Bank loan

Snapshot: regulation of bank credit facilities in Malta

Regulation

Capital and liquidity requirements

Describe the impact of capital and liquidity requirements on the structure of bank lending facilities, including the availability of related facilities.

Maltese banks are very conservative in their lending practices and in developing more sophisticated loan proposals. This conservatism has been a defining characteristic of the Maltese bank since its inception, mainly due to the size of the market and the gradual development of the more sophisticated capital market that we see today. The 2008 financial crisis had little or no impact on Maltese banks due to their limited exposure to international commercial paper. Consequently, the liquidity requirements imposed by Basel III have not had a significant impact on the general approach of Maltese banks to credit.

Disclosure requirements

For debtors of public enterprises, are there any disclosure requirements applicable to bank loan facilities?

Yes. Public companies must disclose the nature and extent of their bank lending facilities. Details of these borrowings should also be included in the audited financial statements.

Use of loan proceeds

How is the use of bank loan proceeds regulated by the debtor? What liability could investors be exposed to if the debtor uses the proceeds in a way that is contrary to the regulations? Can investors mitigate their liability?

The use of the proceeds of the bank loan is subject to several specific conditions imposed by the bank. These very often prescribe the specific mechanism of drawdown by the borrower under which the bank would pay to the borrower’s third party creditors only under the agreed facility to maintain a legally privileged rank in relation to the asset to pay, when the lien is available under Maltese law. Anti-corruption rules, anti-money laundering regulations and anti-terrorism sanctions are all included as conditions in the terms and conditions of Maltese banks.

If a borrower applies the loan proceeds contrary to the bank’s terms, this is usually an event of default, causing the bank to accelerate and recall the loan. Mitigation of this risk lies in the practice of requiring the bank to advance funds only to the borrower’s designated vendors, which allows the bank to maintain a high degree of control over the allocation of funds to the borrower. their original destination.

Article 15 of the banking law also prohibits a bank from granting credit facilities against the pledge of its own shares or against any other security issued by the institution itself. It must also ensure that all credit facilities or other banking services granted or extended to one of its directors or to their spouses; to any entity in which one or more of its directors are interested as director, partner, manager, agent or member; or to any other person or entity for which one or more directors of the bank acts as guarantor, are granted on terms which are not more favorable than those that the credit institution would otherwise have applied.

Cross-border loans

Are there regulations that limit an investor’s ability to extend credit to debtors organized or operating in particular jurisdictions? What liability do investors face if they lend to such debtors? Can investors mitigate their liability?

Yes. The Regulation on the Prevention of Money Laundering and Terrorist Financing (SL 373.01) imposes significant limitations on banks with regard to any banking activity undertaken with debtors organized in jurisdictions deemed to be high risk or subject to international sanctions. . Any breach of these regulations exposes the bank to administrative fines of up to 5 million euros or up to 10 percent of the bank’s total annual turnover.

Debtor leverage profile

Are there limits to an investor’s ability to extend credit to a debtor based on the debtor’s debt profile?

No. Maltese law does not provide any specific rule restricting an investor’s ability to extend credit to a debtor, based on the debtor’s leverage profile. This does not affect the general legal principles on fiduciary duties, under which the directors of the investor would be expected to consider investment opportunities on the basis of a proper and objective assessment of the debtor’s general creditworthiness and uses. to which the credit will be applied.

Interest rate

Do regulations limit the interest rate that can be charged on bank loans?

Article 1852 of the Civil Code (Chapter 16 of the Laws of Malta) establishes the general rule that the maximum interest rate permitted by law (and public order) is 8 percent per annum, subject to certain exceptions which will be considered below. If a higher interest rate is charged, it should be reduced to that rate.

It is also an established legal principle that the composition of interest is generally only enforceable if the obligation to pay interest is for a term of more than one year, and the interest rate is capitalized annually, meeting the requirements. of article 1850 of the Civil Code. .

Banks and certain cross-border financing transactions are exempt from this general rule under the Interest Rates (Exemption) Regulation (SL 16.06), which allows commercial rates in excess of this limit to be charged for various forms of facilities and borrowings in circumstances where no party to the financial transaction is a natural person.

Bank interest rates are usually expressed as a percentage above the bank’s base rate, and they can vary slightly between the consumer loan rate, the home loan rate, and the business loan rate. Interest rates on loans to small and medium-sized businesses tend to be above the euro area average. The two main factors underlying the pricing of interest rates are the bank’s cost of funding and the element of risk, with local banks making limited use of cheap funding from the European Central Bank due to a high local deposit base.

Currency restrictions

What are the limits imposed on investors who finance bank loans in a currency other than the local currency?

Between 1972 and 1994, Malta applied a strict exchange control regime limiting the flow of capital out of Malta. In 1994, current account transactions were freed from exchange controls. Between 2002 and 2004, capital controls were phased out, meaning that all remaining exchange control restrictions were removed until May 1, 2004, when Malta became a full member of the Union European.

In 2003, the Foreign Exchange Control Act (Chapter 233 of the Laws of Malta) was revised and renamed the External Transactions Act as part of Malta’s legal and economic preparations to become a full member of the European Union.

Since Malta joined the European Union, there have been no regulations on foreign exchange controls. In addition, no distinction is made between companies owned or controlled by EU citizens and those owned or controlled by third country citizens for exchange control purposes, although the Minister of Finance has the power to take regulations to impose restrictions on capital transactions in a limited number of and exceptional circumstances to preserve the stability of the Maltese financial system.

In light of the removal of exchange control regulations, investors who finance bank loans are free to make these investments in any currency.

Other regulations

Describe any other regulatory requirements that impact the structure or availability of bank credit facilities.

The main regulatory consideration that could have an impact on the structuring or availability of bank credit facilities relates to large exposures, especially given the comparatively smaller size of Maltese banks’ balance sheets.

Declaration date of the law

Correct on

Give the date that the above content is correct.

May 11, 2020.