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)