Since the emergence of the COVID-19 pandemic, the Government of the Republic of Serbia has, on several occasions, introduced measures aimed helping businesses maintain liquidity and working capital. These measures have included, among other things, direct subsidies worth a total of EUR 200 million in the form of loans available to entrepreneurs, cooperatives, micro-, small-, and medium-size businesses, state guarantee schemes to encourage banks to extend loans to businesses, and a moratorium on the repayment of loans which lasted until September 30, 2020.
Following the expiration of that moratorium, banks have engaged directly with clients on a case-by-case basis to rearrange loan repayment terms in order to prevent workout scenarios and, more broadly, a potential increase in NPLs. At least so far, these measures seem to have helped prevent loan defaults on a large scale. According to a report prepared by the National Bank of Serbia at the end of December 2020, the total ratio of NPLs was 3.7%, representing a moderate increase from the record minimum NPL ratio of 3.4% recorded in September 2020. As reported by the NBS, the main methods used by the banks to achieve NPL reduction are write-offs and transfers to third parties. Given the forex restrictions, transfers of domestic loans can only be made to Serbian banks and legal entities (in case of due and non-performing corporate loans), which remains one of the main impediments to initiating a cross-border sale of NPLs.
Although no progress has been made in abolishing the forex restrictions, the NBS introduced amendments to certain bylaws which will further streamline lending by international financial institutions and make project finance structuring less complex when the security provider is a Serbian resident. Namely, in January 2021, amendments enabled IFIs that Serbia is a member of or with which Serbia has signed an agreement governing their activities in the country, and with articles of incorporation or an agreement governing their activities in Serbia that has been ratified (such as the EBRD), to freely agree on repayment terms in their loan agreements, without having to observe the previously applicable requirement that the loan repayment period could not be less than one year from the date of the loan drawdown, or six months from the date of drawdown of each tranche where the loan is drawn in tranches.
Furthermore, the amendments scaled down certain other restrictions related to the provision of collateral by Serbian legal entities for foreign-to-foreign lending transactions. Namely, Serbian legal entities must still obtain counter-collateral in return for warranting or otherwise securing loans between non-resident(s) seated in the EU (securing loans between non-resident(s) that do not have their seat in the EU is still allowed, but only if the non-resident debtor is majority owned by the Serbian resident securing the loan), but such obligation no longer exists in situations in which a resident-company is guaranteeing for another resident-company that obtained loans from abroad. However, the NBS has failed to clarify which type of counter-collateral and what value would be required in these situations in these latest amendments. Overall, the current lending climate remains positive, and both domestic and foreign banks are involved in lending to both corporate and retail clients. Although major financial restructurings have not yet been seen in practice, it is likely that such processes will start rolling out once the effects of the relevant Covid measures have been fully exhausted.
Serbia’s Government also continues to improve the existing framework in various emerging areas by increasing digitalization and introducing other novel solutions. For instance, in December 2020, the Law on Digital Assets was adopted, which, when it enters into force on June 30, 2021, will include Serbia in the small group of countries that has codified rules on, among other things, the issuing of digital assets (including cryptocurrency and digital tokens), secondary trading with digital assets, the provision of services connected to digital assets, initial public offerings of digital assets, and other related issues. It remains to be seen whether being among the pioneers in regulating cryptocurrencies in Europe will bring additional players to the Serbian financial market.
Branislav Maric, Managing Partner, and Tijana Arsenijevic, Senior Associate, Zajednicka Advokatska Kancelarija Maric in cooperation with Kinstellar