation and Supervision Agency ("BRSA") provided further
clarifications to the practitioners who submitted questions to the BRSA.

Amending Regulation does not explicitly state whether the companies, which
are not subject to independent audit under the relevant legislation, are also required
to present their financial tables audited by the independent auditors. BRSA confirmed
that since Article 11/A of the Regulation does not
refer to the legislation related to determination of the companies being
subject to independent audit, the banks must obtain financial tables audited by
the independent auditors from their customers with a total risk in the banking
sector of TRY 100 million and over, even if such companies are not subject to
independent audit under the relevant legislation. Accordingly, it can be stated
that the Regulation broadens scope of the legislation which regulates
conditions of the requirement to be subject to independent audit and causes
many other companies to also become subject to independent audit due to their
risks in banking sector.

As explained above, Article 8 of the Regulation lists
a number of transactions in which loan customers are not obliged to present
their financial tables. In this regard, it is not clear whether the loan
customers must present the documents listed in Article 11/A of the Regulation
for their transactions stipulated in Article 8 of the Regulation. It is
understood from BRSA that Articles 8 and 11/A of the Regulation must be
separately assessed and the loan customers with a total loan risk in the banking
sector of TRY 100 million and over must submit the documents listed under
Article 11/A of the Regulation.

The Amending Regulation has introduced a new
obligation on the banks to obtain the most recent consolidated financial tables
of their customers' parent companies. Under the Amending Regulation, these
consolidated financial statements must be prepared in line with the Turkish standards
and audited by independent auditors authorized by the Public Oversight,
Accounting and Audit Standards Authority of Turkey. On the other hand, Article
11/A of the Regulation stipulates that the loan customers residing
outside of Turkey must submit their balance sheets, profit and loss statements
as well as accompanying financial statements which are prepared in accordance
with their own legislation and include the footnotes in line with the
international standards. As it may be seen, the Amending Regulation does not
address the issue whether loan customers' parent companies residing outside of
Turkey are obliged to present their financial statements. If so, it is also not
explicit whether these financial statements of the loan customers' parent
companies residing outside of Turkey must be in line with Turkish or
international standards. Within this scope, BRSA clarified that the loan
customers' parent companies residing outside of Turkey must provide the banks
with their financial statements (i) prepared in accordance with
the accounting and financial reporting standards published by the Public
Oversight, Accounting and Audit Standards Authority of Turkey and (ii) audited
by independent auditors authorized by the Public Oversight, Accounting and
Audit Standards Authority of Turkey. This approach is expected to put a lot of
strain on the loan customers' parent companies residing outside of
Turkey.

Lastly, it also needs to be clarified whether a
company residing outside of Turkey must provide the banks with their balance
sheets, profit and loss statement as well as accompanying financial tables which
are prepared in accordance with their own legislation and include the footnotes
in line with the international standards, in case it intends to obtain loans
for their Turkish resident branches. In this respect, BRSA stated that
in case a Turkish resident branch obtains loan from a Turkish bank, it is
required to submit its financial tables (i) prepared in accordance with the
accounting and financial reporting standards published by the Public Oversight,
Accounting and Audit Standards Authority of Turkey and (ii) audited by
independent auditors authorized by the Public Oversight, Accounting and Audit
Standards Authority of Turkey. Nonetheless, it is not clear how this provision
can be implemented in practice.

IV.
Conclusion

With the aim of protecting Turkish banks, BRSA has
recently amended the Regulation by extending the scope of the loan customers
being subject to submit certain documents to the banks as well as by increasing
the number of the documents that need to be presented to the banks in order to
obtain loans. The changes introduced to the Regulation have created
difficulties in practice and they also have some ambiguities. Therefore, the Regulation
still needs to be clarified in order to prevent misunderstandings and difficulties
that may be encountered in practice.

Authors: Gönenç Gürkaynak, Esq., Nazlı Nil Yukaruç, Büşra
Üstüntaş and Damla Doğancalı, ELIG Gürkaynak Attorneys-at-Law

(First published
by Mondaq on January 21, 2020)