• Begum Durukan Ozaydin, Muhammed Kesim

Amendment to the BRSA Regulation on Classification of Loans and Provisions to be Set Aside

Amendments to the Regulation on Procedures and Principles for Classification of Loans and Provisions to be Set Aside (“Regulation”) by the Banking Regulation and Supervision Agency (“BRSA”) has been published in the Official Gazette No. 31533 on July 6, 2021. The amendments mostly relate to (i) the reclassification of non-performing loans and (ii) valuation of the assets acquired by the banks due to their receivables.

Changes Introduced

NPL Reclassification and Restructuring

The banks are now obliged to (i) keep their criteria for reclassification of non-performing loans ready for audit in written form pursuant to Article 6.5 of the Regulation and (ii) carry out an evaluation regarding the repayment capacity of the borrower prior to the restructuring of the obligation of the borrower as per Article 7.10 of the Regulation.

Write-Down Timelines

Article 8.3 of the Regulation previously provided for the option that the portion of the loans classified as “5th group - as loss" as per the Regulation and for which the provision for loan loss expected for lifetime or special provision has been set aside due to the default of the debtor and for which there exist no reasonable expectations for recovery may be written down pursuant to TFRS 9 (Turkish Financial Reporting Standards 9 – Financial Instruments Standard) starting from the first reporting period (interim or year-end reporting period) following their classification in such group. The amendment to the article specifies that the above-mentioned portion of the loans shall be written down at a time deemed appropriate by the banks subject to the specific situation of the debtor and the banks shall now be required to record the periods of write downs along with their justification and shall keep such records ready for audit.

Collateral Groups for Loan Classification

Article 13 of the Regulation already stipulates that the banks, who do not implement the TFRS 9, are obliged to monitor their collaterals with respect to the loans by classifying them under regulated collateral groups. The amendment to the Article 13 introduces new collateral types under such groups. Accordingly, (i) electronical warehouse receipts (elektronik ürün senedi - ELÜS) that are traded in Türkiye Ürün İhtisas Borsası A.Ş. (Turkish Merchantile Exchange) (TÜRİB) and (ii) state-subsidized commercial credit insurance policies will be classified among the second group of collaterals. Moreover, third group collaterals are amended to exclude the above-mentioned collaterals that are now included within second group.

Acquisition of Assets Due to Receivables

The obligation of the banks to account in accordance with the Turkish Accounting Standards and to dispose within three years the commodities and real estate that banks acquire due to their receivables under Article 16 of the Regulation have been extended to cover partnership (shareholding) interests and other assets as well. In addition, the BRSA has become authorized to change such duration as a result of the amendment. A valuation requirement in accordance with the Communiqué on Credit Risk Mitigation Techniques of the BRSA for such assets are also introduced prior to them being acquired. Such assets shall be recorded over the lesser of (i) the amount calculated to set off against credit debt (ii) actual value less sale costs.

Guidelines

BRSA has also announced the Guideline on Resolving Problem Loans, which relates to the resolution of restructured or non-performing loans, along with the Guideline on Procedures of Allocating and Monitoring the Loans on its website on July 8, 2021.