NBS pushes for the solution to the problem of non-performing loans – Easier buyout of NPLs for funds

The value of non-performing loans in Serbia, including personal and corporate loans, amounts to around EUR 3.5 billion, or close to 22% of all bank loans, and banks strive to solve the problem through writeoffs or by selling bad loans. Corporate loans are more problematic, as every fourth loan is a NPL. Last week, the National Bank of Serbia (NBS) adopted new regulations for the implementation of NPL Resolution Strategy, which are, according to pundits, a big step towards finding the solution to the problem.

Namely, the Executive Board of the NBS adopted amendments to the Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items and the Decision on Reporting Requirements for Banks, with the aim of improving the regulatory framework for the treatment of restructured receivables.

This way, the Bank encourages sustainable restructuring practices and prevents evergreening. The NBS Decisions have two fundamental consequences for the banking system and the entire financial market, estimates the director of the consulting company WM Equity Partners, Vladimir Pavlovic.

– First, the National Bank of Serbia has tightened the conditions under which commercial banks can improve the classification of problematic loans, which will in turn motivate commercial banks to sell their NPL portfolios, or at least put them in charge of their specialized companies for managing NPLs – says eKapija's interviewee.

Second, the experience of the past five years has shown that the banks which have sold their receivables or transferred them to their specialized companies for managing NPLs have fared much better than those which tried to resolve the issue internally. To clarify, the collection of problematic receivables requires great flexibility in cooperating with debtors and their potential partners, a vast array of potential measures (partial writeoffs, conversion into capital, acquiring ownership of securities...), and banks usually can't afford that kind of flexibility.

– We hope that the conversion of receivables into capital might partially revive the stock market at the Belgrade Stock Exchange, wheres activating the acquired securities may lead to the creation of certain financial products which haven't yet been present in our market, such as, for example, real estate funds – Pavlovic says.

Finally, but equally as important, according to our interviewee, banks can focus on financing the local economy after selling problematic receivables, which is the activity that certain banks have pushed into the background in favor of the issue of NPLs.

The practice so far

In 2014 and 2015, the banks sold or assigned RSD 94 billion of problematic loans for a compensation of RSD 46 billion.

Of this, 35% remained within the banking sector, as the banks were buying bad loans from each other, whereas 65% left the sector. The president of the Executive Board of Banca Intesa, Draginja, Djuric, has recently said that the bank has always had a lower level of NPLs relative to the average of the banking sector in Serbia and that their goal is to participate in the total loans with no more than 10% (EUR 150-170 million) by the end of the year.

– We are working on resolving NPLs through writing them off or selling them, with the help of our parent bank. We have sold EUR 65 million worth of such loans so far – Djuric said to the media and explained that NPLs had been sold to specialized funds operating in Serbia.

– The sale of a large NPL portfolio in the amount of EUR 90 to 95 million is being prepared – Draginja Djuric announced.

Igor Anic, member of the Executive Board of ProCredit Bank, said earlier that the level of NPLs in the bank was very low and that they weren't interested in selling them to funds which buy out problematic loans at a certain discount.

Erste Bank sold EUR 23.5 million of its written off receivables to the Czech APS Fund last year. Piraeus Bank, on the other hand, cleaned its balance sheet of the problematic loans made in the earlier period, having set aside EUR 42 million for the purpose. The director general of WM Equity Partners and one of the first portfolio managers in Serbia, Vladimir Pavlovic, believes that the new changes to the regulations will considerably improve the NPL market and positively impact the financial market and the Serbian economy, adding that it's pity it didn't happened much earlier.

– On the other hand, I think that it is natural that the clients for such receivables will certainly be the potential partners interested in ownership shares in companies with financial problems. Foreign funds will certainly be interested in large transactions, more precisely, in receivables to companies which have or did have profits larger than EUR 50 million – Pavlovic says.

Our interviewee hopes that local funds will develop as well and that they will successfully cover the segment of companies with smaller profits.

– Founding local private funds for the purchase of receivables and the restructuring of companies may be interesting for local investors as well, as they can now contribute only symbolically, by making fixed-term deposits in commercial banks – Pavlovic says.

Compliments from the EBRD

The European Commission has recently commended the National Bank of Serbia and the Government of Serbia for their efforts in resolving NPLs. The NPL Resolution Strategy and the accompanying action plan were adopted in August 2015. The Government of Serbia is realizing the NPL Resolution Strategy in cooperation with the IMF, the World Bank and the EBRD. The EBRD is interested in supporting the resolution of NPLs in Serbia and the restructuring of problematic companies in cooperation with private investors, as recently stated by Daniel Berg, the EBRD director for Serbia.

– The EBRD could act as a co-investor to the funds interested in working on restructuring the companies with bad business results in Serbia – Berg said and cited the recently announced KKR project in Greece, focusing on restructuring under-performing companies, as a good example.

– We are interested in working with all specialized investors and others. We are ready to support the purchase of bad corporate loans, but also to follow the purchaser's investments in order to help the companies to recover and stand on their own feet – Berg announced and added that the sale of NPLs to investment funds is only one potential solution to the problem of bad loans in the banking sector in Serbia

Jelena Djelic

Narodna banka Srbije Beograd

EBRD Evropska banka za obnovu i razvoj Beograd

Vlada Republike Srbije

Delegacija Evropske unije u Republici Srbiji Beograd

WM Equity Partners doo Beograd

Banca Intesa a.d. Beograd

ProCredit Bank a.d. Beograd

Erste Bank a.d. Novi Sad

Kohlberg Kravis Roberts

NPL

NBS

EBRD

European Bank fro Reconstruction and Development

Daniel Berg

Vladimir Pavlovic

APS Fund

NPL Resolution Strategy

Banca Intesa

evergreening

managing problematic receivables

non performing loans

Draginja Djuric

Igor Anic

KKR Fund