Serbia is a partner country under the Vienna Initiative NPL framework.
As of June 2016, non-performing loans (“NPLs”) amounted to €3.3 billion, for a NPL ratio of 20.2% and a NPL coverage ratio of 65.1%.
A NPL Working Group consisting of IFIs (including IMF, IFC and EBRD) and government representatives was created in 2015 to address the NPL problem. The authorities published their NPL Resolution Strategy in 2015 and committed to various policy reforms under the IMF standby arrangement.
To identify and prioritise further actions required, in April 2015 (with updates in December 2015) the Ministry of Finance published the Draft of Analysis of the existing impediments to the sale of NPLs in Serbia, a study supported under an EBRD technical assistance project. The Serbian authorities have begun implementing various measures, such as amending the Mortgage Act and introducing a new legal and operational framework to improve the quality of collateral valuations.
Assessment of NPL Burden and Corporate Debt Distress
IMF, Republic of Serbia – Sixth Report under the Stand-By Arrangement, December 2016
Banking sector conditions remain stable. Data for the second quarter of 2016 points to continued resilience in the wake of last year’s asset quality review, with an average capital ratio exceeding 21 percent(well above the regulatory minimum of 12 percent and above the regional average) and a gradual improvement in asset quality (as illustrated by the change in the composition of classified assets). Banking sector profitability continues to improve year-on-year, with the reduction in credit losses outpacing the decline in banks’ net interest income. The NPL strategy continues to be implemented and is delivering good results, with the aggregate stock of NPLs falling both in nominal terms and relative to total loans. While the NPLs remain high, they are fully provisioned. Still, progress made by individual banks is uneven, underscoring the importance of concerted supervisory action—in particular by scrutinizing banks’ strategies for reducing NPL stocks to acceptable levels, and encouraging write-offs of exposures deemed uncollectable. To underpin long-term stability of the Serbian banking system, and to ensure harmonization of the regulatory framework with EU standards, the NBS is pushing ahead with the implementation of Basel III.
EBRD, Country Assessment: Serbia, Transition Report 2016
Non-performing loans (NPLs) should be reduced further. Consistent implementation of the NPL resolution strategy is needed to support more market-based transactions. Other regulatory changes are also needed to create a more liquid market for NPL sales and transfers and allow a faster clean-up of banks’ balance sheets.
European Investment Bank, CESEE Bank Lending Survey, H2 2016
Credit demand has further strengthened, while supply conditions have moderately tightened, with group NPLs, more than domestic NPLs, contributing to this moderate tightening. In fact, in contrast to stagnation of NPL figures reported in the previous survey, credit quality has improved significantly over the last six months both in the corporate and retail sectors. This encouraging development is projected to continue in the following half year, outperforming the CESEE region.
World Bank Group, Republic of Serbia, Country Partnership Framework 2016-2020, May 2015
The chronically high rate of NPLs in Serbia increases banks’ risk aversion, dampens credit growth, jeopardizes profitability and presents a systemic risk for the banking sector. The domino-effect caused by insolvent companies preventing loan repayment, as well as potential savings and investments, further increases the cautiousness of banks. Improving the regulatory framework for NPL resolution is a key to decreasing the internal risks faced by the financial system in Serbia. The resolution of NPLs in Serbia is impeded by lengthy insolvency proceedings, unclear positions of classes of creditors, legislation protecting debtors rather than creditors, weak supervision over insolvency administrators, and lack of technical knowledge among the judiciary where court proceeding and execution of security can take years. The IMF, as part of its current standby facility is coordinating a working group of IFIs including IFC, EBRD and the World Bank Group to address the NPL problem in Serbia.
National Bank of Serbia, NPL Resolution Strategy, Q2 2015
The rising NPLs in Serbia are a consequence of both macroeconomic and bank specific factors. Among the macroeconomic determinants, econometric analyses are confirming that higher unemployment rate, exchange rate depreciation and higher inflation are contributing to higher NPLs, while NPLs are showing negative correlation with the pace of economic recovery (higher GDP growth results in lower NPL ratio). Bank specific factors are also slowing down resolution of NPL portfolios. Although credit standards are much tighter nowadays compared to pre-crisis period, banks still have to improve their capacity to manage NPL portfolios. The evidence of banks’ operational capabilities in the area of NPL management shows that some banks are faced with weak internal organization and poor analytical capacity, without clear processes and procedures for NPL management, which is important for their effective resolution. This is transferred in high share of NPLs that are overdue for more than 365 days (73% at the end of April 2015).
National reforms and support by the international organisations
Highlights of significant measures implemented recently
Report on “Analysis of the existing impediments to the sale of NPLs in Serbia”: A study prepared by EBRD with assistance from KPMG and published for public consultation by MoF in H2 2016, highlighted areas for further action in order to support the development of a secondary market for NPLs.
“NPL Resolution Strategy” and “Action Plan”: Adopted by the Government in August 2015, both are being implemented and monitored by an official Working Group (WG). EBRD, with financial support from DFID, has been providing coordination support to MoF in that area.
Amendments to the Mortgage Act: Adopted in July 2015, with one of the most prominent changes being the possibility of any creditor, regardless of the ranking of its claim, to initiate the foreclosure procedure.
Amendments to the Banking Act: Came into effect in H1 2015 and incorporated numerous changes, such as reflecting some of the provisions of the BRRD , including an asset separation tool for the transfer of the assets, rights or liabilities of a bank under resolution to the Deposit Insurance Agency (DIA), or to asset management vehicle(s) (AMC).
Explanation on tax deductibility of distressed debts write-offs: The government issued mid-2016 an official explanation on the tax deductibility of distressed debt write-offs.
Supervisory Guidance for Loan-Loss Provisioning (LLP): Setting expectations for LLP under IAS 39 (implemented in December 2015). Banks are in the process of implementing recommendations for strengthening their internal accounting policies. National Bank of Serbia (NBS) expects auditors to independently assess banks’ progress. NBS is simultaneously strengthening its analytical and supervisory capacity for IFRS.
Law on Consensual Financial Restructuring: The new law became applicable in February 2016, now applies to both companies and individual entrepreneurs (the latter were previously excluded from the old law) and is intended to provide a better legal framework for voluntary debt restructuring.
Amendments to the Law on Agency for Bankruptcy Administrators in 2015: The Agency got authority over all bankruptcy procedures and administration for the state-owned companies bankruptcy cases.
Real Estate Cadastre operations: in order to improve efficiency, 324 new part-time employees were engaged thanks to funding from the World Bank and the Republic Geodetic Authority. As a result, the average time for mortgage registration has improved (11 days in 2016 compared to 48 in 2015). However, backlog of cases and unresolved appeals from the previous years are still issues preventing full operational efficiency of the cadastre agency.
Amendments to corporate insolvency law: Amendments are aimed at ensuring: (i) adequate safeguards for the secured creditors’ rights; (ii) better value maximization and more predictable and swift disposal of assets where assets are not strictly necessary for rehabilitation; and (iii) stronger protection of new creditors in a reorganization. Public consultation concluded in October 2016 and the amendments were initially expected to be adopted by end-February 2017. The submission and adoption of the changes have however been delayed.
Amendment to the Civil Procedure Act: the Amendment’s objective is to grant unconditional right to the new creditor (NPL acquirer) to take over an ongoing dispute without additional consent from the counterparty. A draft of the Amendment has been prepared by MoJ and should be adopted by the end of the second quarter of 2017.
Law on Real Estate Appraisers: The law will regulate the profession of real estate appraisers and is intended to help ensure that collateral valuations are sufficiently conservative, and thus contribute to adequate provisioning. A draft law was adopted by the National Assembly in December 2016.
Banking Secrecy Rules: Building on some of the recommendations of the report on “Analysis of the existing impediments to the sale of NPLs in Serbia”, NBS has published an official interpretation of the application of banking secrecy rules with the aim to facilitate comprehensive due diligence for NPL sales. However, clarification of the scope of business secrecy and data protection laws remains to be completed. EBRD has prepared a proposal for MoF on amendments to the Business Secrecy Protection Law, which would remove impediments to the sale of loans resulting from the current provisions on bank secrecy and data protection.
Serbian Government, NPL Resolution Strategy, Official Gazette of the Republic of Serbia, Number 72/15, Q2 2015
Acknowledging the severity of the NPL overhang, the Serbian authorities, with assistance from the IFIs, are committed to support meaningful debt resolution by the private sector.
To this end, the authorities have tasked a Working Group with the development of a comprehensive NPL resolution strategy that aims to, among others:
I. Identify and remove impediments for meaningful debt resolution;
II. Strengthen incentives for viable but distressed debtors and creditors to participate in meaningful restructuring;
III. Ensure timely loss recognition; and
IV. Prevent further accumulation of distressed debt in the Serbian banking system.
The Working Group is in charge of implementation monitoring, including the identification of any slippage and/or residual risks that warrant additional measures.
NPL Resolution Strategy, Executive Summary and Action Plan
EBRD’s current focus in Serbia is related to bolstering the banking sector and deepening the financial intermediation. In line with the Joint IFI Action Plan for Growth in Central and South-Eastern Europe, EBRD will seek to help stabilise the financial sector.
EBRD will continue its policy dialogue, directly with the National Bank and through the Vienna Initiative 2.0, to encourage local currency lending and improve cross-border cooperation on banking sector issues and help in resolving the problem of NPLs.
Specific to NPLs:
The Bank is expanding its engagement with relevant authorities in assisting with the resolution of NPLs. Further than technical assistance provided by the legal transition team on consensual resolution, the Bank will continue to conduct market assessment of NPLs and facilitate the interaction between the Ministry of Economy and private equity funds focusing on special situations.
The Bank will continue working with the authorities on the Vienna Initiative 2.0, in which Serbia is an active member. In particular, under Vienna 2.0, the Bank is working closely with EBA and ECB to include non-EU members into coordination in the context of the EU’s ongoing Banking Union project. In addition, Vienna 2.0 has established two new working groups – on NPLs and on innovative instruments for supporting credit growth – which is expected to come up with policy recommendations to address the resolution of NPLs and the rekindling of credit growth in Serbia and other countries in the region.
On 28 and 29 April 2015, the NBS hosted a two-day conference “Belgrade Initiative – Resolution of Non-Performing Loans in Serbia”. A further workshop is planned for the summer of 2016.
From the press release of the National Bank of Serbia
The conference was organised in cooperation with the Ministry of Finance and World Bank Financial Services Advisory Centre (FinSAC), and gathered a number of representatives of the private and public sectors and international financial institutions.
The conference was opened by NBS Governor Jorgovanka Tabaković, Finance Minister Dušan Vujović, Fernando Montes-Negret from the World Bank/FinSAC, Daehaeng Kim from the IMF, Matteo Patrone from the EBRD and Thomas Lubeck from the IFC.
Around 150 representatives of competent ministries, banks, international financial institutions, Association of Serbian Banks, domestic and foreign audit firms, investors and lawyers took part. In the first day, the focus was placed on solutions that have proven feasible and applicable to the NPL resolution in economic environments similar to Serbia’s. Participants agreed that the NPL resolution is a burning issue and that activities to be taken by public sector representatives must be coordinated. Namely, any isolated solution would not ensure comprehensive and long-term NPL resolution. One of the key messages is that coordinated action of all competent institutions is crucial.
Furthermore, participants underscored that macroeconomic and fiscal consolidation, whose effects are already palpable, will contribute to faster NPL resolution. Aware that resolving this issue cannot be either fast or simple, participants agreed that efforts must be directed at solutions applicable to all cases. Therefore, a thorough analysis of root causes and identification of all obstacles and bottlenecks is essential so as to preclude any fallout. Besides, the NPL resolution must be practicable and economically sustainable.
It was concluded that the NPL resolution must be financed by the private sector, whereas the public sector must provide support through regulatory incentives. Private sector representatives confirmed that numerous regulatory solutions have already been adopted but have not been implemented, which is why they need to be promoted.
Public and private sector representatives agreed that diagnostic studies of banks, carried out by the NBS in cooperation with the IMF, and following the methodology comparable with that of the ECB, will help better identify issues relating to NPLs. Moreover, developing the NPL market is one of the priorities, with foreign investors already showing interest. Everyone agreed that, in addition to finding solutions, their efficient implementation is of paramount importance.
The second conference day gathered a smaller circle of participants and was devoted to the dialogue between representatives of the public sector and international financial institutions. Emphasis was placed on the activities initiated or soon to be initiated in the field of resolving NPLs and preventing further build-ups. Also discussed were diagnostic studies of Serbian banks, enhancement of residential real estate appraisal, development of the secondary NPL market and successful corporate restructuring cases. It was reiterated that the NPL resolution should result only from coordination of all stakeholders, which is why a comprehensive NPL resolution strategy will be drawn up.
Draft Analysis of the Existing Impediments to the Sale of NPL in Serbia
Comprehensive analysis prepared by EBRD and consultants identifying existing impediments for the sale and/or transfer of NPLs in Serbia. The members of the NPL Working Group have given their preliminary responses/comments to the report and the period of public consultation has concluded. The final report is expected Q3 2016.