In the last decade, as a result of the global economic crisis and the accompanying recession, there has been a significant increase in NPL ratios throughout the SEE region.
In Serbia, the NPL ratio has been steadily increasing from 2008 onwards, reaching its peak in the third quarter of 2015, when NPLs constituted 22.8% of the total gross loan portfolio in the country. Despite the fact that the NPL ratio in Serbia has decreased by 3% from that time, standing, as of the third quarter of 2016, at 19.5%, the country still has one of the Europe’s highest and most persistent levels of NPL stocks, which undermines the stability of its banking sector and the capacity of its banks to undertake new lending.
Yet, in spite of its potential, the Serbian NPL market is still underdeveloped, lacking substantial trade volumes. Unlike the market leaders in the trade of NPLs, Serbia has been restricting cross border transfers of non-performing loans, has been reserving the trade of retail NPLs for banks, and has, for a long time, been reluctant to officially recognize and regulate advanced trade techniques such as sub-participation arrangements and synthetic sales of NPLs, with their associated legal effects.
In response, and in an attempt to overcome these problems, boost development of the local NPL market, and further decrease the NPL ratio, in August 2015 the Serbian Parliament adopted the NPL Resolution Strategy, precisely identifying the means for remedying the impediments for NPL market development and setting out the rules and incentives for improving the applicable regulatory framework.
As a result, by the end of 2016, Serbia had undergone a plausible regulatory reform. Under the amended banking regulations, bank supervision and reporting obligations have been improved, and the rules on the trade of NPLs extended to loans under which payments of interest and principal were not past due for 90 days or more but were nevertheless seen as uncollectable. Tax regulations have been amended so as to facilitate banks’ execution of write-offs resulting from NPLs. The new Law on Financial Restructuring has been adopted, improving possibilities for certain companies in financial distress and their creditors to amicably redefine their relationships and move towards resolving debtors’ financial crises. The Serbian Banking Association has adopted the INSOL Principles to provide national guidelines for restructuring distressed clients.
The regulatory reform has continued in 2017. The year started with the adoption of the Law on Valuators of Immovable Assets, designed to prevent banks from further accumulating NPLs by extending loans to ineligible borrowers based on over-valuated collaterals, which was a common practice in the past. As of July 2017, banks are to become officially entitled to engage in synthetic sales of NPLs and able to properly reflect transfer of credit risks arising thereunder in their books. Most importantly, liberating the regime applicable to trade of retail NPLs has been set as a goal for the year end. While it is uncertain in which manner and to what extent this trade will be unhampered, the establishment and operation of the so-called non-depositary institutions that would be entitled to trade retail NPLs is largely anticipated. These institutions would not hold banking licenses, but would be under the supervision and scrutiny of the National Bank of Serbia. This option is also strongly supported by the major international financial institutions. The announcement of the anticipated liberation of the trade of retail NPLs has, though, raised concerns among customers; as a result, assurances have been given by the National Bank of Serbia that retail borrowers will retain the rights and protection provided to them under the Law on Protection of Consumers of Financial Services.
With the total volume of NPLs of approximately EUR 3 billion and continuous regulatory reforms aimed at improving the sphere of trade of NPLs, Serbia is expected to soon become the next “hot market” in this industry.
By Natasa Lalovic Maric, Partner, Wolf Theiss Serbia
This Article was originally published in Issue 4.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.