Turkiye has long had one of the lowest non-performing loan (NPL) rates in Europe, but recent years have seen some ups and downs. Between 2017 and 2020, the rate fluctuated between 3.25% and 3.46%. During the pandemic, the rate dropped significantly as borrowers benefited from extended loan payment schedules. Thereafter, the rate rose briefly before falling below the European Union average of 2.27% in 2023. Since the beginning of 2024, however, rising interest rates have pushed the NPL rate back up, to 1.71%. Experts expect the rate to rise to 2.5% by the end of the year, above the EU average and a challenge for borrowers and lenders.
Turkiye has established a clear regulatory framework for dealing with NPLs. Loans are classified as non-performing if they are overdue for more than 90 days or if a borrower has to take out a new loan to cover missed payments. The framework also includes rules for companies that manage and purchase these loans, called asset management companies. These companies follow specific guidelines on how to operate and how to transfer debts.
The establishment of an asset management company in Turkiye requires the approval of the Banking Regulation and Supervision Agency (BRSA) based on certain requirements prescribed by law. Even after initial approval, they must meet additional conditions, including maintaining experienced management and reliable systems for handling their activities. At least three board members must have seven years’ experience in fields such as law, economics, or banking. If an asset management company fails to meet these requirements, it risks losing its license to operate.
The role of asset management companies is carefully regulated. Their main task is to buy troubled loans from banks and other financial institutions and then work to collect payments. They are prohibited from offering loans or engaging in any other business outside this scope. The transfer of loans must follow a fair and transparent process, often involving a public tender where all bidders are treated equally. This ensures that the process is open and competitive.
Financial institutions transferring loans to these companies are required to inform borrowers of the relevant transfer in question. This includes providing details of the asset management company now handling their debt. Before the transfer is finalized, the relevant institution must provide all relevant information about the loans, such as the amount owed, any legal action taken, and the borrower’s contact details. They must also be prepared to respond to any questions or complaints from borrowers pertaining to the transferred loans.
After taking over the loans, asset management companies must notify the borrowers in writing or electronically. This notification explains key details about the debt, including the amount owed, its origin, and what could happen if it is not paid. When first contacting borrowers, firms must provide this information in a clear and simple way. They must also send a written follow-up to the borrower’s address to ensure transparency. If borrowers are unable to pay or fail to reach an agreement with the company, legal action may be taken to recover the debt. Any payments made during this process must be reported to the authorities to ensure proper records are kept.
Some asset management companies use external service providers to assist with debt collection. However, these companies remain fully responsible for ensuring that all actions are compliant. Contracts with third-party service providers must meet regulatory standards and be available for inspection by the authorities if required. The BRSA closely monitors these companies and can suspend or revoke their license if they fail to comply. Asset management companies must also keep the authorities informed of any major changes, such as opening new branches or changing their business structure.
The Turkish NPL market is increasingly attractive as high interest rates and inflation pressure borrowers. These conditions create opportunities for asset management companies to grow their operations. However, strict regulatory compliance is crucial for maintaining market confidence and smooth operations.
Managing non-performing loans can be complex, but Turkiye’s regulatory framework offers a strong foundation for success. By following these rules and communicating clearly with borrowers, asset management companies can thrive while supporting financial stability.
By Alaz Eker Undar, Partner, CMS
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
