THE SCOPE OF THE LIMITATION OF CASH COMMERCIAL LOANS
Decision No.10250 and Decision No.10265 (“Decisions”) (i) entirely prohibit some companies to use cash commercial loans in TRY, (ii) allow some companies to use cash commercial loans in TRY by limiting the amount of the loan provided that some requirements are met, (iii) exempt some companies from the Decisions.
(i) COMPANIES THAT ARE ENTIRELY PROHIBITED TO USE CASH COMMERCIAL LOANS IN TRY
Companies subject to independent audit are prohibited to use cash commercial loans in TRY, in case;
a) The equivalent of their foreign cash assets (“FX Assets”) exceeds TRY 15,000,000.00 as of the date of loan application to the bank, and
b) Their FX Assets exceed 10% of the greater amount between; their total assets in accordance with the most recent financial statements or net sales revenue of the last year.
We would like to state that banks and financial entities are exempted from this prohibition. In addition, within the scope of the swap transactions carried out by the companies with the banks, the amounts borrowed in TRY by giving foreign currency (including gold) on the spot are also considered cash commercial loans in TRY. Therefore, the prohibition applies to such transactions as well.
What are FX Assets?
In accordance with Decision No.10250, FX Assets consist of foreign currency deposits in banks with effective foreign currency, including gold. Decision No. 10265 sets out a clearer definition of FX Assets, listed as follows:
- Effective foreign currency, including gold
- Foreign currency deposits in banks
- Assets consisting of securities/share certificates issued in foreign currency by domestic or foreign companies (Eurobonds issued by the Republic of Turkey are exempted )
- Participation shares of exchange-traded funds indexed to gold or foreign currency, or related indices
- Reverse repo transactions in foreign currency with companies residing abroad
- Assets in foreign currency given to banks (including gold) in order to obtain Turkish Lira on the spot within the scope of swap transactions with banks.
What is considered commercial cash loan in TRY?
With Decision No.10250, all cash commercial loans in TRY to be used by the companies that are subject to independent audit, with the exception of banks and financial institutions, were restricted. Decision No.10265 expanded the scope of the restrictions and included cash commercial loans in TRY as of August 1, 2022 that will be provided by financial leasing, factoring and financing institutions that are subject to the Financial Leasing and Financing Companies Law No.6361. In addition, cash commercial loans in TRY to be extended to domestic companies by the foreign branches of the banks are also within the scope of the limitations specified in the Decisions.
With the Decision No. 10265, the loans that are not included in the limitations are as follows;
- Loans that are received through corporate credit cards excluding cash withdrawals,
- Loans converted into cash through the Direct Debit System,
- Loans qualifying as irrevocable limit commitments offered by banks to third parties other than the loan customer, and supplier financing loans, which are paid to suppliers by crediting the company in the status of buyer,
- Indemnified non-cash loan amounts that were converted into cash loans in TRY
- Cash commercial loans in TRY restructured and new cash commercial loans in TRY extended within the scope of restructuring.
How is the calculation made for the companies obliged to prepare consolidated balance sheets?
Decision No. 10250 states that, for the companies obliged to prepare consolidated balance sheets in accordance with the accounting and financial reporting standards published by the Public Oversight Accounting and Auditing Standards Authority, the calculations regarding aforementioned sections (a) and (b) will be made upon the consolidated balance sheets. Later, with Decision No. 10265 this calculation method is clarified as follows:
- The foreign subsidiaries and affiliates of the company will not be included in the most recent consolidated balance sheets.
- FX Assets of the companies’ domestic subsidiaries and affiliates excluding banks and financial establishments subject to consolidation, will be included in the calculation of total FX Assets.
- In case the parent company is subject to the prohibition, the subsidiaries and affiliates subject to consolidation will be evaluated apart. In other words, even if the parent company is prohibited to use commercial cash loans in TRY, its subsidiaries and affiliates might be eligible to use commercial cash loans in TRY.
(ii) COMPANIES THAT ARE ALLOWED TO USE A LIMITED AMOUNT OF COMMERCIAL CASH LOAN IN TRY
The Decisions regulate an exemption for the companies with a short position. In this scope, companies may use commercial cash loans in TRY provided that the company has a net FX short position, and the amount of net FX short position is stated to the Bank. The amount of the commercial cash loan in TRY is limited to the amount of the net FX short position in a three months period as of the application to the bank. The statement regarding the FX short position must be confirmed by an independent audit firm or certified public accountant. Following this, the confirmation must be submitted to the bank.
It should be kept in mind that; overdraft accounts and other revolving loans, cash withdrawals from corporate credit cards, or intraday and overnight loans are also added to the calculation. For these loan types, as of June 30, 2022 the total amount of loan balance used by the companies is considered the starting balance. If there is an increase in the total amount of loan balance compared to the last month, this increase is considered a new commercial loan. In this case, the relevant bank must be provided with the necessary information and documents in order for the bank to check if the
requirements regarding the limitation of commercial loans are met. In addition, the companies that use new commercial cash loans in TRY must prepare a statement in which they declare and undertake that their use of new commercial cash loans in TRY is in accordance with the Decisions. This statement must cover the period starting from June 30, 2022 (June 30, 2022 is included) until the evening of the last business day of the month following the end of each quarterly calendar period. An example of this statement is attached as Annex 1 to Decision No. 10265.
(iii) COMPANIES THAT ARE EXEMPT FROM THE DECISIONS
According to the Decisions, the companies that are subject to independent audit and meet the following conditions are exempted from the limitation of using cash commercial loans in TRY. The companies that meet the requirements mentioned below are able to use cash commercial loans in TRY:
a) The equivalent of their FX cash assets to TRY does not exceed TRY 15,000,000.00 as of the date of the loan application to the bank,
b) Their FX Assets do not exceed %10 of the greater amount between; their total assets in accordance with the most recent financial statements or net sales revenue of the last year.
In the determination of net assets and net sales revenue, the most up-to-date financial tables submitted to the tax office, including the temporary tax periods, will be taken into account. For companies that have the obligation to prepare consolidated financial statements, this determination will be made based on the most up-to-date balance sheets that are audited by independent audit firms.
Another group that is completely exempted from the restrictions is the companies whose independent audit obligations will begin at the end of 2022 for the first time, although they are subject to independent auditing.
How will the restrictions be monitored?
While an approach based on the declarations of the companies was adopted with Decision No.10250, it is seen that with Decision No.10265, certain obligations are imposed on the companies that are willing to use cash loans in TRY.
As mentioned above, the companies that are exempt from the restrictions are required to submit documents every three months as of June 30, 2022 to the Bank that extended the loan. These documents must prove that they continue to meet the requirements to be exempt from the Decisions. We would like to state that, there is a distinction between the companies obliged to prepare consolidated financial statements and other companies. The companies obliged to prepare consolidated financial statements must submit the most up-to-date consolidated financial statements audited by independent audit firms. On the other hand, the companies that do not have the obligation to prepare consolidated financial statements may submit the current financial statements submitted to the tax office, including the provisional tax periods.
Another audit mechanism is for the companies that are not subject to independent auditing or will be subject to these obligations for the first time at the end of 2022. Although these companies are exempt from the restrictions, in case of hesitation about whether they are subject to an independent audit by the bank at the date of the loan application, some obligations have been brought for these companies with Decision No. 10265. Based on their statements credit will be granted by the bank; however, these companies are required to submit documents approved by a certified public accountant or independent audit firm proving that they are not subject to independent auditing or that their independent auditing obligations will begin at the end of 2022 within one month from the date of loan use.
Sanction Provisions
Certain sanction provisions were envisaged for the companies that use commercial cash loans in TRY but do not submit the documents which prove that they comply with the limitations or continue to comply with the limitations quarterly and the companies that use commercial cash loans in TRY but do not submit the documents which prove that they do not have independent audit obligation or even if they have, it will start for the first time at the end of 2022. To avoid sanctions, these documents must be approved by independent audit firms for the companies that have the obligation to prepare consolidated financial statements and by independent accountant financial advisors for the companies that do not have these obligations.
It has been explained above that the companies which use cash commercial loans in TRY by meeting the conditions specified in the Decisions must submit documents to the bank every 3 months showing that they continue to meet the conditions. If the companies do not submit these documents within 3 months or it is understood from the documents that they do not meet the conditions, certain sanctions will be imposed. Likewise, certain sanction provisions are envisaged for companies that do not submit documents proving that they are not subject to independent auditing within 1 month from the date of the loan use, or the companies that are found to be subject to independent audit from the documents they submit. For the companies which violate these obligations;
- New commercial credit in TRY will not be extended within the scope of Decision No. 10250 and Decision No. 10265, and
- As of June 30, 2022, 500% risk weight will be applied to all commercial cash loans in TRY, regardless of the approach used when calculating the amount subject to credit risk, regardless of the credit risk mitigation techniques, credit rating grades and real estate mortgages.
Conclusion
Prior to the Decisions, there was no restriction on the use of cash commercial loans in TRY. However, after the publication of the Decisions, the companies willing to use cash commercial loans in TRY must be sure whether they fall within the scope of the Decisions. Therefore, it must be evaluated that the company meets the requirements set by the Decisions in order to use a new cash commercial loan in TRY. Otherwise, it is possible to face sanctions.