Blog: Snapshot: regulation of bank loan facilities in Malta – Lexology

Regulation

Capital and liquidity requirements

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

Maltese banks are very conservative in their lending practices and in their development of more sophisticated lending propositions. This conservatism has been a defining feature of Maltese banking since its inception, principally owing to the size of the market and the gradual development of the more sophisticated capital market seen today. The financial crisis of 2008 had little, if any, impact on Maltese banks owing to their limited exposure to international commercial paper. Consequently, the liquidity requirements imposed by Basel III have not had any noticeable impact on Maltese banks’ general approach to lending.

Disclosure requirements

For public company debtors, are there disclosure requirements applicable to bank loan facilities?

Yes. Public companies are expected to disclose the nature and extent of their bank loan facilities. Details of those borrowings must also be included in the audited financial statements.

Use of loan proceeds

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

The use of bank loan proceeds is subject to several specific conditions imposed by the bank. These very often prescribe the specific drawdown mechanism by the borrower in respect of which the bank would only pay third-party creditors of the borrower with regard to the agreed facility to retain a legally privileged ranking over the asset being paid for, where the privilege is available under Maltese law. Anti-corruption rules, anti-money laundering regulations and antiterrorism sanctions are all included as conditions in the standard terms and conditions of Maltese banks.

If a borrower applies the loan proceeds contrary to the bank’s conditions, this typically constitutes an event of default, resulting in the bank accelerating and calling in the loan. The mitigation of this risk lies in the practice of having the bank advance funds solely to designated suppliers of the borrower, enabling the bank to keep a high degree of control over the application of funds towards their originally intended purpose.

Article 15 of the Banking Act also prohibits a bank from granting any credit facilities against the security of its own shares or against any other securities issued by the institution itself. It must also ensure that any credit facilities or other banking services granted or extended to any of its directors or their spouses; to any entity where one or more of its directors is interested as a director, partner, manager, agent or member; or to any other person or entity for whom one or more of the bank’s directors is a guarantor, are granted under terms and conditions that are not more favourable than the credit institution would have otherwise applied.

Cross-border lending

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

Yes. The Prevention of Money Laundering and Funding of Terrorism Regulations (SL 373.01) imposes significant limitations on banks in respect of any banking business undertaken with debtors organised in jurisdictions that are deemed to be high-risk or that are subject to international sanctions. Any breach of these regulations exposes the bank to administrative fines of up to €5 million or up to 10 per cent of the bank’s total annual turnover.

Debtor’s leverage profile

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

No. Maltese law does not lay down any specific rules that restrict 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 based on a proper and objective assessment of the debtor’s general creditworthiness and of the uses to which the credit will be applied.

Interest rates

Do regulations limit the rate of interest 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 permissible by law (and as a matter of public policy) is 8 per cent per annum, subject to certain exceptions as shall be considered below. If a higher interest rate is charged, it must be reduced to this rate.

It is also an established legal principle that the compounding of interest is not generally enforceable unless the obligation to pay interest is for a period of more than one year, and the interest rate is capitalised annually, satisfying the requirements of article 1850 of the Civil Code.

Banks and certain cross-border financing transactions are exempt from this general rule in virtue of the Interest Rate (Exemption) Regulations (SL 16.06), allowing 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 over and above the bank’s base rate, and they may vary slightly between the consumer lending rate, the home loan rate and the business lending rate. Interest rates on loans to small and medium-sized enterprises tend to be higher than the euro area average. The two main factors underpinning interest rate pricing are the bank’s cost of funding and the risk element, with local banks making limited use of cheap European Central Bank funding as a result of a high local deposit base.

Currency restrictions

What limitations are there on investors funding bank loans in a currency other than the local currency?

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

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

Since Malta’s accession to the European Union, there have been no exchange control regulations. Furthermore, no distinction is made between undertakings owned or controlled by EU citizens and those owned or controlled by non-EU citizens for the purposes of exchange controls, although the Minister of Finance has the power to make regulations to impose restrictions on capital transactions in limited and exceptional circumstances to preserve the stability of the Maltese financial system.

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

Other regulations

Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

The principal regulatory consideration that could have an impact on the structuring or availability of bank loan facilities is that relating to large exposures, particularly given the comparably smaller size of the balance sheets of Maltese banks. 

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