Despite global financial downturns, Serbia’s banking and finance market has exhibited remarkable stability and consistent growth. It has experienced significant advancements driven by economic expansion, technological progress, and regulatory reforms aiming to enhance stability, transparency, consumer protection, and efficiency.
In recent years, the Serbian banking market has witnessed significant consolidation, reducing the number of operating banks from 31 in 2016 to the current count of 21 (this data and the rest used in this article are sourced from the official website of the National Bank of Serbia). Inflation and an increased ECB interest rate during the previous year significantly impacted loan costs. This increase in costs has influenced credit activity within the banking sector, affecting lending practices and credit accessibility for businesses and individuals. In March, total domestic loans registered a 3.7% growth.
Despite these challenges, profitability has shown significant growth. The total banking sector’s profit before taxation increased from EUR 458.1 million in 2021 to EUR 837.2 million in 2022, representing an 82.75% growth. In the first three months of 2023, profit before taxation reached EUR 310.2 million, with an expected increase of 48.21% for the entire year if the current trend continues. The growth in profitability can be attributed to the consolidation trend, inflation, interest rate increases, and a decrease in the level of non-performing loans (NPLs).
Reducing NPLs has been a primary focus in the Serbian banking sector. Implementing various measures has led to a significant decrease in the NPL ratio, dropping from a post-crisis record level of 23.18% in May 2015 to a low of 3.00% by the end of 2022. The NPL ratio for the first quarter of 2023 remained unchanged.
This achievement can be attributed to a systemic problem-solving approach, timely implementation of appropriate measures, and the sustainability of results.
Several regulations have played a crucial role in successfully reducing NPLs in Serbia. The Decision on the Accounting Write-Off of Bank Balance Sheet Assets has facilitated the removal of non-performing assets from banks’ balance sheets. Banks have efficiently addressed problematic loans by employing the accounting write-off, leading to an overall reduction in the NPL ratio.
The Strategy for Resolving Problematic Loans and the NPL Program have also made significant contributions. These strategic documents, adopted in 2017-2018 and 2019-2020, respectively, have provided a comprehensive framework for resolving problematic loans in the Serbian banking sector. They have guided banks in implementing effective measures such as collection, write-off, and assignment (sale) of NPLs to third parties, significantly reducing NPLs. By the end of March 2023, 54.0% of NPLs came from citizens and 31.4% from companies.
Divesting banks to corporate entities has emerged as an effective mechanism for addressing NPLs, with the sale of receivables held by banks in bankruptcy playing a substantial role in reducing this percentage. While the sale of claims towards private individuals as borrowers is currently not allowed in Serbia, amending consumer protection laws to permit the assignment of these claims would be a logical next step.
In addition to mitigating NPL levels, selling these receivables brings further advantages, including reactivating credit activity through debtor credit restoration and increasing public revenue by reducing illicit economic practices.
To ensure consumer protection, it is necessary to establish a regulatory framework that regulates the operations of companies engaged in acquiring such claims. Many regional jurisdictions, such as Montenegro and Albania, subject these companies to central bank oversight, stringent criteria, and financial requirements similar to those applied to other financial institutions.
Moreover, implementing new regulations would foster fresh foreign investments in a new type of loan offered for sale.
As Serbia progresses towards EU integration, further harmonizing banking regulations and integration with European financial markets may present new opportunities and challenges. These may include the application of the Digital Operational Resilience Act and adherence to Environmental, Social, and Governance rules.
Overall, the Serbian banking and finance market continues to improve, guided by regulatory reforms and technological advancements, with the aim of achieving stability, transparency, consumer protection, and efficiency. Notwithstanding the presence of favorable trends, the observable decline in the number of banks within the market indicates the persistent existence of underlying structural issues that need to be solved.
By Jelisaveta Janic, Partner and Head of Banking and Finance, Vukovic & Partners
This article was originally published in Issue 10.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
