Turkey’s new foreign currency lending regime

Addendum to Legal Handbook for Doing Business in Turkey “Foreign Exchange Control” Sub-section¹

Amendments to Turkish legislation on the extension of foreign-currency denominated loans (the “FX Loans”) and foreign-currency-indexed loans (the “FX-Indexed Loans”) were introduced with an effective date of May 2, 2018 (the “Effective Date”) as a risk management step taken to reduce the domestic foreign exchange exposure of Turkish legal entities and individuals. This addendum reflects our updates to the "Banking and Finance/Foreign Exchange Control" sub-section to our Legal Handbook for Doing Business in Turkey publication.

The Council of Ministers Decree No. 2018/11185 (the “Amendment Decree”), which modified the Decree numbered 32 on the Protection of Value of the Turkish Currency, terminates the ability of Turkish borrowers to obtain FX-Indexed Loans, and restricts the availability of FX Loans extended by both domestic and international lenders.

The Amendment Decree removes the ability of Turkish individuals to obtain both FX Loans and FX-Indexed Loans. As to legal entities, the Amendment Decree prohibits the FX-Indexed Loans, and limits, as a general rule, the extension of FX Loans to those legal entities with foreign currency income only. Legal entities with no foreign currency income are able to borrow in foreign currency only if they or the borrowing concerned fall within one of the exceptions specified herein.

Below is a summary of restrictions applicable to the extension of the FX Loans and exceptions thereto.

Qualifying borrowers - legal entities generating foreign currency income: Legal entities with foreign currency income are allowed to obtain FX Loans up to an amount equal to their aggregate foreign exchange income within the last three financial years.

For the purposes of the Amendment Decree, “foreign currency income” means any income generated from export, transit trade and trade and deliveries deemed as export and foreign currency generating services and transactions.

Verification of aggregate foreign currency income is the responsibility of the lender for domestic lenders, or the intermediary Turkish bank for international lenders. Should a borrower’s foreign currency income verification prove to be incorrect, the portion of the disbursed FX Loan in excess of the total foreign income over the last three fiscal years will need to be recalled or converted to a Turkish Lira loan.

If such legal entity or the borrowing falls under any of the exceptions below, this income test will not apply.

Unqualified borrowers - legal entities with no foreign currency income: Legal entities which cannot generate foreign currency income are not allowed to obtain FX Loans as of the Effective Date, unless one of the following circumstances applies:

• the borrower is a public authority/institution, bank, financial leasing company, factoring company, or a financing company;
• the borrower has a minimum foreign currency loan balance of US$ 15 million (or its equivalent in another foreign currency);
• the borrowing is within the scope of investment incentive certificates or for the financing of certain machines and tools listed in the respective customs tariff statistics positions;
• the borrower has been awarded an internationally announced domestic tender or has undertaken defense industry projects approved by the Undersecretariat for Defense Industries;
• the borrowing is for public private partnership (PPP) projects;
• the borrower does not generate, but has the potential to generate, foreign currency income (in which case, the loan amount to be within the limits of such potential foreign currency income, which needs to be properly evidenced); or
• the borrowing is in line with principles to be set out by the relevant Ministry (as of publication, this is currently the Prime Ministry).

Entry into force of the Amendment Decree does not affect the validity of the FX Loans which have been already disbursed. Nevertheless, as of the Effective Date, such loan facilities shall not be renewed as FX-Loans, unless the borrower is entitled to obtain such loans under one (or more) of the exceptions specified above.

Notification of foreign currency loan balance: In order to monitor the foreign currency loan balance of persons domiciled in Turkey, the Central Bank of Turkey (the “Central Bank”) promulgated, on February 17, 2018, the Regulation on Procedures and Principles for Monitoring of Transactions Affecting Foreign Currency Positions (the “Monitoring Regulation”).

Accordingly, if at the end of an accounting period, the foreign currency loan position of an individual/entity is higher than US$ 15 million (or its equivalent in any other foreign currency), such individual/entity is required to notify the Central Bank of its foreign currency loan position as of the subsequent accounting period, through an electronic portal titled Systemic Risks Data Monitoring System.

The required notifications will be filed (i) quarterly, within one month following each quarter; and (ii) annually, within three months following each financial year.

The Monitoring Regulation further requires an independent auditor to confirm the content of the notifications listed above through the same electronic portal by May 31st of the year immediately following the submission of the annual notification.