September 2023 – According to Article 5 of the Serbian Banking Act (Zakon o bankama), no person other than a bank licensed in Serbia may engage in the granting of loans unless authorised by law. One Serbian law that does allow foreign banks (i.e., banks not established and licensed in Serbia) to provide cross-border loans to Serbian entities is the Serbian Foreign Exchange Act (Zakon o deviznom poslovanju). In particular, Article 18(7) of the Foreign Exchange Act expressly allows Serbian entities to borrow cross-border from foreign banks, which are not required to obtain a banking licence in Serbia for this purpose.
Bearing in mind that raising capital on the capital markets through the issuance of bonds and notes has yet to take off in Serbia to any significant degree, most corporate finance in Serbia is currently provided by bank lenders—either domestic or foreign banks or their syndicates.
Secondary debt market
Nevertheless, some of these corporate loans may eventually end up in a secondary debt market outside the banking sector. The National Bank of Serbia's ("NBS") Decision on Risk Management of Banks (Odluka o upravljanju rizicima banke) allows local banks to transfer certain types of their loans to either another Serbian bank or to another legal entity (e.g., an unlicensed company) incorporated in Serbia, in order to reduce non-performing assets. The transferability of these loans depends on their performance, i.e., loans that may be transferred outside the banking sector are:
- non-performing loans – loans to corporate clients (including entrepreneurs and farmers) that have been declared past due; and
- problematic performing loans – still performing loans that are classified as problematic in accordance with the NBS’s Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items (Odluka o klasifikaciji bilansne aktive i vanbilansnih stavki banke) and are classified as problematic by the selling bank on the classification cut-off date immediately preceding the submission of the notification of the intended transfer to the NBS.
On the consumer finance side, the situation is somewhat different: retail loans almost entirely originate within the banking sector and must remain within the banking sector, as the secondary debt market for retail loans is only allowed between banks.
According to Article 39 of the Financial Services Consumer Protection Act (Zakon o zaštiti korisnika finansijskih usluga) and Article 42a of the above-mentioned NBS Decision on Risk Management of Banks, a bank may assign claims arising from any loan (i.e., whether performing or non-performing) granted to an individual as a retail client / financial consumer (fizičko lice - korisnik finansijskih usluga) only to another bank licensed in Serbia.
Non-bank consumer lending opportunity
The above suggests that non-bank lending opportunities in Serbia are virtually non-existent, especially in the retail/consumer finance sector. However, this conclusion would not be entirely correct. There is another piece of legislation that does allow for a certain form of non-bank lending, namely the Payment Services Act (Zakon o platnim uslugama).
Pursuant to Articles 78, 79 and 95 of the Payment Services Act, a payment institution (platna institucija) that has obtained a licence from the NBS to provide payment and ancillary services as a payment institution may, in addition to the provision of payment services, engage in certain other activities, including the granting of loans, subject to the following conditions:
- the granting of loans is an operational and ancillary activity directly related to the provision of payment services and does not jeopardise the safety and soundness of that part of the payment institution's operations relating to the provision of payment services, nor hinder supervision by the NBS;
- such loans must meet the following criteria:
- the loan is granted for the sole purpose of executing a payment transaction;
- the repayment period of the loan does not exceed 12 months;
- the loan is not granted from the funds of payment service users received by a payment institution for the execution of payment transactions of those users; and
- the own funds of a payment institution are always adequate to cover the total amount of the loans granted, in accordance with the capital requirements prescribed by the NBS.
As a result, investors who might see untapped potential in the Serbian consumer finance market need not be deterred by the immediate showstopper of having to invest heavily upfront to establish or acquire a bank in Serbia, as banks are typically the most regulated and expensive vehicles to operate. The alternative vehicle that could be considered is a payment institution, which also needs to be incorporated in Serbia and licensed by the local regulator (i.e., the NBS), but the level of regulation applicable to payment institutions is still lighter compared to the all-encompassing regulatory inventory applicable to banks.
By Petar Kojdic, Partner, Kinstellar