Recent Development

The Council of Ministers published a decree amending the Decree No. 32 on the Protection of the Value of the Turkish Currency ("Decree No. 32") in the Official Gazette No. 30312 on 25 January 2018.  The amendments providing restrictions on FX loans will enter into force on 2 May 2018. 

What's new? 

The amendments restrict utilization of FX loans from Turkey and abroad.

Loans Utilized by Turkish residents from Abroad

Prior to the amendments, real person Turkish residents were not entitled to utilize foreign currency denominated loans from abroad. With the amendments, Turkish residents that do not have foreign exchange income will no longer be able to utilize foreign currency denominated loans from abroad, save for certain exceptions:

a) Foreign currency denominated loans to be utilized by public authorities and institutions, banks and financial leasing companies, factoring companies and financing companies.

b) Foreign currency denominated loans to be utilized by Turkish residents whose loan balances are USD 15 million or more at the time of the utilization;

c) Foreign currency denominated loans to be utilized by Turkish residents whose utilization of loan is envisaged within an investment incentive certificate and foreign currency denominated loans to be utilized for the financing of certain machines and devices.

d) Foreign currency denominated loans to be utilized by Turkish residents that won an internationally announced domestic tender or by Turkish residents undertaking defense industry projects that are approved by the Undersecretariat of Defense.

e) Foreign currency denominated loans to be utilized by Turkish residents appointed to carry out projects within the context of a public private partnership.

f) Foreign currency loans to be utilized by Turkish residents that do not have foreign exchange income in the last three fiscal years and that do not exceed the amount of their predicted income in foreign currency that is certified, on the condition that their connections regarding exporttransit trade, sales and deliveries deemed export, foreign exchange earning services and transactions and possible foreign exchange income is certified.

g) Cases to be determined by the relevant ministry.

For foreign currency denominated loans to be utilized from abroad by Turkish residents that have foreign exchange income, the sum of the loan to be utilized and the current loan balance cannot exceed the total foreign exchange income of the last three fiscal years, if the debtor's total loan balance is less than USD 15 million at the time of the utilization. Additionally, the intermediary bank is obliged to ascertain that this condition is fulfilled. If the loan balance extended by the branches of Turkish banks and financial institutions abroad (including banks' offshore branches but excluding free zone branches) exceeds the total foreign exchange income of the last three fiscal years, the excess is recalled or converted into Turkish lira denominated loans.

Banks and financial institutions will freely be able to utilize loans from abroad within their customs, save for relevant legislation.

In addition to the above, the loans utilized from abroad must still be utilized through Turkish banks and the principal, interest or other payments must be made via Turkish banks.

Loans Utilized From Turkey

For foreign currency denominated loans utilized from abroad, the borrower will need to have foreign exchange income to utilize foreign currency denominated loans from Turkey save for exceptions stated for the loans to be utilized from abroad. However, this condition is not applicable for foreign currency denominated financial leasing transactions for the financing of certain machines and devices.  Foreign currency denominated loans to be extended by banks to Turkish residents in Turkey which do not exceed the amount of the receivables kept as foreign exchange in the Turkish branches of banks as collateral and/or the amount of issued securities by the centralized governments and central banks of the member countries of the Organization for Economic Cooperation and Development (OECD) or the amount of securities issued through their sureties will also qualify as an exemption thereunder.

For foreign currency denominated loans to be utilized from Turkey by Turkish residents that have foreign exchange income, the sum of the loan to be utilized and the current loan balance cannot exceed the total foreign exchange income of the last three fiscal years if the borrower's total loan balance is less than USD 15 million at the time of the utilization. Additionally, Turkish banks and financial institutions are obliged to ascertain this condition is fulfilled. If the loan balance extended by the banks (including free zone branches) and financial institutions in Turkey exceeds the total foreign exchange income of the last three fiscal years, the excess is recalled or converted into Turkish lira denominated loans.

Real person Turkish residents will not be entitled to utilize foreign currency denominated loans from Turkey. Turkish residents will not be entitled to utilize foreign currency indexed loans from Turkey.

Save for the relevant legislation, Turkish banks and financial institutions will be entitled to provide each other with foreign currency denominated loans, without any term limitations, directly or through participation in an international syndicate and in accordance with their customs.

Turkish resident financial leasing companies will be entitled to enter into financial leasing transactions based on foreign currency with Turkish resident entities and persons residing abroad if the transactions comply with the principles stated above.

In this context, foreign exchange income means "income generated from export, transit trade sales and deliveries deemed export, foreign exchange earning services and transactions as determined by the relevant legislation" and loan balance means "the total unpaid portion of cash loans denominated in foreign currency utilized from abroad or in Turkey".

Foreign currency denominated loans  utilized by Turkish residents from Turkey or abroad, whose loan balance is below USD 15 million will not be renewed as foreign currency denominated loans save for the exceptions above. This will also apply to goreign currency indexed loans. Loans utilized prior to the effective date of 2 May 2018 will be included in the calculation of loan balances.

Conclusion

The amendments impose significant restrictions on Turkish residents utilizing FX loans. FX loan borrowers must consider these restrictions when working on their financial planning. As the amendments are targeting to regulate borrowings below USD 15 million, SMEs will need to take a closer look at them.