ANNUAL REPORT ON ACTIVITIES AND RESULTS
National Bank of Serbia 2018
ANNUAL REPORT ON ACTIVITIES AND RESULTS
2018 NATIONAL BANK OF SERBIA Belgrade, Kralja Petra 12, Tel.: +381 11 3027-100
Belgrade, Nemanjina 17, Tel.: +381 11 333-8000
www.nbs.rs Number of copies: 60 ISSN 2217-7167 Introductory note
The National Bank of Serbia submits its Annual Report on Activities and Results to the National Assembly by no later than 30 June of the subsequent year.1 As stipulated by the Statute of the National Bank of Serbia,2 the Annual Report on Activities and Results presents data on the achievement of the National Bank of Serbia’s objectives and the performance of its tasks relating to monetary and foreign exchange policies, FX reserves management, measures and activities aiming to safeguard and strengthen financial stability, the supervision of banks, insurance undertakings, voluntary pension fund management companies and lessors, as well as the supervision of payment service provision and electronic money issuance, the issuance of banknotes and coins, cash management and the payment system. The Report also includes financial statements about the National Bank of Serbia’s operations, disclosing revenues and expenditures by key items, as well as assets, liabilities and capital, data on the Bank’s institutional framework, its legislative/legal activity, international cooperation, financial services consumer protection, payment cards, internal audit and information technology, internal organisation and staff policy, human resources, operations of the Bank’s branches and the Institute for Manufacturing Banknotes and Coins – Topčider, including data on other activities of the National Bank of Serbia. The Annual Report on Activities and Results in 2018 was reviewed and adopted by the National Bank of Serbia’s Executive Board on 6 June 2019.
Executive Board of the National Bank of Serbia:
Jorgovanka Tabaković, PhD, Governor Željko Jović, PhD, Vice Governor Ana Ivković, PhD, Vice Governor Dragana Stanić, MA, Vice Governor
1 The Law on the National Bank of Serbia, RS Official Gazette, Nos 72/2003, 55/2004, 85/2005 – other law, 44/2010, 76/2012, 106/2012, 14/2015 – CC decision and 44/2018. 2 RS Official Gazette, Nos 12/2013, 18/2015 and 72/2015.
Foreword by the Governor
Behind us is yet another year in which the National Bank of Serbia (NBS) focused its measures and activities on furthering Serbia’s economic progress. By ensuring price and financial stability, we continued to rely on our monetary policy to support lending activity and economic growth. Owing to this and to a responsible fiscal policy, Serbia was able to make remarkable progress, achieve the highest economic growth in a decade and create more favourable prospects for growth going forward.
With inflation firmly under control, we have achieved our main objective and ensured the conditions for sustainable growth and the creation of new jobs. For six years straight, we have maintained inflation low and stable – it measured 2% in December, this being also its average for the year as a whole. At the same time, inflationary pressures on the demand side remained low, despite strong economic growth and favourable labour market trends. Subdued inflationary pressures were also indicated by the low and stable core inflation, measuring 1% y-o-y in December, and by the inflation expectations of the financial sector and corporates, which were anchored within the bounds of the target tolerance band, thus confirming the credibility of our monetary policy.
The results we have accomplished gain even more importance if we remember that 2018 was marked by many challenges from the international environment. The global economic activity increased, though at a slower rate than initially anticipated due to the rising protectionism and geopolitical tensions. Growth in the euro area, our main trade partner, also subsided. In addition, the Federal Reserve System continued with monetary policy normalisation while the European Central Bank announced its beginning. The signalled change in the pace of normalisation reflected on global financial conditions and capital flows, which were first tightened, and then
turned more favourable by the end of the year. Moreover, under the impact of numerous factors on the demand and supply sides, the global price of oil varied considerably, demonstrating an upward tendency for the major part of the year. Therefore, we had to carefully monitor and analyse movements, make decisions cautiously and at the same time strengthen our domestic macroeconomic fundamentals to be better hedged against risks emanating from the international environment.
The joint efforts of the National Bank of Serbia and the Serbian Government resulted in better macroeconomic performance and improved business and investment climate. This reduced the need for external financing and bolstered our economy’s resilience to potential negative effects of global factors. The corporates’ net profit of around RSD 500 bn in 2018 is perhaps the best proof of what we have achieved owing to a full coordination of monetary and fiscal policies. Such a result of the corporate sector is an important source of investment funds and indicates the profitability of investing in Serbia’s economy.
Macroeconomic results are also evident in Serbia’s country risk premium, which decreased further in 2018. The lower risk premium enabled the use of both domestic and foreign financing sources under more favourable terms and, in turn, increased the prospects of faster progress in the coming period. That Serbia’s business and investment environment has improved is attested by better grades of our international competitiveness. According to the Competitiveness Report of the Global Economic Forum for 2018, Serbia has improved its position for the third year in a row, and is now 65th in a group of 140 countries. As in the previous year, progress has been made in terms of macroeconomic environment indicators, underpinned by the low and stable inflation, declining public debt and more favourable credit rating of our country. Serbia also made significant progress in terms of financial system indicators, primarily owing to a considerable contraction in the share of NPLs in total loans, high capital adequacy and greater availability of financing for SMEs. The World Bank’s new Doing Business report also sees Serbia as continuing to get closer to the best international practice in terms of business conditions – it increased its total number of points from last year and is now among the top 50 countries (of the total 190) ranked according to the ease of doing business. Another acknowledgement of the achieved macroeconomic results was the Standard & Poor’s upgrade of Serbia’s outlook, from stable to positive. Standard & Poor’s stated that the NBS, with its efficient measures and activities aligned with the inflation targeting principles, has shown operational independence, built its credibility and anchored inflation expectations.
To achieve the inflation target and support economic growth, the NBS has resorted to monetary policy easing since May 2013. In 2018, the NBS
trimmed its key policy rate to the lowest level in the inflation targeting regime (3.0%). Since the beginning of the cycle of monetary policy accommodation, the key policy rate was cut by a total of 8.75 pp, which enabled sizeable savings for corporates and households. At the same time, interest rates on dinar loans to corporates and households were reduced by more than 10 pp. With a lower country risk premium, increased interbank competition and persistently low interest rates in the euro area, this provided for further growth of disposable income and investments in the private sector. Also, monetary policy easing led to lower interest rate expenses for the government, which in turn enabled better fiscal performance.
Coupled with positive trends in the labour market, lower interest rates were conducive to lending, which recorded a 9.9% y-o-y growth rate at the end of the year (excluding the exchange rate effect), with a relatively robust rise in household and corporate loans. Lending growth was achieved alongside the resolution of non-performing loans (NPLs), i.e. their write-off and sale to non-banking sector entities. Excluding the effects of NPL write- off and assignment, lending growth was even more pronounced and measured 12.2%.
Thanks to such rise in lending, and primarily to effective regulatory measures introduced by the NBS, as well as to banks’ commitment to the continuation of NPL resolution activities, the share of these loans in total loans dropped to 5.7% in 2018, their lowest level since 2008, when we began to monitor this indicator of the quality of banks’ assets. Thus, in slightly more than three years since the adoption of the NPL Resolution Strategy, the share of NPLs in total loans contracted by 16.7 pp. At the same time, owing to the high coverage by reserves for estimated losses, NPLs pose no threat to the banking sector’s operations or to financial stability.
Despite uncertainty in the global financial market, the relative stability of the dinar exchange rate has been maintained. Throughout most of the year appreciation pressures were dominant, largely as a result of good macroeconomic performance of the Serbian economy and the high inflow of foreign currency under various grounds, mostly from FDI and the continued dynamic growth of export. Not aiming at any particular dinar value, we intervened in the FX market in both directions, preventing sharp swings in the exchange rate. In 2018 the NBS was again the net buyer in the FX market (bought EUR 1,835.0 mn and sold EUR 255.0 mn), thus contributing to an increase in FX reserves.
The NBS FX reserves increased by EUR 1.3 bn during 2018, ending the year at EUR 11.3 bn, thus providing high protection against external risks. At the same time, net FX reserves, which exclude liabilities to banks under FX required reserves, rose to their highest level since 2000, when we began
monitoring these data – they reached EUR 8.9 bn, up by EUR 580.0 mn from end-2017. In accordance with the principles of safety and liquidity, FX reserves in 2018 were invested with top-tier institutions, as well as in highly- liquid securities of prime issuers. Consistent in our efforts to minimise risks, we increased the amount of gold to 20.42 tonnes (from 19.36 tonnes at end- 2017), hence its share in the structure of FX reserves in 2018 measured 6.5%.
During 2018, the financial infrastructure was stable and efficient. The NBS carefully monitored developments at home and abroad, analysed risks that might build up in the financial system and took measures towards reducing them. The Serbian banking system is still characterised by exceptional liquidity, as well as capital adequacy. The capital adequacy ratio of 22.3% at the end of the year is significantly above the regulatory minimum of 8%, applied since June 2017 and prescribed by the international regulatory framework as well. Despite many challenges it was exposed to during and after the crisis, our banking sector remained stable and resilient to shocks from the international environment, as confirmed by the regular stress testing carried out during 2018.
The NBS kept a watchful eye on international developments, particularly because of the ever-faster technological changes and innovations. In an effort to stay abreast of current trends as well as needs, last October we launched the most state-of-the-art payment method in the world – instant payment system, thanks to which money is transferred within 1.2 seconds, 24/7/365. In line with the latest trends in payment systems, the new payment technology has become available to our corporates and citizens. Also, the Law on Multilateral Interchange Fees, adopted at the NBS’s initiative, lowered the fees for card-based transactions. A safe and efficient payment infrastructure, with a broad spectrum of payment instruments and services, facilitates business operations and makes the business environment even more attractive.
The increasing use of the dinar in the domestic financial system remained one of our strategic priorities. During 2018 the degree of the dinarisation of deposits continued to increase (to 32.2%), while the degree of dinarisation of loans remained unchanged (33%) from 2017. In order to increase the use of the dinar in the financial system in 2018, the NBS continued to undertake a series of activities, the most important of them being the signing of a new Memorandum on the Dinarisation Strategy with the Serbian Government, thus confirming institutional resolve to adopt additional measures in order to support the dinarisation process and contribute to financial system stability. The new Memorandum on the Dinarisation Strategy defines additional measures and activities that will increase the degree of dinarisation and lower the FX risk in the system.
By maintaining low and stable inflation and a stable financial system, the NBS gave a major contribution to the implementation of the new 30-month Policy Coordination Instrument for Serbia, approved by the IMF in July 2018. Monitoring the progress in monetary policy implementation, the IMF assessed that the monetary policy kept inflation firmly under control, at the same time supporting economic activity and maintaining the relative stability of the exchange rate. The fact that these results were achieved against the backdrop of uncertainties from the international environment only confirmed the efficiency of the NBS’s measures and monetary policy. The IMF underlined the preserved financial stability as another achievement of the NBS, and especially the progress in terms of NPL resolution.
The NBS maintained its successful cooperation with other international institutions – the World Bank, the European Bank for Reconstruction and Development, and in particular the European Central Bank and the European Commission, with which we maintained a regular high-level dialogue, exchanging macroeconomic projections and views on key issues pertaining to Serbia’s sustainable growth and development. The NBS remained an active participant in Serbia’s EU accession process, primarily by preparing the negotiating positions for certain chapters and engaging in intensive consultations with the European Commission on plans for the transposition of EU regulations. One of the major events in 2018 was the opening of two additional chapters in Serbia’s accession process, i.e. Chapter 17 – Economic and monetary policy, where the NBS has a leading role, and Chapter 18 – Statistics, where it also plays an important role as one of the main statistics producers in Serbia.
During 2018, the NBS remained transparent, predictable and accessible to the professional and overall public. We sought to provide the public with timely information on our operations and increase the predictability of measures and activities we might undertake in the coming period. With particular care, we prepared reports and expert analyses, and presented them to the public, so that our explanations and assessments of economic movements may be helpful to market participants in understanding domestic and international economic trends. In conditions of rapid changes in the media, we paid particular attention to our official website and its subdomains, and were active on the social media, in an effort to make information about our operations available in a simpler and faster manner.
We continued to provide assistance to financial service consumers and carry out a number of educational activities. Together with the Faculty of Economics, University of Belgrade, we organised research seminars with guest speakers including leading international experts from central banks and universities across Europe and the United States. We believe that this
kind of research seminars is important for lifting the standard of economic research and development of economics in Serbia.
In 2018 the NBS’s total profit after tax equalled RSD 30.66 bn. The operating profit (not stemming from exchange rate differences and revaluation reserves), totalling RSD 13.24 bn, was distributed in accordance with Article 77 of the Law on the National Bank of Serbia, namely 70% of this profit, or RSD 9.27 bn, was channelled to the Serbian budget, 10% to fixed capital and 20% to the NBS’s special reserves.
In this Annual Report on Activities and Results, we presented key measures and activities which the NBS took in 2018. We believe that with the results we have achieved, we continue to strengthen our credibility and boost the confidence of the public. In the coming period, our guiding principle will remain the same – to work in the interest of Serbia and for a better economic position of our citizens.
Jorgovanka Tabaković, PhD, Governor
ABBREVIATIONS
GDP – gross domestic product BIS – Bank for International Settlements bp – basis point DKRT – consolidated FX treasury account EBRD – European Bank for Reconstruction and Development EIB – European Investment Bank ESCB – European System of Central Banks EU – European Union ECB – European Central Bank CPI – Consumer Price Index y-o-y – year-on-year IFEM – interbank FX market mn – million bn – billion IMF – International Monetary Fund IFRS – International Financial Reporting Standards NPL – non-performing loan OPEC – Organisation of the Petroleum Exporting Countries H – half-year pp – percentage point RTGS – Real Time Gross Settlement SDR – Special Drawing Rights Q – quarter FED – Federal Reserve System HHI – Herfindahl-Hirschman Index
Other generally accepted abbreviations are not cited.
CONTENTS
I KEY NBS RESULTS IN 2018 13
II INSTITUTIONAL FRAMEWORK AND ORGANISATION OF THE NATIONAL BANK OF SERBIA 17 II.1 Constitutional position and the Law on the National Bank of Serbia 17 II.2 Bodies of the National Bank of Serbia 20 II.3 Organisation 24
III PRICE AND FINANCIAL SYSTEM STABILITY 27 III.1 Monetary policy 27 III.1.1 Monetary policy in 2018 27 III.1.2 Monetary policy instruments 30 III.1.3 Achievement of inflation target in 2018 35 III.2 Regulation and supervision of financial institutions 36 III.2.1 Banks 36 III.2.2 Insurance sector 52 III.2.3 Voluntary pension funds 58 III.2.4 Financial leasing 61 III.2.5 Information systems supervision 63 III.2.6 Anti-money laundering/combating the financing of terrorism 64 III.3 Bank resolution function 68 III.4 Stability of the financial system 70 III.4.1 Financial stability function 70 III.4.2 Financial stability assessment 73
IV OTHER FUNCTIONS AND ACTIVITIES OF THE NATIONAL BANK OF SERBIA 81 IV.1 Foreign exchange reserve management 81 IV.2 Issue of money and cash management 88 IV.2.1 Issue of banknotes and coins 88 IV.2.2 Activities of NBS branches 91
IV.3 Payment system 97 IV.3.1 NBS as the payment system operator 97 IV.3.2 Payment institutions and electronic money institutions 106 IV.4 Other activities 108 IV.4.1 Economic research and statistics 108 IV.4.2 International cooperation 111 IV.4.3 Foreign exchange operations and foreign credit transactions 122 IV.4.4 Legislative activities 128 IV.4.5 Enforced collection 131 IV.4.6 Public debt administration 132 IV.4.7 Communication with the public 133 IV.4.8 Financial consumer protection and education 135 IV.4.9 Social responsibility 137 IV.5. Management 139 IV.5.1 Human resources management 139 IV.5.2 Internal audit and risk management 143 IV.5.3 Information and communications technology 144
V FINANCIAL STATEMENTS 145 V.1 Financial position and result of operations of the National Bank of Serbia 145 V.2 Accounting principles and standards 148 V.3 Risk exposure and management 151 V.4 Independent auditor’s report 157 V.5 Annual financial statements 158 V.6 Institute for Manufacturing Banknotes and Coins – Topčider 164
VI PLANS FOR THE FUTURE PERIOD 167
ADDITIONAL INFORMATION 171 Publications of the National Bank of Serbia 171 Index of charts and tables 172
I KEY NBS RESULTS IN 2018
For six years in a row, the NBS has preserved low and stable inflation, measuring 2% at the annual average and at year-end in 2018.
Thereby it preserved the real value of citizens’ income (wages, pensions, etc.), and facilitated doing business, planning and investment for corporates. The year 2018 saw the highest growth in a decade.
The key policy rate was lowered to 3% – its lowest level in the inflation targeting regime. Since May 2013, when the cycle of monetary policy easing began, and until end- 2018, interest rates on new corporate and household loans were slashed, resulting in lower interest expenses and higher disposable income of corporates and households.
Almost two-digit lending growth ensures funds for investment growth and meeting the needs of households.
Serbia’s FX reserves exceeded EUR 11 bn in 2018 and reached their maximum net amount since 2000. This additionally increased our economy’s resilience to external uncertainties.
13 National Bank of Serbia Annual Report on Activities and Results in 2018
Confidence in the dinar is growing. This is best attested by growth in dinar savings of citizens of more than 22% in 2018, to levels 3.5 times higher than at end-2012, as well as the rise in the dinar share of public debt, which almost came to the same level as the dollar part of the debt. In December 2018, the National Bank of Serbia and the Serbian Government signed a new Memorandum on the Strategy of Dinarisation of the Serbian Financial System.
Financial stability has been preserved and enhanced further, and financial soundness of banks has improved, owing to the NBS’s macroprudential policy and the systemic approach to resolving inherited non-performing loans. Since the adoption of the NPL Resolution Strategy, NPLs have been reduced by almost 70% and their share in total loans by almost 17 pp, to 5.7% in December.
Owing to a more favourable macroeconomic environment, notably low and stable inflation, stability of the financial system and decrease in public debt, for three years straight, Serbia has improved its competitive position in the global market and, according to the World Economic Forum’s latest Global Competitiveness Report, it is currently ranked as the 65th in the group of 140 countries.
At end-2018, Standard & Poor’s improved credit rating outlook of Serbia from stable to positive, stressing that with its efficient measures and activities, aligned with the inflation targeting principles, the NBS has proved its operational independence, established its credibility and anchored the inflation expectations.
In 2018, the NBS introduced the state-of-the-art payment system – instant payment system, owing to which payment transactions are available to citizens and corporates 24/7/365. Payments can be made from all frequently used modern communication devices, at any time and from any place, and the money is transferred within 1.2 seconds.
14 Key NBS Results in 2018
At the NBS’s initiative, the Law on Multilateral Interchange Fees was adopted, lowering the costs of card- based transactions. The Law Amending the Law on Payment Services enabled greater transparency and comparability of payment services fees.
Assistance to financial services consumers was provided on a regular basis, and the consumer protection function was additionally strengthened.
At the meeting of the Accession Conference with Serbia at ministerial level, held on 10 December in Brussels, Serbia opened two additional chapters in its EU accession process, namely Chapter 17 – Economic and monetary policy, where the NBS is the leading institution, and Chapter 18 – Statistics, where the NBS also has a significant role, as one of the main statistics producers in Serbia. This means that so far Serbia has opened 16 of the 35 chapters, two of which are temporarily closed.
15
II INSTITUTIONAL FRAMEWORK AND ORGANISATION OF THE NATIONAL BANK OF SERBIA
II.1 Constitutional position and the Law on the National Bank of Serbia
The institutional position of the National Bank of Serbia (NBS) is defined by the Constitution of the Republic of Serbia in its sections on the economic system and public finances. Namely, according to Article 95 of the Constitution, the National Bank of Serbia is a central bank of the Republic of Serbia, independent and subject to supervision by the National Assembly to which it accounts for its work. It is managed by the Governor and the Law on the National Bank of Serbia is enacted. Article 107, paragraph 2 of the Constitution further assures the autonomy of the NBS by providing for its right to propose laws within its remit.
Law on the National Bank of Serbia
Law on the National Bank of Serbia3 governs the status, organisation, powers and functions of the NBS and its relations to other Serbian government authorities and international organisations and institutions.
Objectives
The primary objective of the NBS is to achieve and maintain price stability. Without prejudice to its main objective, the NBS contributes to the preservation and strengthening of financial stability. Without prejudice to the above objectives, the NBS supports the implementation of the Government’s economic policy, operating in accordance with principles of a market economy.
3 RS Official Gazette, Nos 72/2003, 55/2004, 85/2005 – other law, 44/2010, 76/2012, 106/2012, 14/2015, 40/2015 – CC decision and 44/2018.
17 National Bank of Serbia Annual Report on Activities and Results in 2018
Tasks
Tasks of the NBS are to: determine and implement monetary and foreign exchange policies; manage foreign exchange reserves; determine and implement, within its scope of authority, the activities and measures aimed at maintaining and strengthening the stability of the financial system; issue banknotes and coins and manage cash circulation; regulate, oversee and promote the smooth performance of domestic and cross-border payment transactions, in accordance with law; issue and revoke banks’ operating licenses, carry out prudential supervision of bank operations and perform other activities, in accordance with the law governing banks; issue and revoke insurance licences, supervise the insurance business, issue and revoke licenses to perform specific insurance activities, and perform other activities, in accordance with the law governing insurance; issue and revoke financial leasing licenses, supervise the performance of financial leasing operations and perform other activities, in accordance with the law governing financial leasing; issue and revoke operating licenses of voluntary pension fund management companies, issue and revoke fund management licenses, supervise this activity and perform other activities, in accordance with the law governing voluntary pension funds; issue and revoke operating licenses of payment institutions and electronic money institutions, supervise the provision of payment services and electronic money issuance, and perform other activities, in accordance with the law governing payment services; pursue activities relating to the protection of the rights and interests of consumers of services provided by banks, financial lessors, insurance undertakings, voluntary pension fund management companies, payment service providers and electronic money issuers, in accordance with law; ascertain the fulfilment of conditions for the initiation of procedures for the resolution of banks and/or banking group members, and implement these procedures; decide on instruments and measures to be taken in the resolution process, and perform other activities relating to bank resolution, in accordance with the law governing banks; issue and revoke operating licenses of payment system operators, supervise their operation and perform other activities, in accordance with the law governing payment services; perform statutory or contractual activities for the Republic of Serbia, without prejudice to its autonomy and independence.
18 Institutional Framework and Organisation of the National Bank of Serbia
Pursuant to the Law Amending the Law on the National Bank of Serbia4 and the Law Amending the Law on Foreign Exchange Operations,5 as of 1 January 2019, the NBS took over the task of issuing and revoking authorisations to perform exchange operations and supervision of exchange and foreign exchange operations from the Ministry of Finance – Tax Administration.
Position of the National Bank of Serbia
The Law on the National Bank of Serbia regulates in further detail, in compliance with international standards and rules, the constitutional principle of autonomy of the NBS, by stipulating that the NBS is autonomous and independent in carrying out its tasks as laid down by this and other laws, that NBS bodies and members of these bodies may neither seek nor take instructions from government bodies and institutions or other persons, and that government bodies and institutions and other persons may neither impact the autonomy and independence of the NBS nor seek to influence the NBS, its bodies or their members in carrying out their tasks. The NBS has a legal entity status ex lege and is not registered in the register of legal entities. The NBS has its Statute which is published in the Official Gazette of the Republic of Serbia. In the performance of its tasks, the NBS works together with the Government and other state institutions and, without prejudice to the achievement of its objectives, undertakes measures within its scope of authority to promote that cooperation. The NBS may take up membership in international financial organisations and institutions, and engage in cooperation with foreign central banks, regulatory bodies and financial and credit institutions. Without prejudice to the achievement of its objectives, the NBS may, with the Government’s consent, act for and on behalf of the Republic of Serbia in international financial organisations and institutions and engage in other forms of international cooperation. The NBS may not extend credits, loans, overdraft facilities or other forms of credit facilities to the Republic of Serbia, autonomous province or local government unit, public enterprises and other legal entities whose founder is the Republic of Serbia, autonomous province or local government unit, or to public enterprises and other legal entities founded by the Republic of Serbia, autonomous province or local government unit, or public enterprises and other legal entities in which the Republic of Serbia, autonomous province or local government unit have a controlling stake, nor may it issue guarantees for the settlement of obligations of these entities or otherwise ensure the settlement of their obligations, or buy securities directly from those entities. Exemptions from the monetary financing ban are daily loans and loans extended for the purpose of settling liabilities in respect of membership in the IMF. Banks in which the Republic of Serbia, an autonomous province or a local
4 RS Official Gazette, No 44/2018. 5 RS Official Gazette, No 30/2018.
19 National Bank of Serbia Annual Report on Activities and Results in 2018
government unit have a controlling stake, have access to loans and lending facilities of the NBS on equal terms as other banks.
II.2 Bodies of the National Bank of Serbia
NBS bodies are: Executive Board of the National Bank of Serbia (hereinafter: Executive Board); Governor of the National Bank of Serbia (hereinafter: Governor); Council of the Governor of the National Bank of Serbia (hereinafter: Council). The Executive Board and the Governor are responsible for achieving the NBS objectives, within their remit as defined by the Law on the National Bank of Serbia. Amendments to the Law on the National Bank of Serbia from June 2018 abolished the Administration for Supervision of Financial Institutions.6
Executive Board
The Executive Board includes the Governor and Vice Governors. The Executive Board determines monetary and FX policies, as well as activities aimed at maintaining and strengthening stability of the financial system, and in particular: NBS monetary policy programme; manner of calculation, collection and payment of interest on loans and other receivables of the NBS and on the funds the NBS pays interest on; terms and conditions of issuing NBS securities; terms and conditions under which the NBS conducts open market operations and performs discount activities; short-term loan policy; dinar exchange rate policy; required reserves base and ratio, as well as terms, conditions and timelines for the allocation and use of banks’ required reserves; FX reserve management policy and guidelines; other monetary and FX policy instruments and measures; measures for maintaining bank liquidity; measures and activities, within the NBS remit, aimed at maintaining and strengthening the stability of the financial system.
6 The tasks carried out by the Administration are now performed by organisational units that were once part of the Administration, and are directly accountable to NBS bodies.
20 Institutional Framework and Organisation of the National Bank of Serbia
The Executive Board sets the key policy rate and other interest rates applied by the NBS in the conduct of monetary policy, and also defines the manner of determining NBS interest rates. In addition, the Executive Board exercises substantial powers in the field of supervision of financial institutions. In accordance with the law, the Executive Board issues regulations and other general acts in the area of supervision of financial institutions (banks, insurance undertakings, financial lessors, voluntary pension fund management companies, payment institutions and electronic money institutions), decides on the licensing and delicensing of these financial institutions, and on the fulfilment of conditions for filing bankruptcy or liquidation procedure against banks, insurance undertakings and financial lessors. The Executive Board enacts regulations and other general and individual acts in the field of bank resolution, in accordance with the law governing banks. The Executive Board determines the uniform fees charged for services provided by the NBS. Amendments to the Law on the National Bank of Serbia from June 2018 established that the Executive Board, in accordance with the Law, adopts regulations and other general acts in the area of issuing and revoking authorisations to perform exchange operations and supervision of exchange and foreign exchange operations, and in the areas of the protection of rights and interest of financial services consumers. In addition, the Executive Board issues guidelines for the uniform application of regulations falling within the scope of authority of the NBS. Executive Board meetings are held as often as deemed necessary, but no less than once a month. Meetings are chaired by the Governor. The Executive Board takes decisions by a majority vote of all members. In the event of a tie, the Governor has the casting vote. The minister in charge of finance is invited to attend meetings of the Executive Board and participate in deliberations without the right to vote. The Executive Board adopts its Rules of Procedure.
Governor and Vice Governors
Governor: represents and acts on behalf of the NBS; manages operations of the NBS and organises its work; implements decisions of the Executive Board and of the Council of the Governor; enacts regulations, general and individual acts under the NBS’s remit, which are not assigned by law to the authority of the Executive Board and Council of the Governor; proposes regulations, general and individual acts to be adopted by the Executive Board and the Council of the Governor, unless provided otherwise by the Law on the National Bank of Serbia;
21 National Bank of Serbia Annual Report on Activities and Results in 2018
regulates the NBS’s internal organisation and job classification, as well as labour relations of NBS employees; appoints and dismisses employees who manage NBS organisational units; performs other tasks defined by law in a manner that does not conflict with the objectives stipulated by the Law on the National Bank of Serbia. The Governor is appointed by the National Assembly on proposal of the President of the Republic of Serbia. The Governor is appointed for a six-year renewable term of office. Pursuant to the Law on the National Bank of Serbia, the NBS has between two and four Vice Governors. They are appointed by the National Assembly, on proposal of the Governor, for a six-year renewable term of office. The provisions of the Law governing the appointment, incompatibility of office and conflict of interest regarding the Governor’s position apply accordingly to Vice Governors. Specific tasks that the Governor may confer upon Vice Governors are regulated in detail by the Statute of the National Bank of Serbia.
Council of the Governor
The Council of the Governor consists of five members, including the President, appointed by the National Assembly at the proposal of the National Assembly’s Finance Committee. Members of the Council are appointed for a five-year renewable term of office. Members of the Council are not NBS employees. Provisions of the Law on the National Bank of Serbia governing the appointment, incompatibility of office and conflict of interest regarding the Governor’s position apply accordingly to the Council members. At least one member of the Council must have minimum ten years of work experience in accounting or auditing. The Council of the Governor: adopts the Statute of the National Bank of Serbia, at the proposal of the Executive Board; determines the exchange rate regime of the dinar, at the proposal of the Executive Board and with the Government’s consent; adopts the FX reserves management strategy, at the proposal of the Executive Board; decides on membership in international financial organisations and institutions; adopts the NBS financial plan; adopts NBS annual financial statements; appoints the manager of the NBS’s organisational unit in charge of internal audit; selects the external auditor, considers the external auditor’s report and monitors the implementation of audit recommendations in the NBS; oversees the system of financial reporting, risk management and internal controls in the NBS;
22 Institutional Framework and Organisation of the National Bank of Serbia
evaluates the adequacy of accounting policies and procedures adopted in the NBS; adopts the annual plan of internal audit in the NBS and periodically reviews internal audit reports; oversees the performance of internal audit and compliance of operations in the NBS; adopts a strategy of NBS development, proposed by the Executive Board, and monitors its implementation. The Council submits a report on its work to the National Assembly as often as necessary, but no less than twice a year. Meetings of the Council are held as often as necessary, but at least once every two months. Meetings are held if at least three Council members are present. The Council takes decisions by a majority vote of all members. The Council adopts its Rules of Procedure.
23 National Bank of Serbia Annual Report on Activities and Results in 2018
II.3 Organisation
MANAGEMENT OF THE NATIONAL BANK OF SERBIA (as at 31 December 2018)
GOVERNOR
Jorgovanka Tabaković, PhD
VICE-GOVERNOR VICE-GOVERNOR VICE-GOVERNOR SECRETARY GENERAL
Dragana Stanić, MA Željko Jović, PhD Ana Ivković, PhD Nataša Tanjević, PhD
24 Institutional Framework and Organisation of the National Bank of Serbia
COORDINATION OF THE NATIONAL BANK OF SERBIA (as at 31 December 2018)
GOVERNOR Jorgovanka Tabaković, PhD
Vice-Governor Vice-Governor Vice-Governor Secretary General Dragana Stanić, MA Željko Jović, PhD Ana Ivković, PhD Nataša Tanjević, PhD
Centre for Cooperation w ith Payment System Bank Supervision Domestic and International Accounting and Finance Governor's Office Department Department Institutions and Financial Department Organisations
Insurance Supervision Monetary and FX Operations Bank Resolution Centre General Affairs Department Department Department
Department for Financial Department For FX Matters Consumer Protection and Procurement Department and Foreign Credit Relations Education
Economic Research and Belgrade Branch AML Supervision Centre Statistics Department (general affairs)
Centre for Information Novi Sad Branch Financial Stability Department Systems Supervision (general affairs)
Enforced Collection Department
Cash Department
Legal Department
Department for Human Resources and Organizational Matters
ICT Department
Internal Audit
Reporting and Analysis Centre
Controlling Centre
Belgrade Branch (cash operations)
Novi Sad Branch (cash operations)
Niš Branch (general affairs and cash operations)
Kragujevac Branch (general affairs and cash operations)
Užice Branch (general affairs and cash operations)
Institute for Manufacturing Banknotes and Coins – Topčider
25 National Bank of Serbia Annual Report on Activities and Results in 2018
ORGANISATIONAL CHART OF THE NATIONAL BANK OF SERBIA (as at 31 December 2018)
NATIONAL BANK OF SERBIA
Organisational units Specialised organisation
Institute for Main organisational Kragujevac Manufacturing Be lgr ade Br anch Novi Sad Br anch Niš Br anch Už ice Br anch units Br anch Banknotes and Coins - Topčider
Monetary and FX Group for Financial Group for Financial Group for Financial Group for Financial Treasury and Cash Development and Quality Operations Department Consumer Education Consumer Education Consumer Education Consumer Education Vault Division Centre
Department For FX Treasury and Cash Treasury and Cash Treasury and Cash Treasury and Cash Matters and Foreign Credit General Affairs Unit Pre-Press Department Vault Division Vault Division Vault Division Vault Division Relations
Financial Stability Banknote Printing General Af fairs Unit General Aff airs Unit General Af fairs Unit Department Department
Economic Research and Coin Production Department Statistics Department
Centre for Cooperation w ith Domestic and Department for Value and International Institutions Secured Papers and Financial Organisations
Card Production and Bank Resolution Centre Personalisation Solutions
Department of Maintenance Cash Department and Energy
Payment System Sales Department Department
Enforced Collection Department of Economic Department Affairs
General Administrative, Governor's Office Legal and Personnel Department
Internal Audit
Legal Department
Accounting and Finance Department
ICT Department
Department for Human Resources and Organizational Matters
General Affairs Department
Procurement Department
Controlling Centre
Reporting and Analysis Centre
Bank Supervision Department
Centre for Information Systems Supervision
Department for Financial Consumer Protection and Educ ation
AML Supervision Centre
26
III PRICE AND FINANCIAL SYSTEM STABILITY
III.1 Monetary policy
III.1.1 Monetary policy in 2018
In 2018, the monetary policy was pursued in accordance with the Monetary Policy Programme of the National Bank of Serbia in 2018.7 As envisaged by the Programme, the NBS seeks to achieve the inflation target through consistent and predictable changes in the key policy rate, taking into account the inflation projection, economic developments in the domestic and international environment, and the impact of these changes on financial stability. According to the Programme, the NBS will continue to exercise caution when making monetary policy decisions, taking into account the uncertainty stemming from the international environment. The main monetary policy instrument of the NBS – the key policy rate – was trimmed further in March and April 2018, by a total of 50 bp to 3.0%. By lowering the key policy rate to its lowest level in the inflation targeting regime, the NBS provided additional support to lending activity and economic growth. The key policy rate was kept unchanged for the remainder of the year, considering past monetary policy easing and persisting uncertainties in the international environment. By making the decision to trim the key policy rate in March and April, each time by 25 bp, the Executive Board assessed that anticipated movements in inflation and its factors in the coming period, coupled with the further strengthening of domestic indicators, enables additional monetary policy easing. From the start of the year, inflationary pressures were lower than expected and inflation fell to 1.4% y-o-y in March and then to 1.1% y-o-y in April. Low inflationary pressures were also indicated by core inflation, which decelerated to 0.8% y-o-y in March, remaining there in April as well. This is its lowest level since
7 RS Official Gazette, No 111/2017.
27 National Bank of Serbia Annual Report on Activities and Results in 2018
inflation has been measured by the CPI. Both short-term and medium-term inflation expectations were anchored around the target midpoint (3.0%). In addition to low inflationary pressures, further monetary policy accommodation led to a significant lowering of macroeconomic risks. The Executive Board underscored that, owing to structural improvements and the narrowing in internal and external imbalances, Serbia’s resilience to potential adverse effects of global factors improved. The results achieved in terms of fiscal consolidation and sustainability of public finance are best illustrated by the data on the shift from a fiscal deficit to a surplus as of 2017, a decrease in public debt to almost 50% of GDP, a lower risk premium and improved credit rating of the country. The Executive Board assessed that the improvement in Serbia’s risk perception was key for more favourable treatment and financial conditions the country may encounter in the financial market. In addition, improved risk perception leads to lower costs of borrowing of corporates and households. Also, the fact that investors now see Serbia as a much safer investment destination has resulted in increased FDI inflow (EUR 3.2 bn net in 2018) and higher foreign investments in dinar government securities, which has contributed to the continuation of appreciation pressures in the FX market during most of 2018 as well. Lending activity continued up, supported by the key policy rate reduced to its lowest level in the inflation targeting regime, as well as by the increased interbank competition, lower country risk premium and low interest rates in the euro area money market. Lending growth was facilitated by continued NPL resolution, i.e. the write-off and sale of NPLs to non-banking sector entities. In slightly more than three years since the adoption of the NPL Resolution Strategy, the share of NPLs in total loans declined to its lowest level since 2008 and the introduction of this indicator of banks’ asset quality (by 16.7 pp to 5.7% in December 2018). Owing to the considerable drop in the NPL ratio, high bank capital adequacy and greater SME access to finance, Serbia made a significant progress in the international competitiveness list of the World Economic Forum for 2018, judged by the financial system indicators. According to the Executive Board estimate, further improvement in the business environment, a high and project-diversified FDI inflow channelled primarily to tradable sectors, implementation of infrastructure projects and past monetary policy easing are likely to lend a further impetus to investment, which will remain one of the drivers of economic growth. Household consumption is also likely to yield an increasingly positive contribution, supported by favourable trends in the labour market, characterised by wage and employment growth and declining unemployment. These are the main factors on which the Executive Board based its expectation that GDP rise in 2018 would accelerate to its ten-year maximum. Based on the outcome of the achieved macroeconomic stability and implemented structural reforms, the Executive Board expects a similar growth dynamics in the medium term as well. During the previous year, the Executive Board revised up its estimates of economic growth for 2018, and other relevant domestic and international institutions
28 Price and Financial System Stability followed suit. First, the Executive Board expected a 3.5% GDP growth rate in 2018, but with investment rising more than anticipated, it stated in May that economic growth will exceed the estimated figure and then in August it raised its 2018 growth estimate to 4%. In November, when positive risks arising from increased domestic demand materialised, as previously underlined by the Board in August, the Executive Board again raised its GDP growth projection for 2018, to 4.2%, which is the highest rate in ten years. Robust economic growth was achieved amid a relatively low inflation, equalling 2.0% in December, which was also its average in 2018. The Executive Board was guided by the expectation that future inflation movements would reflect to a large extent the gradual rise in domestic demand. Unlike favourable macroeconomic conditions at home, factors from the international environment suggested caution in the conduct of monetary policy. Serbia’s high GDP growth rate is primarily attributable to domestic factors, bearing in mind that external demand growth was slower and prospects of global economic growth weaker than anticipated, mostly due to the rising protectionism in international trade and exacerbated geopolitical tensions. All relevant institutions lowered their global growth projections, forecasting the same level of growth in 2018 as in 2017 (3.7%). Economic growth of the euro area, our main economic partner, was also revised down, though its economic activity should continue trending above its potential. In addition to subdued production in the automobile industry, an adverse effect also came from the slower growth in services, consumption and investments. On the other hand, the growth of Central and South-East European countries, which are also our important trade partners, was faster than expected, despite the decline in net exports due to a slowdown in external demand. Investments grew in many countries, owing to the stepped-up disbursement of EU funds. The Executive Board pointed out that rising protectionism in international trade and geopolitical tensions could have an adverse effect not only on the global economic growth, but also on the commodity and financial markets, thus mandating caution in making monetary policy decisions. The spreading of protectionism and tightening of trade tensions could dent investor readiness to invest and, in turn, global capital flows to emerging economies. In deciding on the monetary policy, the Executive Board took into account the uncertainty in terms of the pace of normalisation of monetary policies of leading central banks, the dollar/euro ratio and capital flows to emerging economies. During 2018, the Fed continued with monetary policy normalisation and raised the target range for its federal funds rate by 100 bp to 2.25%–2.50%. On the other hand, the ECB pursued an accommodative monetary policy – it maintained its interest rates at historic lows (the key rate at zero and deposit facility rate at below zero) and continued to carry out net asset purchases, though in decreased amounts, only to conclude them at the end of the year. In order to maintain favourable liquidity, the ECB underlined that it would continue to reinvest the principal payments from maturing securities for an extended period of time, even after it begins raising its interest rates. At the same time, around mid-year the ECB announced – and remained with this stance until the end of the year – that it would not change its key rate at
29 National Bank of Serbia Annual Report on Activities and Results in 2018
least through the summer of 2019, while markets expected the rate to stay on hold until end-2019. Heightened volatility of global oil prices, which rose during most of the year, also mandated caution in monetary policy conduct. At over USD 80 per barrel, the oil price was on average 46% higher in Q3 than in the same period in 2017. The rise in oil prices in the global market was the main reason of a somewhat higher inflation in the international environment. Still, the global oil price plummeted since October, ending the year more than 20% lower than at end-2017. The volatile movements in the global price of oil were mainly determined by the shifting prospects of global growth, variations in supply due to geopolitical tensions and agreements on production between OPEC countries and Russia. Movements in global prices of other primary commodities were also uncertain, primarily in terms of the prices of primary agricultural commodities whose movements spill over onto the prices of domestic agricultural products. Still, the Executive Board estimated that the resilience of the Serbian economy to potential adverse effects from the international environment has increased, owing to the strengthening of domestic macroeconomic indicators and a more favourable outlook for the period ahead. This is also confirmed by the fact that strong economic growth and the NBS’s results in terms of the preservation of price and financial stability were the main reasons behind Standard and Poor’s decision to upgrade Serbia’s long-term foreign and local currency sovereign credit rating outlook from stable to positive at the end of last year. As the key risks in the monetary policy pursuit emanate from the international environment, the Executive Board will continue to closely monitor and analyse movements in the international financial and commodity markets and assess their impact on economic developments in Serbia. As so far, the monetary policy will be predictable and consistent in delivering low and stable inflation in the medium term which, together with maintaining financial stability, will contribute to sustainable economic growth and strengthen the country’s resilience to external uncertainties.
III.1.2 Monetary policy instruments
The main monetary policy instrument of the NBS is the key policy rate, i.e. the interest rate on the main open market operations. The role of the key policy rate is supported by the corridor of interest rates on deposit and lending facilities and by other open market operations. In addition to the key policy rate, the NBS uses other instruments of monetary regulation, notably reserve requirements and operations in the FX market.
Open market operations
The main open market operations of the NBS in 2018 were one-week reverse repo transactions, i.e. repo sale of securities (liquidity absorbing).
30 Price and Financial System Stability
The NBS implemented repo transactions through own securities. For the purposes of repo sale, in 2018 the NBS issued one series of T-bills in the total nominal amount of RSD 500.0 bn. The issuing of one series of high nominal value is consistent with the practice in earlier years which enables more adequate management of securities within the same series and facilitates liquidity management for banks.
Chart III.1.2.1 Repo sale and stock of sold securities (RSD bn)
350
300
250
200
150
100
50
0 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2018 2018 Stock of sold securities in banks' portfolio (end of month) Securities sold (purchase price)
Source: NBS.
In 2018, 52 repo sale auctions were organised. Auctions were organised once a week, upon the model of the variable multiple interest rate. The total securities sales amounted to RSD 2,488.4 bn. The sales volume was somewhat lower than in 2017 (RSD 2,701.7 bn). The stock of NBS bills in banks’ portfolios averaged RSD 47.8 bn in 2018, down by RSD 3.9 bn from 2017. Relative to end-2017, the stock of these securities decreased by RSD 28.6 bn, to RSD 16.5 bn at end-December.
Deposit and lending facilities
In 2018, banks continued to place overnight deposits with the NBS. The average daily stock of bank deposits with the NBS in 2018 came at RSD 14.6 bn, which is RSD 0.1 bn less than in 2017. The highest average monthly stock was recorded in March (RSD 18.5 bn) and the lowest in October (RSD 8.5 bn). In 2018, banks used lending facilities as intraday loans (seven banks). Intraday loans were worth a total of RSD 23.4 bn, with the peak recorded in January (RSD 8.5 bn) and December (RSD 7.7 bn). Overnight loans were not used.
31 National Bank of Serbia Annual Report on Activities and Results in 2018
Chart III.1.2.2 Key policy rate and interest rate corridor (daily data, p.a., in %)
6
5
4
3
2
1 Jan Feb Mar Apr May June July Aug Sep Oct. Nov Dec 2018 2018
Key policy rate Interest rate on deposit facility Interest rate on lending facility
Source: NBS.
Required reserves
In October 2018, the NBS passed a new Decision on Banks’ Required Reserves with the National Bank of Serbia.
Chart III.1.2.3 Volume of sterilisation by monetary policy instruments (RSD bn)
500 450 400 350 300 250 200 150 100 50 0 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2018 2018
FX RR Dinar RR ОMОs − purchase price
Source: NBS.
The new Decision, which has kept the basic characteristics of the required reserves model in effect until then, ensures alignment with the regulations introducing the Instant Payment System. In this regard, the Decision stipulates that banks allocate the dinar required reserves to the current account or an RTGS-IPS8
8 Real Time Gross Settlement – Instant Payment System.
32 Price and Financial System Stability account, and that the daily balance of allocated dinar required reserves is the sum of the daily balances of dinar funds on both accounts. In addition, the provisions of the Decision concerning the liabilities for which the bank does not calculate the required reserves, such as funds received from international financial organisations, governments and financial institutions founded by foreign countries, define more precisely the conditions for their exclusion from the base for the calculation of the required reserves. In this regard, it prescribes the requirement that the interest margins on loans from these sources must be lower than the average interest margins on loans approved by the bank from other sources of funding. The provisions of the Decision concerning the comprehensiveness of the base for the calculation of the required reserves, the method of calculation, the differentiated required reserves ratios aimed at stimulating the dinar sources of funding, the maintenance period and the average allocation of the required reserves, as well as the calculation and payment of interest on the allocated dinar required reserves remained unchanged. At end-2018, the calculated required reserves allocated in dinars stood at RSD 171.2 bn, up by RSD 15.5 bn from end-2017. Of this amount, RSD 10.8 bn related to the increase in FX required reserves allocated in dinars, and RSD 4.7 bn to the increase in purely dinar required reserves. In the same period, the amount of calculated required reserves allocated in foreign currency increased by EUR 174.9 mn, standing at EUR 1.9 bn. During 2018, the FX basis increased by EUR 1.5 bn, mostly on account of rising foreign liabilities (EUR 0.8 bn) and FX savings (EUR 0.6 bn). In the maturity structure of FX basis, banks’ liabilities with the maturity of less than two years doubled in amount compared to liabilities with longer maturities (EUR 1.0 bn, compared to EUR 0.5 bn).
Foreign exchange market operations
Under the 2018 Monetary Policy Programme, the NBS continued implementing the managed float exchange rate regime, with the possibility to intervene in the foreign exchange market with a view to easing the excessive short-term volatility of the exchange rate, maintaining price and financial stability and an adequate level of FX reserves. In 2018, the dinar gained 0.2% against the euro in nominal terms. The strengthening of the dinar in 2018 is the continuation of the appreciation tendency present since April 2017 which is a reflection of improved macroeconomic indicators of the country. Strong macroeconomic performance and positive prospects of the domestic economy boosted foreign currency inflows from different sources, primarily FDIs, whose net inflow was more than sufficient to cover the current account deficit. The foreign currency inflow was also intensified on account of increased interest of foreign portfolio investors for investing in long-term dinar, mainly 10-year benchmark securities (in H1), as well as on account of remittances
33 National Bank of Serbia Annual Report on Activities and Results in 2018
and increased net purchase of foreign cash, particularly during holidays and the tourist season. Appreciation pressures were also fuelled by the expanded bank lending (increase in net indexed bank assets).9 In 2018, the NBS intervened in the IFEM as a net buyer of EUR 1,580.0 mn (buying EUR 1,835.0 mn and selling EUR 255.0 mn). The NBS intervened as a price taker, strictly under market conditions. In January we witnessed depreciation pressures, primarily caused by temporary, seasonal factors (heightened FX demand of domestic enterprises – energy importers), while appreciation pressures prevailed from February until the end of the year. FX supply significantly exceeded FX demand in the period from February until the end of August. As of September, FX supply and demand were almost balanced, which led to the weakening of appreciation pressures and the temporary occurrence of mild depreciation pressures. By quarter, the dinar gained 0.1% against the euro in nominal terms in Q1. The NBS intervened in January by selling EUR 180.0 mn, and in February and March by buying EUR 580.0 mn. In Q2, the dinar kept appreciating (by 0.3%) and the NBS exclusively purchased foreign currency in the IFEM (EUR 790.0 mn). In Q3 the dinar depreciated against the euro by 0.3% in nominal terms, with the NBS buying EUR 405.0 mn net (buying EUR 420.0 mn and selling EUR 15.0 mn). In Q4 the dinar strengthened against the euro by 0.2% in nominal terms, with the NBS selling EUR 15.0 mn net (buying EUR 45.0 mn and selling EUR 60.0 mn).
Foreign exchange swaps
In 2018, the NBS continued to hold its regular three-month and two-week FX swap auctions of FX purchase and sale for dinars, in order to boost the development of interbank swap trading and facilitate more efficient bank liquidity management. During the year, 100 two-week swap auctions were held, with the NBS swap purchasing and selling EUR 134.0 mn, as well as 100 three-month swap auctions, at which it swap sold and bought EUR 190.0 mn. The largest performance in 2018 was recorded in October, when the NBS swap sold and bought EUR 69.0 mn. At end- 2018, the stock of FX receivables and FX liabilities of the NBS in respect of three- month swap auctions equalled EUR 55.0 mn each. NBS FX receivables and FX liabilities to banks in respect of two-week swap auctions measured EUR 39.0 mn each.
Other interest rates
In March 2018 the interest rate at which the NBS calculates and pays the interest for average daily balance of allocated dinar required reserves was reduced from 1.75% to 1.50%, only to be lowered again to 1.25% in April.
9 Aiming to balance their foreign currency positions, thus reducing exposure to foreign exchange risk, banks sell foreign currency, which results in the strengthening of the dinar.
34 Price and Financial System Stability
Furthermore, in April 2018 the NBS interest rate corridor was also narrowed relative to the key policy rate from ±1.50 pp to ±1.25 pp.
III.1.3 Achievement of inflation target in 2018
In 2018 inflation trended at a level lower than in 2017. It moved within the target tolerance band (3±1.5%) throughout the year, with the exception of two months (March and April) when it was temporarily below the lower bound of the target band. In December it measured 2%, which was also the annual average. The largest contribution to inflation in 2018 came from the prices of food (0.8 pp), primarily vegetables, followed by cigarettes (0.4 pp) and petroleum products (0.3 pp), while the aggregate contribution of the prices of other products and services was 0.5 pp. This shows that inflationary pressures on the demand side remained low in 2018 despite the robust economic growth and favourable labour market trends. In monthly terms, y-o-y inflation decelerated at the beginning of the year to 1.1% in April, primarily as a consequence of the high base from the prices of vegetables and petroleum products. Due to these opposing dynamics in the two groups of prices, moderate growth in consumer prices was recorded as of May, reaching 2.6% y-o-y in August. Y-o-y inflation decelerated afterwards to 2% in December, as a result of a reduced contribution from the prices of industrial non-food products and petroleum products, due to a considerable fall in the global oil prices at the end of the year. In terms of inflation components, overall food prices grew by 2.7% in 2018, largely on account of the hike in the prices of unprocessed food (6.4%), notably vegetables (23.1%). Processed food prices rose by 0.8% y-o-y in December, and their contribution to headline inflation in 2018 remained low (0.2 pp), primarily owing to the persistently low prices of primary agricultural commodities in the
Chart III.1.3.1 Contributions of CPI components to y-o-y inflation (pp)
6
5
4
3
2
1
0
-1
-2 Jan. July Jan. July Jan. July Jan. July Jan. July 2014 2015 2016 2017 2018
Energy Food Services Industrial goods excluding food and energy Consumer prices (%) Targeted inflation Target tolerance band
Sources: SORS and NBS calculation.
35 National Bank of Serbia Annual Report on Activities and Results in 2018
global market. The strongest boost came from the prices of non-alcoholic beverages, bread and other bakery products, and processed meat products. Industrial product prices excluding food and energy picked up by 0.9% y-o- y in December, contributing 0.3 pp to inflation. The price growth in this group was dominantly determined by the February and July cigarette price hikes totalling 8.2% (contribution to inflation 0.4 pp). The dinar appreciation in the greater part of the year lowered the prices of imported products expressed in dinars. The largest negative contribution stemmed from the prices of clothes and footwear. At the annual level, the prices of services went up by 2.4% (contribution to inflation 0.6 pp), largely reflecting the increase in the prices of travel packages (by around 12%) and transport services (5.1%), on account of the higher prices of technical inspection of vehicles and intercity transportation. Energy prices gained 2.2% in 2018 (contribution to headline inflation 0.3 pp in December). In this category the highest positive contribution came from petroleum products due to the rise in the global oil price, which was higher in 2018 relative to 2017 by 30.9% on average. Electricity price did not go up in 2018 and the contribution from the prices of solid fuels was also lower compared to 2017. The largest contribution to y-o-y inflation from the prices of petroleum products was recorded in October (0.7 pp); afterwards, when the global oil price contracted significantly, its contribution to y-o-y inflation also declined, coming down to 0.3 pp in December. Administered prices, i.e. prices under direct or indirect impact of the Government, grew by 2.4% in 2018, contributing 0.4 pp to headline inflation. Growth in this price group was almost fully determined by hikes in the prices of cigarettes. Core inflation,10 as the part of the CPI which is most affected by the monetary policy, remained low and stable in 2018, measuring 1% y-o-y in December, which is also its average value for the entire year. Such developments in core inflation indicate that low inflationary pressures are of a more durable character and largely the result of relative stability of the dinar exchange rate, low and anchored inflation expectations and low inflation abroad. In terms of groups of products and services, the only major positive contribution to core inflation in 2018 came from the prices of travel packages (0.1 pp).
III.2 Regulation and supervision of financial institutions
III.2.1 Banks
During 2018, the structure of the NBS-supervised segments of the financial sector remained largely unchanged. The banking sector continued to dominate the
10 CPI excluding the prices of food, energy, alcohol and cigarettes, which is the most frequently used measure of core inflation.
36 Price and Financial System Stability
Serbian financial system and was the key factor of its stability. In the balance sheet total of the NBS-supervised segments of the financial sector, which measured around 83% of GDP in 2018, the banking sector participated with 90.3%.11 The trend of downsizing employment in the Serbian banking sector, which started back in 2009, continued into 2018. At year-end, the banking sector employed 22,830 persons, 225 fewer than at end-2017.
Тable III.2.1.1 Financial system structure
31 December 2017 31 December 2018
Balance Balance sheet Share Share Number sheet total Number total (%) (%) (RSD bn) (RSD bn)
Banking sector 29 3,369.4 90.7 27 3.774.1 90.3
Lessors 16 75.3 2.0 17 86.7 2.1
Insurance undertakings 21 233.0 6.3 20 279.0 6.7
Voluntary pension funds 7 36.1 1.0 7 40.2 0.9
Total 73 3,713.8 100.0 71 4,180.0 100.0
Source: NBS. The total number of banks operating in Serbia in 2018 declined from 29 at end- 2017 to 27.12 There were 20 banks in the majority ownership of foreign shareholders, two banks with predominantly private domestic capital and five banks in the majority ownership of the Republic of Serbia13. As for the type of ownership, the balance sheet of all three groups of banks increased – most notably of banks in the majority ownership of foreign shareholders in nominal terms (by RSD 257.9 bn), including banks in the majority ownership of the Republic of Serbia in relative terms (by 21.5%). As a result, at end-2018, the share of banks owned by the Republic of Serbia in the balance sheet total of the banking sector increased by 1.4 pp, versus banks in the majority ownership of foreign shareholders whose share declined by 1.4 pp.
Table III.2.1.2 Ownership structure of the banking sector in 2018
Balance sheet total Capital Share (%) Share (%) (RSD mn) (RSD mn)
Domestic banks: 926,549 24,6 163,311 24.1
– state-owned 660,489 17,5 96,743 14.3
– privately-owned 266,060 7,1 66,568 9.8
Foreign banks 2,847,507 75,4 513,394 75.9
Total 3,774,056 100.0 676,705 100.0 Source: NBS.
11 All data in the Report are based on the reports that banks are required to submit to the NBS. These reports have not been audited by external auditors or verified by NBS on-site supervisors. 12 At the meeting of 2 April 2018, the NBS Executive Board adopted the decision on the delicensing of Jugobanka Jugbanka a.d. Kosovska Mitrovica. In late October 2018, Direktna banka a.d. Kragujevac acquired Piraeus banka a.d. 13 The Republic of Serbia is the majority owner and major individual shareholder.
37 National Bank of Serbia Annual Report on Activities and Results in 2018
In terms of capital, it was only banks owned by foreign shareholders that recorded a nominal and relative decline in capital (by RSD 0.5 bn or 1.2 pp). The biggest change was observed among banks with the majority ownership of the Republic of Serbia, whose capital and share in total capital increased by 9.8% and 1.1 pp respectively.
Table III.2.1.3 Banks by balance sheet assets
31 December 2017 31 December 2018
Balance Balance Number Number sheet total sheet total of banks of banks (RSD mn) (RSD mn)
Over 500,000 1 564,860 1 571,075
From 100,000 tо 500,000 10 2,193,512 12 2,712,063
From 50,000 tо 100,000 5 402,050 5 360,452
From 10,000 tо 50,000 9 192,967 8 124,528
Up to 10.000 4 16,003 1 5,938
Total 29 3,369,392 27 3,774,056 Source: NBS. Changes in market shares in 2018 were partly prompted by the takeover of 100% of shares of Piraeus banka a.d. Beograd by Direktna banka a.d. Kragujevac. Of banks owned by foreign shareholders, those from Italy (26.7%), Austria (13.1%) and France (11.0%) held the largest shares in total assets, followed by banks from Hungary (5.9%) and Greece (4.5%), while banks from other countries (11 banks) accounted for 14.2% of total assets.
Table III.2.1.4 Concentration – shares of top banks in banking sector balance sheet assets, loans and deposits (in %)
31 December 2017 31 December 2018
Share in balance sheet assets
Top bank 16.8 15.1
Top five banks 54.9 53.5
Top ten banks 78.4 78.2
Share in gross loans
Top bank 15.3 15.7
Top five banks 53.6 53.3
Top ten banks 77.7 77.7
Share in deposit potential
Top bank 16.7 15.5
Top five banks 55.6 54.1
Top ten banks 79.5 79.0 Source: NBS.
38 Price and Financial System Stability
In terms of balance sheet total, at end-2018 banks whose balance sheet total ranged from RSD 100 bn to RSD 500 bn were the most numerous. The balance sheet total of this group made up around 72%, while that of the top three banks accounted for over 37% of the balance sheet total of the banking sector (each holding over 10% market share). In 2018, market concentration rose slightly only for loans, but the HHI14 stayed well below 1,000, as in the case of balance sheet assets and deposits. Thus, the Serbian banking sector remains concentration-free.
Table III.2.1.5 HHI concentration
Balance sheet Gross Deposit total loans potential
31 December 2017 813 788 827
31 December 2018 779 793 798 Source: NBS.
Structure of banking sector assets and liabilities
Table III.2.1.6 Structure of banks’ assets as at 31 December 2018
Amount Share (RSD mn) (%)
Cash and balances with the central bank 596,822 15.8
Pledged financial assets 4,435 0.1
Receivables based on derivatives 1,608 0.0
Securities 663,859 17.6
Loans and receivables from banks and other financial organisations 208,045 5.5
Loans and receivables from clients 2,161,035 57.3
Change in fair value of hedged items 224 0.0
Receivables arising from hedging derivatives 85 0.0
Investment in associated undertakings and joint ventures 336 0.0
Investment in subsidiaries 24,523 0.6
Intangible assets 14,887 0.4
Property, plant and equipment 51,519 1.4
Investment property 13,647 0.4
Current tax assets 223 0.0
Deferred tax assets 3,084 0.1
Non-current assets held for sale and discontinued operations 1,238 0.0
Other assets 28,486 0.8
Total assets 3,774,056 100.0 Source: NBS.
14 HHI (Herfindahl-Hirschman Index) is calculated as the sum of square values of individual bank shares in the category observed (assets, loans, deposits, etc.). HHI up to 1,000 indicates that there is no market concentration; 1,000–1,800 indicates moderate concentration; above 1,800 indicates high concentration.
39 National Bank of Serbia Annual Report on Activities and Results in 2018
At end-2018, the Serbian banking sector’s balance sheet assets equalled RSD 3,774.1 bn, up by 12.0% from end-2017. As banks focus on traditional credit-deposit activities, loans and receivables accounted for a dominant share of banking sector net assets15 – 62.8% at end-2018, and are therefore the most important determinant of asset quality. The bulk of loans and receivables (91.2%) pertained to clients, and the rest to banks and other financial organisations. The remainder of net assets was mostly made up of securities (17.6%) and cash and balances with the central bank (15.8%).
Table III.2.1.7 Structure of banks’ liabilities as at 31 December 2018
Amount Share (RSD mn) (%)
Derivatives liabilities 1,145 0.0
Deposits and other liabilities to banks, other financial organisations and the central bank 479,853 12.7
Deposits and other liabilities to other clients 2,529,658 67.0
Liabilities arising from hedging derivatives 560 0.0
Changes in fair value of hedged items 0 0.0
Securities 00.0
Subordinated liabilities 34,948 0.9
Provisions 11,468 0.3
Liabilities in respect of assets held for sale and discontinued operations 0 0.0
Current tax liabilities 1,859 0.1
Deferred tax liabilities 891 0.0
Other liabilities 36,969 1.1
Total liabilities 3,097,351 82.1
Capital 676,705 17.9
Total liabilities 3,774,056 100.0
Source: NBS. Gross loans increased by 10.4% to RSD 2,267.2 bn in nominal terms. The increase was prompted by rising cash, investment, liquidity, current assets and housing loans. By sector, household and corporate loans increased the most (by RSD 100.6 bn and RSD 83.4 bn, respectively), making up 39.8% and 44.9% of total gross loans at end-2018, respectively. In terms of the liabilities structure, banks were increasingly relying on stable domestic sources of funding. At end-2018, deposits and other liabilities16 made up the largest portion of the sources of funding – 79.7% (where 67.0% of total liabilities
15 In addition to loans and deposits, this balance sheet item also includes FX accounts abroad, receivables from interest, fees and commissions and other receivables (factoring, forfeiting, sureties, letters of credit and other warranties), and excludes foreign currency required reserves and excess liquidity deposited with the NBS. 16 Pursuant to the new balance sheet structure, the item ’Deposits and other liabilities’, besides deposits, also includes received loans and liabilities in respect of interest, fees and commissions.
40 Price and Financial System Stability were deposits and other liabilities to other clients, except for banks, other financial organisations and the central bank), while capital accounted for 17.9%. Banks’ deposit potential was RSD 2,732.0 bn. In 2018, it expanded by 15.7%, on account of the rise in transaction deposits (RSD 264.7 bn or 24.1%), mostly of corporates, households and the public non-financial sector. At end-2018, deposits of households accounted for 48.6%, and those of corporates for 25.0% of total banking sector deposits, indicating a rise in the share of corporate deposits and a fall in the share of household deposits compared to 2017.
Table III.2.1.8 Structure of banks’ capital (RSD mn)
31 December 2017 31 December 2018
Share capital and other capital 404,547 393,230
Own shares 1 0
Reserves* 196,336 209,139
Profit of the current and previous years 100,739 98,138
Loss of the current and previous years 34,505 23,802
Total 667,116 676,705 Source: NBS.
* And unrealised losses. The currency structure of funding sources did not change much in the course of 2018 either. FX deposits, mainly denominated in euros, remained a dominant source of bank funding. Nevertheless, some progress was achieved, as seen in the further rise in the share of dinar deposits in total deposits by 0.5 pp to 32.5% at the end of the year. Rising by EUR 582 mn or 6.2%, FX savings exceeded EUR 10.0 bn at end-2018.
Table III.2.1.9 Banks by off-balance sheet total
31 December 2017 31 December 2018
Number Off-balance sheet total Number of Off-balance sheet total of banks (RSD mn) banks (RSD mn)
Over 1,000,000 1 1,610,838 1 1,011,780
500,000 to 1,000,000 5 3,119,500 5 3,261,668
100,000 to 500.000 8 1,906,025 8 2,015,273
50,000 to 100,000 4 253,632 5 340,329
10,000 to 50,000 6 148,924 3 68,393
1,000 to 10,000 4 15,197 4 13,578
Below 1,000 1 0 1 154
Total 29 7,054,116 27 6,711,175
Source: NBS. Banking sector capital reached RSD 676.7 bn at end-2018, up by 1.4% from end- 2017. In 2018, four banks were recapitalised, in the aggregate amount of over RSD 7 bn. Share capital declined by RSD 11.3 bn, mainly on account of banking sector
41 National Bank of Serbia Annual Report on Activities and Results in 2018
consolidation and acquisitions. A RSD 7.0 bn rise in banking sector profitability enabled the coverage of losses from earlier years and higher allocations of profit into reserves (up by RSD 12.8 bn from 2017). Off-balance sheet items of the banking sector totalled RSD 6,711.2 bn at end- 2018, down by 4.9% compared to end-2017. The breakdown of banking sector off-balance sheet items shows that the majority of banks (eight) recorded off-balance sheet total ranging from RSD 100 bn to RSD 500 bn, accounting for 30.0% of total off-balance sheet items of the banking sector. Six banks held more than RSD 500 bn, all of them together making up 63.7% of off-balance sheet items of the total banking sector, one of these banks standing out in particular with a 15.1% market share. The most significant off-balance sheet items were other off-balance sheet assets17 (73.6% of total off-balance sheet items), which are credit risk-free, i.e. in respect of which no payments can be made. The most significant credit risk-bearing off-balance sheet items were receivables under derivatives (9.2%) and issued guarantees and other warranties (5.1%). At end-2018, the banking sector’s total open FX position equalled RSD 24.2 bn and the exposure to FX risk (expressed as the FX risk ratio) 4.5%, which is significantly below the prescribed 20% cap.
Table III.2.1.10 Banks’ exposure to FX risk as at 31 December 2018 (RSD mn)
Total Open position Open position Open position Open position in Open position Total open net open FX in EUR in USD in CHF other currencies in gold position position Long Short Long Short Long Short Long Short Long Short Long Short
21,992 1,019 1,275 25 326 134 594 47 93 – 24,187 1,225 24,187
Source: NBS.
Asset quality
According to data as at end-December 2018, the gross NPL ratio fell by 4.15 pp to 5.70% – the lowest level on record. 18 Gross NPLs fell to RSD 130.6 bn, or by 36.2% compared to end-2017. Sector-wise, the share of NPLs in total loans in the corporate sector fell from 10.4% at end-2017 to 5.0%, which is the lowest level on record. Non-financial sector entities in bankruptcy accounted for 19.8% of total NPLs at end-2018. The NPL share also declined among natural persons, by 1.5 pp to 4.4% at end- December. The NPL ratio among natural persons was determined by banks’ efforts to reduce the amount of NPLs through write-offs and collection, as well as by lending growth.
17 Received material collateral, received guarantees and other collateral, funds from depositary and custody operations, approved framework loans and credit lines, revocable commitments and other off- balance sheet assets. 18 The data on the NPL ratio are available as of September 2008.
42 Price and Financial System Stability
The current level of NPLs poses no threat to the operation of the banking sector and, by extension, to financial stability, owing to the high level of reserves for estimated losses. In order to preserve financial stability and protect the interests of depositors and other creditors, the NBS requires, in addition to the reserves prescribed by international standards, the creation of regulatory reserves, i.e. reserves for estimated losses. At end-2018, allowances for impairment (calculated according to the International Accounting Standards) covered 60.2% of total gross NPLs, while the calculated reserve for estimated balance sheet losses in accordance with the regulatory requirements equalled 160.5% of total gross NPLs. The quality of banking sector assets, measured by the share of the most adversely classified assets (categories D and E) in total classified assets fell from 10.1% to 7.0%, signalling significant improvement in 2018. Total calculated required reserves for estimated losses on classified balance sheet assets and off-balance sheet items equalled RSD 223.9 bn at end-2018, while allowances for impairment and provisions in respect of classified balance sheet assets and off-balance sheet items came at RSD 119.0 bn (a fall of 22.5% and 23.8% respectively, relative to end-2017).
Table III.2.1.11 NPL composition (RSD mn)
31 December 2017 31 December 2018
Total gross NPL
amount 204,930 130,650
ratio 9.8% 5.7%
Corporates*
amount 107,603 56,850
ratio 10.4% 5.0%
Natural persons**
amount 53,014 44,911
ratio 5.9% 4.4%
Non-financial sector in bankruptcy***
amount 39,452 25,918
ratio 99.1% 99.9%
Other
amount 4,861 2,971
ratio 4.5% 2.3% * Public enterprises and companies. ** Households, entrepreneurs, private households with employed persons and registered farmers. *** Companies, public enterprises and entrepreneurs in bankruptcy. Source: NBS. The Serbian banking sector remains exceptionally liquid. Of all the risks in the system, liquidity risk is the least pronounced.
43 National Bank of Serbia Annual Report on Activities and Results in 2018
Table III.2.1.12 Classification of bank assets (RSD mn)
Total Share of assets classified in Gross amount classified Classified assets categories D and E in total assets classified assets (%)
А + B + C D + E
31 December 2018
Balance sheet assets 3,961,279 2,500,269 2,294,604 205,665 8.2
Off-balance sheet 6,711,175 920,440 885,403 35,037 3.8 items
Total 10,672,454 3,420,709 3,180,007 240,702 7.0
31 December 2017
Balance sheet assets 3,589,378 2,241,755 1,965,275 276,480 12.3 Off-balance sheet 7,054,116 815,112 782,526 32,586 4.0 items Total 10,643,494 3,056,867 2,747,801 309,066 10.1
Source: NBS. In December 2018, the average monthly banking sector liquidity ratio was two times higher than the prescribed minimum (1.0), equalling 2.0. In 2018 the ratio was even above 2.0, suggesting that liquid assets (first-degree liquid receivables and other receivables due in the next month) were double the sum of liabilities without a set maturity date and liabilities due in the next month. Liquid assets made up 37.4% of total balance sheet assets and 52.8% of short-term liabilities as at 31 December 2018. The average monthly narrow liquidity ratio of 1.7 in the same period was also significantly above the regulatory minimum (0.7). In accordance with Basel III regulations, the liquidity coverage ratio stood at 213.3%, confirming high banking sector liquidity. The Serbian banking sector remained adequately capitalised in 2018, with the CAR of 22.3% at year-end. This is well above the regulatory floor of 8%, applied since June 2017. Owing to the high capital position and good quality of regulatory capital, the banking sector Tier 1 capital ratio measured 21.1%, and Common Equity Tier 1 capital ratio – 21.1%. These indicators were also considerably above the prescribed minimums of 6% for the Tier 1 capital ratio and 4.5% for the Common Equity Tier 1 capital ratio.
Table III.2.1.13 Performance indicators
Number of 31 December 2018 non-complying banks
Capital adequacy ratio (min. 8%) 22.3% 0
Fixed investment ratio (max. 60%) 12.4% 1
Liquidity ratio* 2.04 0
FX risk ratio (max. 20%) 4.5% 0
* Average monthly indicator. Source: NBS.
44 Price and Financial System Stability
The share of accounting equity in total liabilities measured 17.9% at end-2018. As of June 2017, banks in Serbia are required to calculate and report to the NBS the leverage ratio (definition – Tier 1 capital relative to total on- and off-balance exposure of a bank – the same as in the EU), which equalled 12.6% at end-2018.
Table III.2.1.14 Banks’ financial result
31 December 2017 31 December 2018
Amount Number of Amount Number of (RSD mn) banks (RSD mn) banks
1. Profit 73,892 22 76,652 25
2. Loss 5,202 7 936 2
Financial result (1–2) 68,690 29 75,716 27 Source: NBS. Twenty six out of 27 banks fully complied with the prescribed limits of performance indicators at end-2018. One bank failed to comply with one indicator. In 2018 the Serbian banking sector again posted a positive pre-tax net financial result in the amount of RSD 75.7 bn, up by 10.2% or RSD 7.0 bn compared to 2017. With a 2.12% ROA and an 11.27% ROE, the Serbian banking sector was more profitable than in 2017. In 2018, 25 banks operated at a profit, while two banks recorded a negative financial result. A concentration trend was noted in total profit; hence more than 80% of the banking sector’s total profit was generated by the seven banks with the highest net profit.
Table III.2.1.15 Banking sector’s profitability indicators (%)
2017 2018
ROA 2.08 2.12
ROE 10.57 11.27
Interest margin / average balance sheet assets 3.7 3.6
Interest margin / total operating income 63.7 66.5
Operating expenses / total operating income 59.9 58.7
Salary expenses / operating expenses 37.4 39.4 Source: NBS. In an environment of lending expansion in 2018 (supported by economic growth and positive labour market trends), including the customary reliance of domestic banks on traditional credit-deposit business models, the main driver behind the rising net profit was net interest and fee income. In 2018, net interest income rose by RSD 6.0 bn (reflecting the simultaneous rise in income by RSD 4.8 bn and a decline in expenses by RSD 1.2 bn). Compared to the year before, net fee income rose by RSD 2.7 bn.
45 National Bank of Serbia Annual Report on Activities and Results in 2018
Bank supervision activities
Regulatory activity
In July 2018 the NBS adopted the Decision Amending the Decision on Consolidated Supervision of a Banking Group19, introducing new provisions relating to minority interests, as well as Additional Tier 1 and Tier 2 capital instruments issued by subsidiary companies20. It is now also possible to offset positions among banks belonging to the same group, under the prescribed conditions, for the purpose of calculating net positions and capital requirements for market risks on a consolidated basis. The Decision is applied as of 21 July 2018. In October 2018, the NBS adopted the Decision Amending the Decision on Risk Management by Banks21. The amendments aim at improving risk management in banks in respect of outsourced activities and the introduction of new products, while at the same time upgrading the supervision of implementation of relevant provisions regulating this matter. In December 2018, the NBS adopted the following decisions, which came into force on 1 January 2019: the Decision on Managing Concentration Risk Arising from Bank Exposure to Specific Products, Decision Amending the Decision on Capital Adequacy of Banks and Decision Amending the Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items.22 The adopted set of regulations comes as a response to the recognised need for the NBS’s proactive approach to the increasingly recurrent approval of unsecured non-purpose loans to households at unreasonably long maturities. The NBS has therefore expanded its supervisory toolkit and adjusted prudential requirements for banks in order to bring the described practice within acceptable bounds. While the estimated credit-to-GDP gap is recovering, but is still below its long-term trend, the closing of the gap in some segments of household lending indicates risk and calls for targeted measures to curb the risk without undesirable repercussions on the overall lending activity. The key novel solutions envisaged by the above regulations and relating to lending to natural persons (which within the meaning of these regulations exclude farmers and entrepreneurs) are as follows: A new indicator of concentration risk has been introduced, which primarily includes a bank’s current portfolio of cash, consumer and other loans (other than housing loans and current account overdrafts) with the agreed maturity of eight years or more that were approved before the start of application of the new set of regulations. The newly introduced indicator represents an additional regulatory and supervisory instrument of the NBS that will help bring the current stock of these loans within reasonable bounds at an appropriate and gradual pace, given that the
19 RS Official Gazette, No 54/2018. 20 Within the meaning of Regulation (EU) No 575/2013 and Commission Delegated Regulation (EU) No 241/2014. 21 RS Official Gazette, No 76/2018. 22 All three decisions were published in the RS Official Gazette, No 103/18.
46 Price and Financial System Stability capacity of an individual bank to extend new consumer, cash and other loans (other than housing loans and current account overdrafts) with a repayment period of eight years or more will be directly conditional on its compliance with the prescribed percentage cap on the bank’s exposure to concentration risk; A 60% credit indebtedness limit has been prescribed – if this limit is exceeded as a result of approval of any loan to a natural person after the entry into force of the new regulations, a bank is required to disclose its exposure to that particular borrower separately when reporting to the NBS on its asset quality. The level of credit indebtedness is determined as the ratio of the borrower’s total monthly credit liabilities and regular net monthly income (debt-to-income ratio); If a bank, starting from 1 January 2019, approves a consumer, cash or other loan (other than a housing loan or a current account overdraft) due to which the level of the borrower’s credit indebtedness exceeds 60%, or the borrower’s credit indebtedness exceeded 60% even prior to the loan approval, the bank will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full; If a bank, in the course of 2019, approves a consumer loan (other than for the purchase of motor vehicles), cash or other loan (other than a housing loan or a current account overdraft), with a repayment term of eight years or more, it will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full. In 2020 banks will be required to reduce their capital in the same manner if the above types of loans with a repayment term of seven years or more are approved, while starting from 1 January 2021 the same shall apply in case of a repayment term of six years or more; If a bank, starting from 1 January 2019, approves a consumer loan for the purchase of motor vehicles with the agreed repayment term of eight years or more, it will be required to reduce its capital (calculated in accordance with banking regulations for the purposes of monitoring compliance with the prescribed capital adequacy ratios) by the total outstanding principal amount of the exposure to that borrower until the loan is repaid in full. The adopted set of regulations reflects the NBS’s objectives – to encourage cautious risk-taking by banks, without prohibiting the approval of particular types of loans. Rather, the NBS is guiding banks towards sustainable lending practices and avoidance of excessive exposure to specific types of credit products, without undermining the trend of lending growth, while at the same time taking care of the rights and interests of bank services consumers, all with a view to preserving and strengthening financial stability in the Republic of Serbia.
47 National Bank of Serbia Annual Report on Activities and Results in 2018
Off-site supervision
Off-site supervision means supervision and analysis of the reports and other documents banks are obliged to submit pursuant to NBS laws and regulations, as well as of other data on bank operations available to the NBS and data obtained from external sources (including foreign regulatory bodies with which the NBS has signed multilateral or bilateral agreements on cooperation, exchange of information and coordination of supervisory activities). To identify key operational risks and draw up risk profiles of banks, regular monthly information papers were prepared. These entail the analysis of banks’ business models, quality of corporate governance and system of internal controls, analysis of risks affecting a bank’s solvency and liquidity, and the assessment of capital adequacy and liquid assets of a bank. Banks received the conclusions of the supervisory evaluations, as well as quantitative and qualitative supervisory recommendations. In addition to the above, detailed annual assessments of updated individual recovery plans and banking group recovery plans were conducted, and their compliance with the regulatory framework was assessed. Recommendations relating to identified deficiencies or deviations from best practices were issued. During 2018, the implementation of banks’ plans in regard to the reduction of bad assets was monitored. Also analysed were the recording and monitoring of interest and fee income, as well as banks’ internal acts governing this field. In relation to the conclusions of this analysis, a letter was sent to all banks and external auditors. In addition, 69 notifications about the introduction of new products and 97 notifications on the assignment of receivables were analysed. In 2018 there were four off-site bank supervision activities concerning the following: 1) examination of the adequacy and reliability of reports that a bank submits to the NBS (report on the FX risk ratio), 2) examination of the adequacy and reliability of reports that a bank submits to the NBS (daily report on the liquidity ratio), 3) examination of bank governance in terms of informing the NBS about meetings of the Board of Directors, and 4) examination of cash flow management. In addition, an assessment was carried out in one bank as to whether it was failing or likely to fail, based on which the proposal on delicensing was prepared. Also, to act pre-emptively and preclude the spill-over of negative effects on the banking sector and the real economy, the NBS stepped up its surveillance of groups of related persons, and the liquidity position of some banks. As in the period before, there was intensive monitoring of the financial situation and tendencies in state-owned banks (where the state is the largest individual or majority shareholder). Also, the implementation of the IFRS 9 was monitored more closely, meetings were held with managing bodies and external auditors of banks, and some aspects of banks’ operations were analysed. All these analyses and information were used in the preparation of a draft on- site supervision plan and a plan of supervisory activities for 2019. The NBS
48 Price and Financial System Stability
Table III.2.1.16 Overview of on-site supervision in 2018
Type of on-site Subject of on-site supervision Number of supervision banks subject to on-site supervision Targeted prudential Bank governance 2 supervision of bank Management of the risks connected with outsourcing and introduction operations in accordance 1 with the Law on Banks of new products/services Budgeting process, work of the bank’s managing bodies and boards, risk management framework and the process of approval and 1 monitoring of long-term household cash loans
Funding liquidity risk with a focus on asset-liability management 1
Liquidity risk management 1 Approval and monitoring of long-term household cash loans, management of past due household cash loans, models for the calculation of risk parameters for household cash loans, management 1 of the procedure of introduction of new products and management of the funding liquidity risk
Approval of long-term household cash loans, bank governance, management of the risks connected with outsourcing and introduction 1 of new products/services
Risk management, approval of loans to households and persons 1 related to the bank, and the funding liquidity risk
Approval and monitoring of long-term household cash loans 1
Supervision of bank compliance with Follow-up on prudential supervision of bank operations in accordance 10 measures pronounced by with the Law on Banks the NBS
Diagnostic testing of the internal capital adequacy assessment Diagnostic testing 1 process and stress tests
Total on-site supervision activities in 2018 21 continued to operate with the ECB, IMF and foreign supervisors of banking groups operating in Serbia.
On-site supervision
On-site supervision of banks implies the inspection of the business books and other documents of banks, in accordance with the annual on-site supervision plan. Twenty one on-site examinations were conducted in 2018: ten targeted prudential supervisions in accordance with the Law on Banks, ten follow-ups on the measures pronounced by the NBS and one diagnostic test. An overview of on-site examinations conducted in 2018 by supervision subject is shown in Table III.2.1.16.
Measures against banks
Following the bank supervision procedures, in the course of 2018 the NBS undertook the following measures: issued 16 written warnings to banks; adopted four decisions imposing orders and measures and four decisions imposing fines against a bank and/or members of a bank’s managing bodies. The decisions on fines were
49 National Bank of Serbia Annual Report on Activities and Results in 2018
passed against two banks (RSD 25.0 bn and RSD 5.0 bn) and against members of their managing bodies (from RSD 633,546 to RSD 2,954,833). In addition, the NBS filed against banks and relevant responsible persons two applications for the initiation of misdemeanour proceedings and two reports for an economic offence. Sixteen supervision procedures were cancelled by means of conclusions/decisions and one delicensing decision was made.
Acting upon requests for consent
Acting upon requests for issuing operating licences and various consents and approvals in 2018, pursuant to the Law on Banks, the NBS adopted: 24 decisions on granting consent to banks’ main acts (founding acts and articles of association); 120 decisions on prior consent to the nomination of members of boards of directors and executive boards (114 decisions on granting prior consent, four decisions on suspension of the procedure, one decision on rejecting the application and one decision on rejecting the application for prior consent to the nomination of members of boards of directors and executive boards); four decisions on the acquisition of ownership in a bank (two decisions on rejecting the application of a legal person for prior consent for the acquisition of direct ownership which would ensure 100% voting rights in the bank, and two decisions on granting prior consent to a legal person for the acquisition of direct ownership which would ensure 100% voting rights in the bank); four decisions on the acquisition of a subordinated company as a subsidiary subordinated company (two decisions on rejecting the bank’s application for granting consent to the acquisition of a subordinated company as a subsidiary company in which it may acquire 100% participation and two decisions on granting consent to a bank for the acquisition of a subordinated company as a subsidiary company in which it will gain 100% participation); three decisions on granting prior consent to a bank for the allocation of profit through the payment of dividends to its shareholder; three decisions on granting prior consent concerning the fulfilment of conditions that profit from the current year be included in Common Equity Tier 1 capital; one decision on granting prior consent to the reduction in the value of elements of Tier 1 capital; one decision on granting consent to the admission to the list of external auditors that can perform the audit of bank’s financial statements; one decision on granting prior consent to a bank to adjust the capital requirement for operational risk; one decision on granting prior consent to a bank to adjust, due to merger, the calculation of its capital requirement for operational risk by applying the basic indicator approach;
50 Price and Financial System Stability
two decisions on granting prior consent to a bank to include obligations under a subordinated loan in the calculation of its Tier 2 capital; four decisions on granting prior consent to a bank to include Common Equity Tier 1 instruments in the calculation of that capital for the purpose of increasing Tier 1 capital; one decision on granting consent to merger; three decisions on granting consent not to include a subordinated company in the consolidated financial statement (two decisions on granting consent that a subordinated company other than a bank be not included in the consolidated financial statement and one decision on suspending the procedure for granting consent that a subordinated company be not included in the consolidated financial statement); 282 notifications on outsourcing were processed.
NPL Resolution Strategy
The NPL Resolution Strategy, adopted by the Serbian Government in August 2015, was drawn up by the NBS in cooperation with relevant ministries. The Strategy aims to provide incentives and eliminate obstacles identified in the system, which prevent timely resolution of NPLs, and to establish a system that would prevent NPLs from building up to a level that can adversely affect lending activity and, by extension economic growth. In accordance with the Strategy, the NBS Executive Board adopted the NBS Action Plan for the Implementation of the NPL Resolution Strategy, which was fully implemented within the stipulated deadlines. The NBS thus demonstrated its commitment to resolving the NPL issue which is of exceptional importance for the preservation of financial stability. A systemic, coordinated and interinstitutional approach to the resolution of NPLs, supported by the Strategy and the Decision on the Accounting Write-Off of Bank Balance Sheet Assets23, brought about a reduction in the NPL ratio to the historical low – since 2008 when it was introduced. At end-December 2018, the gross NPL ratio stood at 5.7%, down by 16.6 pp from the period when the Strategy was adopted. The three-year Strategy is accompanied with the NPL Resolution Programme for the 2018–2020 Period and the relevant Action Plan, adopted by the Government in December 2018. The Programme pertains to the following areas: (1) resolving NPLs of state-owned financial creditors, (2) improving the bankruptcy framework, and (3) preventing the build-up of NPLs. These activities fall within the remit of the Government and other competent institutions. The Strategy will be implemented over the following two years. The NBS and other competent institutions will closely cooperate and exchange information.
23 RS Official Gazette, No 77/2017.
51 National Bank of Serbia Annual Report on Activities and Results in 2018
III.2.2 Insurance sector
The insurance sector has a significant impact on the development of the overall economy in every country and plays an important role in terms of stability of the financial system. Judging by development indicators, such as the total premium to GDP ratio and per capita premium, the Serbian insurance market is less developed than insurance markets of EU member countries. In 2018 the share of premium in GDP equalled 2.0%, unchanged from 2017, while per capita premium24 amounted to USD 138, up by USD 4 relative to the year before.25 The balance sheet of the insurance sector had a 6.7% share in the total balance sheet of the financial sector supervised by the NBS (banks, financial lessors, insurance and reinsurance undertakings and VPFs),26 which is 0.4 pp higher than last year. At end-2018, 20 insurance undertakings operated in the Republic of Serbia, down by one from the year before.27 Sixteen undertakings engaged in insurance activities and four in reinsurance activities. Of the insurance undertakings, four were exclusive life-insurers, six were exclusive non-life insurers, and another six undertakings provided both life and non-life insurance. The breakdown by capital ownership shows that 15 insurance undertakings were in majority foreign ownership. Beside insurance undertakings, the sales network included: 17 banks, seven financial lessors and one public postal operator which are licensed for insurance agency operations, 90 legal entities (insurance brokerage and agency services), 84 insurance agents (natural persons – entrepreneurs) and 6,960 active certified agents/brokers in insurance.
Chart III.2.2.1 Quarterly movements in total premium (RSD bn)
120
99.9 100 89.1 93.1 74.6 80 70.9 66.7
60 48.8 52.2 45.2 40 21.9 24.1 24.7 20
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018
Source: NBS.
24 The data on the number of population is the last available data – as at 1 January 2018. 25 For comparison purposes, according to the Swiss Re report for 2017, published in July 2018, the premium to GDP ratio was 7.2% in EU member states and 3.3% in emerging markets. The per capita premium stood at USD 2,429 and USD 166, respectively. 26 Except for payment institutions and electronic money institutions. 27 One non-life insurance undertaking merged with another non-life insurance undertaking in Q4 2018.
52 Price and Financial System Stability
In 2018, the total insurance premium amounted to RSD 99.9 bn, up by 7.3% from 2017. Non-life insurance accounted for 76.2% and life insurance for 23.8% of the premium structure. Life insurance premium rose 4.5% relative to 2017. By type of insurance, motor third party liability insurance (MTPL) had the largest share in the total premium (33.6%) in 2018, followed by life insurance (23.8%), property insurance (19.5%) and full coverage motor vehicle insurance (9.0%). The balance sheet total of insurance and reinsurance undertakings at end-2018 equalled RSD 279.0 bn, up by 19.8% from a year earlier. The largest portion of insurance undertakings’ assets at end-2018 pertained to debt securities available for sale (45.5%), fixed-yield debt securities (10.9%), property, plant and equipment (6.7%), receivables (6.5%) and debt securities disclosed at fair value through profit and loss account (1.0%).
Chart III.2.2.2 Total premium by type of insurance
14.9% 14.1% 17.9% 19.5% 8.4% 9.0%
2017 2018
33.6% 24.4% 23.8% 34.4%
MTP L i nsu rance Life insurance Property insurance
Other non-life insurance Full coverage
Source: NBS.
Technical reserves (70.7%) and capital (22.0%) accounted for the largest share of insurance undertakings’ liabilities. In 2018, capital rose by 13.9% (to RSD 61.5 bn) and technical reserves by 22.8% (to RSD 197.3 bn).28 Within technical reserves, the largest share was that of mathematical reserves, which rose 9.2% in 2018. Measured by the HHI, the market concentration slightly increased in 2018 relative to the year before, but was still moderate and recorded 1,304.29
Performance indicators
Core capital adequacy ratio – CAR,30 as an indicator of risk exposure, equalled 210.4% for predominantly non-life insurance undertakings and 254.4% for predominantly life insurance undertakings.
28 Such increase in technical reserves is attributable to loss allowances of almost RSD 9 bn for the significant damage caused by fires, for which reinsurance was secured. 29 The HHI is calculated based on the balance sheet totals of insurance undertakings. 30 The ratio of available to required solvency margin.
53 National Bank of Serbia Annual Report on Activities and Results in 2018
As an indicator of the sufficiency of premiums for the settlement of liabilities arising from non-life insurance contracts and adequacy of risk transfer to reinsurance and coinsurance, the combined ratio31 was satisfactory (87.9%) in 2018, and better than in 2017 (88.9%). This can be explained by the faster growth in self-retained premium earned compared to growth in incurred losses and insurance administration expenses. As an indicator of life-insurance premium adequacy, the benefit ratio32 was 83.7% in 2018, which is an increase compared to the previous year when it stood at 71.0%. This is a result of faster growth in the sum of self-retained settled claims and changes in technical provisions compared to the self-retained earned premium. The insurance sector ended 2018 with a positive business net result of RSD 9.4 bn pre-tax and RSD 8.9 bn after tax and the distribution of a portion of the profit. The total income of insurance undertakings amounted to RSD 165.1 bn, up by 17.9% from a year earlier. The largest share in the sector’s income was made up of the technical premium income (50.6%) and other operating (functional) income (24.3%), followed by expense loading income (13.5%). The sector’s total expenses in 2018 equalled RSD 155.7 bn, up by 16.8% than in 2017. Other operating (functional) expenses made up the greatest share of total expenses (45.0%), followed by the compensation of claims and the sum insured (28.3%) and acquisition costs (15.3%).
Results of insurance supervision
In 2018, 11 on-site supervisions of supervised entities in insurance were conducted (seven insurance undertakings, two insurance brokerage undertakings, one insurance agency undertaking and one bank), i.e. seven scheduled and four ad hoc supervisions, while one off-site supervision, which began in 2017, was now completed. Based on the supervisions carried out in 2018, including those concluded around the end of 2017, which identified illegalities and irregularities in the operations of supervised entities, five supervisory measures were issued to supervised entities and seven entities were fined. At the same time, supervision procedures of seven insurance undertakings were discontinued after supervisory measures were implemented, as well as those procedures where no illegalities or irregularities in the operations of supervised entities were identified. The supervision procedures of insurance undertakings in 2018 identified omissions in performing the insurance activity, the establishment and functioning of the management system, market behaviour of undertakings toward the insurance beneficiary, and particularly in performing the obligation of transparent
31 The ratio of the sum of incurred losses and insurance administration costs relative to the self-retained premium earned. 32 The ratio of the sums of self-retained settled claims and changes in technical provisions compared to the self-retained earned premium. When interpreting the results, we need to take into account the long- term character of life insurance and the significant impact of changes in technical provisions on this indicator.
54 Price and Financial System Stability dissemination of information to policyholders/the insured, or the sale of insurance services and application of premium scales. Omissions were also identified in terms of the profitability of operations, calculation of the insurance premium in accordance with the adopted premium scales, estimated assets of the undertaking, accounting records of business changes, etc. The supervision of one insurance undertaking in terms of the profitability of certain types of insurance revealed that its operations were unprofitable in a dominant type of insurance – motor vehicle and full coverage motor vehicle insurance, which reflected on the total operating result of this undertaking; it was also established that such operating result is attributable to the inadequately calculated insurance premium, which is a consequence of the decrease in the adopted premium scales aimed at improving competitiveness in the insurance market. In addition, the supervision of insurance undertakings paid particular attention to market behaviour – the fair and legal sale of insurance, as well as the proper dissemination of information about insurance services before concluding an insurance contract. The supervision of the implementation of MTPL premium scales revealed that one insurance undertaking calculated the insurance premium at a rate lower than prescribed, and does so for buses and special purpose vehicles. As for the supervision of operations of other supervised entities (insurance brokerage and agency), significant results were achieved in terms of the assessment of the functioning of the sales channel through banks, which reflected directly on the improvement of the insurance services sale and on services associated with banking products. In order to protect the rights and interests of users of insurance services, as well as of banking services, the NBS sent a notification to all banks carrying out insurance agency asking them to ensure that before the consumer signs an insurance contract or a loan contract, or an agreement on the issuance and use of a credit card, he should be adequately informed in a way that would enable an average consumer to fully understand his rights and obligations arising from the insurance contract, including its economic consequences, especially if a particular loan service is conditioned by the signing of the insurance contract. In terms of insurance brokerage, the supervision procedure did not reveal any major irregularities with the supervised entities, except in relation to the implementation of obligations under the Law on the Prevention of Money Laundering and Terrorism Financing. On-site supervision of the establishment of the system of money laundering and terrorism financing risk management identified some omissions in the alignment of obligations and documents of insurance undertakings with the new Law on the Prevention of Money Laundering and Terrorism Financing in terms of customer identity verification procedure (whether a customer or its beneficial owner is a public official), implementation of the legal obligation to notify the Administration for the Prevention of Money Laundering about authorised persons or top management members responsible for the implementation of this Law, and data about the execution of suspicious transactions, organising a periodical internal audit, etc.
55 National Bank of Serbia Annual Report on Activities and Results in 2018
With ad hoc targeted on-site supervisions, Serbia has met its obligation to implement the recommendations of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – Moneyval, the Council of Europe’s permanent monitoring body, for establishing efficient mechanisms for the prevention of money laundering and terrorism financing in life insurance undertakings. In the money laundering and terrorism financing segment, off-site supervision was also conducted in life insurance undertakings in order to obtain an indirect insight into their system for detecting and preventing money laundering and terrorism financing, analysing the implementation of regulations in this area and perceiving the operating risks of insurance undertakings in order to plan on-site supervision for the following year. As part of the continuous monitoring of market behaviour and based on analysed data about complaints and other relevant indicators, the problematic aspects of operations of insurance undertakings and other supervised entities included in the planned supervision activities were identified in order to estimate their behaviour in a timely manner and ensure legal protection of the rights and interests of insurance services consumers. The following omissions in insurance undertakings were identified: 1. assessment of risk undertaken in insurance, leading to refusals to pay compensations to beneficiaries; 2. manner of calculating the return of the insurance premium in case of the termination of an insurance contract, as a contract connected with a loan agreement; 3. manner of handling consumer claims, etc. Activities under the off-site actuarial supervision were carried out separately, namely: (1) monitoring the risk by supervisory matrices of the risk of insurance undertakings, (2) analysing quarterly opinions of the certified actuary, opinion of the certified actuary on financial statements and annual reports on the operations of undertakings, opinion of the certified actuary on the implementation of the coinsurance and reinsurance policy, (3) receipt and analysis of the submitted annual, quarterly and monthly data of insurance undertakings, as well as (4) composing quarterly Insurance Sector Reports.
Certification and further professional education in insurance
In two regular examination terms, the NBS organised certification exams for acquiring the title of a certified broker or a certified agent in insurance and one certification exam for acquiring the title of a certified actuary. Based on the final results of exams, we issued 292 decisions on acquiring the title of a certified broker or a certified agent in insurance, and three persons acquired the title of a certified actuary. Activities on the supervision of continuous professional education of certified brokers and certified agents in insurance, as well as certified actuaries, were carried out regularly in 2018.
56 Price and Financial System Stability
Regulatory activity
The NBS gradually adjusts insurance regulations with the EU’s acquis communautaire, mindful of the protection of the rights and interests of insurance services beneficiaries and insured persons. The new Insurance Law and its secondary legislation, adopted in late 2014 and the first half of 2015, are almost entirely aligned with the EU’s Solvency I Directive, as well as with certain elements of the Solvency II Directive. In line with the adopted Strategy for Implementation of Solvency II in the Republic of Serbia and the planned gradual implementation, a comparative analysis was performed of the Insurance Law and its secondary legislation with Solvency II. Given that for the period 2018–2021 the Strategy envisages analyses to assess the readiness of insurance/reinsurance undertakings to respond to the regulatory requirements set out in Solvency II, in 2018 the First Quantitative Impact Study (QIS 1) was carried out in Serbia. The completion of activities regarding the drafts and proposals of regulations necessary for establishing a new regulatory framework for carrying out insurance and reinsurance operations is envisaged for 2021. NBS representatives are participating in the working group for the preparation of a new Law on Compulsory Traffic Insurance, set up by the Ministry of Finance in June 2017, to further align the Law with the relevant acquis communautaire in this area. New provisions of the Law on Compulsory Traffic Insurance are being drafted. For the purpose of alignment with recommendations of international bodies and contemporary standards in the area of the prevention of money laundering and terrorism financing, during 2018 the NBS adopted amendments to the following secondary legislation: Decision on the System of Governance in an Insurance/Reinsurance Undertaking, Decision on Implementing Provisions of the Insurance Law relating to the Issuance of Licence to Carry on Insurance/Reinsurance Activities and Specific Approvals of the National Bank of Serbia, Decision on Implementing Provisions of the Insurance Law relating to Insurance Brokerage and Agency Activities. Also, in accordance with the World Bank methodology, a national risk assessment in terms of money laundering and terrorism financing was carried out in the insurance sector, which assessed the sector as low-risk. To ensure fair and transparent operations of insurance undertakings and other insurance market participants towards insurance services users, higher standard of business operations and, in turn, more thorough protection of the beneficiaries’ rights and interests, on 20 April 2018, as previously announced, the NBS published the Guidelines on minimum standards of behaviour and good business practice of insurance market participants. A gap analysis was performed to assess the alignment of domestic regulations with the Insurance Distribution Directive and the guidelines of the European Insurance and Occupational Pensions Authority (EIOPA) in this area.
57 National Bank of Serbia Annual Report on Activities and Results in 2018
Within the project Policy and Legal Advice Centre (PLAC II), which helped Serbia conduct accession negotiations more effectively by improving the alignment of domestic regulations with the acquis communautaire, implementing regulations and improving the institutional capacity for the negotiations, the NBS received technical assistance for the areas Solvency II and Insurance Distribution. In addition to this, it also received support for the area of insurance within the NBS’s project Strengthening of the Institutional Capacities of the National Bank of Serbia in the Process of EU Accession, financed under IPA. The results anticipated from this project imply the alignment of business practices, building and strengthening institutional cooperation, and efficient harmonisation and implementation of regulations in insurance supervision with the relevant EU regulations, which will help improve the efficiency and safety of the entire financial system and increase consumer protection.
III.2.3 Voluntary pension funds
At end-2018, the market comprised four companies managing seven voluntary pension funds (VPFs). Assets of all funds were held with one custody bank. Intermediation services in the conclusion of VPF membership contracts were provided by five banks and one insurance brokerage undertaking, acting as intermediaries, while information services on membership in VPFs were provided by 563 sales agents (of 777 persons licensed by the NBS to perform these activities) who were engaged by management companies, intermediary banks and insurance brokerage undertakings. For the purpose of securities purchase and sale, management companies cooperated with ten brokerage firms. The market remained highly concentrated, as indicated by HHI at 2,779 points at end-2018. The share of the largest fund in net assets of the entire sector was around 40%, while four largest funds held around 95% of the market. The VPF balance sheet continued to grow in 2018. Net assets of the funds reached RSD 40.2 bn at end-2018 and were up by around 11.2% relative to the end of the previous year. Payments to individual accounts of members in 2018 amounted to RSD 3.5 bn, while withdrawals totalled RSD 1.4 bn. In 2018, investment returns generated by the funds amounted to RSD 2 bn. The number of VPF beneficiaries at end-2018 stood at 192,295, which is around 2.7% of total population, or around 9.2% of the total number of employees. The main investment principles of each fund are defined by its investment policy. Investment policy is a document which presents the fund to its members and, among other, defines the goals of the fund’s asset investment, as well as limitations in terms of investment risk. In relation to this, each fund’s investment structure is defined; hence, some VPFs invest in euro instruments only, and others mainly in dinar instruments. All VPFs invest primarily in government debt securities.
58 Price and Financial System Stability
As the investment structure varies, the returns of VPFs also differ. In 2018, they ranged from 2.31% to 6.56%. The average return in the sector in 2018, measured by FONDex, which shows movements in investment unit values of all VPFs, stood at 5.5%. VPF investment was, as in the past period, determined by the circumstances in the financial market. Thus, at end-2018 the bulk of funds’ assets (83.1%) was invested in government bonds. Demand deposits accounted for 4.4%, shares for 8.4%, term deposits for 3.1% and investment in units of open-end investment funds for 0.5%, while 0.3% of funds’ assets were invested in EBRD bonds. In Q4 2018, for the first time since the start of VPF operation, 0.2% of total assets were invested in shares of foreign legal entities abroad. At end-2018, the maturity of the largest share of government debt instruments in which VPF assets were invested was one to five years –18.7% were with the maturity of up to one year, 17.5% of one–two years, 43.6% of two–five years, 17.2% of five– ten years, and 3% with the maturity of over ten years. The average maturity of assets invested in government securities, weighted by their share in total investments in those securities, was 3.4 years. Broken down by currency structure, at end-2018 dinar assets accounted for 86.6% of total assets, while FX-denominated assets (EUR and USD) made up the remaining 13.4%. The emergence of new financial instruments, notably long-term dinar ones, is rather important for VPFs as they enable them to manage their assets and risks more efficiently, and/or to better diversify their investment, in accordance with investment policy. One of the incentives to VPF development in Serbia are tax facilities. Contributions by employees and employers up to a specified amount are exempt from the personal income tax and contributions for mandatory social insurance. This is an additional incentive to employees and employers to allocate certain amount of
59 National Bank of Serbia Annual Report on Activities and Results in 2018
funds to saving in VPFs. In 2018, the non-taxable contribution amounted to RSD 5,757. Moreover, there are tax facilities for payouts of accumulated funds from VPFs – withdrawal is not considered the grounds for capital gain. Development of the VPF sector was also stimulated by the fact that since early 2018 fund management fee is calculated at a lower rate of 1.25% (2% earlier), whereby the assets of VPFs are increased, which additionally contributes to the protection of financial interests of VPF members. After the removal of the cap on the rate for the calculation of pension contribution fee, management companies were allowed to freely set this rate, thus further stimulating market competition.
Ongoing supervision
During 2018, the NBS continuously supervised VPFs through off- and on-site examinations, and performed licensing procedures. In the first half of 2018, within its continuous off-site monitoring, the NBS analysed data from regular annual Questionnaires on activities regarding ML/TF risk management, submitted by all management companies. In 2018, the NBS issued one decision imposing supervisory measures against one management company based on the results of the targeted on-site examination. In H2 2018, one comprehensive on-site examination was commenced. During 2018, one decision was issued granting consent to the appointment of a management member in a management company. Besides, ten decisions were issued approving VPF prospectuses and summary prospectuses, as well as three decisions approving the text and placement of advertisement for two VPFs. The NBS organised two licensing examinations in two exam terms for natural persons to be engaged in dissemination of information on VPF membership and, based on the submitted applications, 41 licenses were issued to persons who passed the examination.
Regulatory activity
In 2018, the NBS adopted a new Decision on Detailed Conditions and Manner of Issuing Licences and Approvals to Voluntary Pension Fund Management Companies33 in order to eliminate key deficiencies in the existing regulations registered in the Moneyval Report for the Republic of Serbia from June 2016, within the FATF Recommendation 26, concerning the issuance of operating licence, granting of prior consent to acquisition of a qualified stake and to the re-appointment of management members of VPF management companies. The NBS also adopted the Decision on Guidelines for the Application of the Provisions of the Law on the Prevention of Money Laundering and Terrorism Financing for Obligors Supervised by the National Bank of Serbia.34
33 RS Official Gazette, No 28/2018. 34 RS Official Gazette, Nos 13/2018 and 103/2018.
60 Price and Financial System Stability
III.2.4 Financial leasing
Market participants
There were 17 licensed financial lessors in Serbia at the end-2018. Financial leasing sector employed 360 people in total. Of the total number of financial lessors, ten were in majority ownership of domestic legal entities and seven in majority ownership of foreign legal entities. Three leasing companies were founded by non-financial sector entities, and the remaining companies were founded by banks, banking group members or other financial institutions.
Balance sheet
At end-2018, balance sheet assets of financial lessors totalled RSD 86.7 bn, up by 15.2% relative to end-2017, when they stood at RSD 75.3 bn. The largest share
61 National Bank of Serbia Annual Report on Activities and Results in 2018
of financial lessors’ total balance sheets was made up of financial lease receivables (89.7%). The share of cash and cash equivalent items in total balance sheet assets amounted to 4.6%, while the share of short-term financial assets and other receivables stood at 4.1%. As financial lessors finance most of their activities by long-term foreign borrowing, long-term foreign credits made up the largest portion of their liabilities at end-2018. The share of capital in total balance sheet liabilities stood at 11.1%. The financial leasing market falls into a moderate competition category, as indicated by HHI, which equalled 1,259.5 points in 2018. The share of the largest financial lessor in total balance sheet assets stood at 18.6%, negligibly lower than in 2017 (19.0%).
Structure of lease investments
The bulk of financial leasing went to non-financial corporates (85.0%), while entrepreneurs received 5.3% of the funding, natural persons 3.9%, public enterprises 2.8% and farmers 2.3%. At end-2018, the structure of investment by the lease asset shows that the financing of freight vehicles, minibuses and buses accounted for the highest share, at 41.2% (43.1% in 2017). The share of financing of passenger vehicles rose from 33.2% in 2017 to 35.1% in 2018. The breakdown by sector shows that the majority of financial lease investments went to transport, storage, information and communications (30.4%), followed by other activities (21.2%), trade (15.8%), mining, manufacturing and water (13.7%), and electricity, gas, steam and air conditioning supply sectors (0.3%).
Income statement
Profit before tax of all financial lessors equalled RSD 1.6 bn in 2018. Relative to end-2017, total income and profit increased by 8.3% and total expenses and losses fell by 16.2%. The most significant category of lessor income was interest income with a share of 53.6% in total income. It is followed by income from leasing and impairment of property income, with a 13.6% and 13.4% share, respectively. The largest share in total lessor expenses were salaries, compensations and other employee-related expenses (31.5%), other operating expenses (27.0%), and interest expenses from leasing (18.2%).
Off-site and on-site supervision of financial lessors
The NBS conducted off-site supervision of financial lessors based on the data from reports submitted by financial lessors to the NBS, in accordance with the Law on Financial Leasing and relevant secondary legislation. In the course of off-site
62 Price and Financial System Stability supervision of financial lessors, no irregularities or illegalities were identified on the basis of which financial lessors may be issued measures under the said law. In 2018, comprehensive on-site supervision of two lessors’ operations was initiated.
Granting licenses
In 2018, the NBS issued a license for carrying out financial leasing operations to one company. It also issued 25 decisions granting consent to the appointment of members of managing and executive boards in seven financial lessors. One decision was issued granting consent to a legal entity to acquire ownership over stakes of the lessor, which allow the owner 10% and more of management rights in that lessor. One decision was issued terminating the procedure of granting consent to a legal entity to acquire ownership over stakes of the lessor, which allow the owner 10% and more of management rights in that lessor. Two decisions were issued granting consent to performing voluntary liquidation of two financial lessors.
III.2.5 Information systems supervision
For the purpose of timely interventions, the NBS continuously monitors how financial institutions manage information system risk, arising from information- communications technologies. It also assesses that risk, aiming at higher levels of safety and stability in operations of financial institutions. Risk assessment for all financial institutions was carried out in the following areas: (a) information system management, risks and audit, (b) information system development and maintenance, (c) information system security, (d) business continuity management and (e) outsourcing. Risks were assessed in relation to the size and importance of a financial institution. In order to consider the implementation of standards and regulations governing the application of information-communications technologies in financial institutions, the NBS circulates the Questionnaire on financial institution information systems annually. Based on the information collected through the Questionnaire on financial institution information systems, external audit reports, and information received from on-site and off-site examinations of financial institution information systems, the NBS identifies and assesses information system risks in financial institutions, thus being in a position to take pre-emptive actions and eliminate irregularities. In 2018, the NBS conducted the planned on-site examinations of information system and business continuity management in financial institutions. Based on the analysis of results, the supervisors determined the risk trend relative to the previous reporting period, which informed the preparation of the on-site examinations plan
63 National Bank of Serbia Annual Report on Activities and Results in 2018
for 2019. In addition, to ensure stable and safe operations, the NBS carried out follow-up examinations of measures issued based on the findings of previous on-site examinations of information systems. Keeping abreast of new trends in the development of information- communications technologies, the NBS processed 290 received cases, the majority of which concerned new technology solutions in the area of information system security and innovative solutions for electronic services including new communication channels with service users and preparations for the implementation of regulations on instant payments.
III.2.6 Anti-money laundering/combating the financing of terrorism
In the area of anti-money laundering and combating the financing of terrorism (AML/CFT), the NBS has double – regulatory and supervisory role.
Regulatory role
In its regulatory capacity, the NBS prepares/takes part in preparation of some laws and bylaws in the AML/CFT area aimed, among other, at reducing the possibilities for money laundering and terrorism financing (ML/FT) through institutions supervised by the NBS, in accordance with the Law on the Prevention of Money Laundering and Terrorism Financing35. In 2018, for the purpose of ensuring obliged entities’ full compliance with the Law on the Prevention of Money Laundering and Terrorism Financing, the NBS adopted the Decision on Guidelines for the Application of the Provisions of the Law on the Prevention of Money Laundering and Terrorism Financing for Obligors Supervised by the National Bank of Serbia36, which was additionally improved by subsequent amendments to this Decision37 оf 21 December 2018. The amended Decision was issued primarily in order to stipulate provisions to be applied by obliged entities performing exchange operations, which are subject to NBS’s supervision as of 1 January 2019 in accordance with the Law Amending the Law on Foreign Exchange Operations. The guidelines regulate the manner in which an obliged entity supervised by the NBS prepares the AML/CFT risk analysis, the procedure to determine whether the client or the beneficial owner of the client is a
35 RS Official Gazette, No 113/2017. Obliged entities supervised by the NBS are banks, voluntary pension fund management companies, financial lessors, insurance undertakings, insurance brokerage/agency undertakings and insurance agents licensed to engage in life insurance business. This does not include insurance agency undertakings and agents whose operations are the responsibility of an insurance undertaking in accordance with law, electronic money institutions, payment institutions, public postal operator headquartered in the Republic of Serbia and incorporated in accordance with the law governing postal services, and persons engaged in the provision of services of purchase, sale or transfer of virtual currencies or the exchange of such currencies for money or other assets through internet platforms, devices in physical form or otherwise, and/or persons mediating in the provision of these services. 36 RS Official Gazette, No 13/2018, 37 RS Official Gazette, No 103/2018.
64 Price and Financial System Stability public official, as well as the manner of implementing other provisions of the law regulating AML/CFT. Amendments to the Decision among other stipulate more unequivocally that obliged entities must take into account the results of the National Money Laundering and Terrorist Financing Risk Assessment in the Republic of Serbia as mandatory factors in their risk assessment. For the sake of compliance with the international standards in the AML/CFT area, the NBS improved the following secondary legislation: Decision on Implementing the Provisions of the Law on Banks Relating to Granting of a Preliminary Bank Founding Permit, Bank Operating Licence and Consents and Approvals by the National Bank of Serbia38; Decision on Implementation of the Provisions of the Law on Financial Leasing Pertaining to Licensing and Consents of the National Bank of Serbia39; Decision on Implementation of Provisions of the Law on Payment Services Relating to Issuing of Licenses and Approvals of the National Bank of Serbia40; Decision on Implementing Provisions of the Insurance Law relating to the Issuance of License to Carry on Insurance/Reinsurance Activities and Specific Approvals of the National Bank of Serbia41; Decision on the System of Governance in an Insurance/Reinsurance Undertaking42; Decision on Implementing Provisions of the Insurance Law Relating to Insurance Brokerage and Agency Activities43; and Decision on Detailed Conditions and Manner of Issuing Licences and Approvals to Voluntary Pension Fund Management Companies44. In relation to these amendments, the most important novelties concern the criteria based on which the NBS assesses business reputation of the founder, acquirer and/or persons nominated for members of management bodies of financial institutions. The list of criminal offences considered to impair good business reputation was broadened and the concept of an associate was defined so that not only the person with impaired business reputation is disqualified from becoming a founder, acquirer or a member of the managing and/or executive board of a financial institution, but also the person whose associate was convicted by a final judgement of certain criminal offences. This also includes the assessment of the asset position of the founder – a natural person who is a founder and/or a member of a private investment fund or a person under foreign law organised for the purpose of management and disposal of assets, as well as the assessment of circumstances that may indicate in particular that a financial institution is founded and/or participation is acquired for the purpose of money laundering or terrorism financing.
38 RS Official Gazette, Nos 82/2015 and 29/2018. 39 RS Official Gazette, Nos 85/2011 and 29/2018. 40 RS Official Gazette, Nos 55/2015, 82/2015, 29/2018 and 15/2019. 41 RS Official Gazette, No 55/2015, /correction 69/2015/, 36/2017 and 29/2018. 42 RS Official Gazette, Nos 51/2015 and 29/2018. 43 RS Official Gazette, Nos 55/2015 and 29/2018. 44 RS Official Gazette, No 29/2018.
65 National Bank of Serbia Annual Report on Activities and Results in 2018
Supervisory role
In its supervisory role, the NBS carries out licensing, supervision and/or monitoring of legal compliance. Supervision also includes the assessment of adequacy of AML/CFT systems, in order to prevent ML/FT activities in financial institutions. In case of detecting weaknesses in the manner of implementation of AML/CFT measures, the NBS takes corrective actions or sanctions in accordance with regulations.
Off-site supervision
For the sake of further strengthening of the financial sector stability and improving the supervisory function in accordance with the development and growth of supervised entities, as well as for the sake of alignment with the EU regulations, international standards in the field and principles of best practice, the NBS continuously works on improving the supervisory assessment of ML/FT risk. The sources of data used for ML/FT risk assessment in obliged entities supervised by the NBS are internal acts related to the management of ML/FT risk, findings of on-site examinations and other supervisory assessments, data and information received from the AML Administration, data from the questionnaire drawn up for the purpose of collecting quantitative and qualitative data and information, information received from the competent prosecutor offices and courts, results of the National Money Laundering and Terrorist Financing Risk Assessment in the Republic of Serbia and other data and information available to the supervisor. The key result of the supervisory assessment of ML/FT risk is the supervisory judgement about the financial institution’s exposure to this risk. Taking into account all the above, the NBS developed the AML/CFT on-site examination plans for 2019.
On-site supervision
In 2018, the NBS carried out 21 AML/CFT on-site examinations, namely: 11 bank examinations, two examinations of lessors, six examinations in the insurance sector, one examination of a VPF management company and one examination in the area of payment service provision. In relation to AML/CFT examinations carried out in 2018, the NBS undertook the following actions: sent seven written warnings to banks and issued two fines to insurance undertakings. Also, six bank examination procedures were discontinued, as well as one on-site examination of a lessor and one examination in the area of payment institutions and electronic money institutions.
National money laundering and terrorism financing risk assessment
The NBS actively participated in the development of the National Money Laundering and Terrorism Financing Risk Assessment (NRA) that was adopted by
66 Price and Financial System Stability the Serbian Government on 31 May 2018. The NRA assesses ML/FT threats and vulnerabilities at the national level. In assessing obliged entities’ vulnerabilities by sector, the following factors were taken into consideration: comprehensiveness of the legal framework, efficiency of supervisory activities, availability and implementation of administrative and penal measures, system regulation in terms of licensing and issuance of other supervisory consents and approvals, employees’ integrity and level of knowledge in the AML/CFT area, efficiency of the compliance function, efficiency of monitoring and reporting of suspicious transactions and other factors of vulnerability. As a member of the AML/CFT Coordination Body, the NBS attended the sessions and actively participated in the development of the NRA Action Plan, adopted by the Serbian Government on 16 July 201845, as well as in the implementation of activities defined by the Action Plan, of which it regularly informed the chairman of the Coordination Body and the Serbian Government. Together with the AML Administration and representatives of other government institutions, the NBS took part in numerous presentations of the NRA and the accompanying Action Plan, focusing on the NRA findings in factoring, financial leasing, banking and insurance industry.
Cooperation with international organisations (Council of Europe’s Moneyval and the FATF’s International Co-operation Review Group (ICRG))
The NBS takes an active role in Moneyval, the Council of Europe’s committee which gathers experts from member states who assess the compliance of the AML/CFT systems in member states with all relevant international standards in the field of legal practice, financial system and internal affairs through the process of mutual evaluations of equal members. The Moneyval aims to ensure that all member states have systems to efficiently prevent money laundering and terrorism financing in accordance with relevant standards in that field, particularly with FATF46 Recommendations and international conventions. Reports on Moneyval evaluations include recommendations for the improvement of the efficiency of the AML/CFT systems in individual states, as well as for boosting the capacity for international cooperation. The NBS actively participates in the reporting to Moneyval and ICRG47 within FATF about the progress made in the AML/CFT area within its remit and at the plenary sessions of Moneyval and FATF. At the 57th plenary session of Moneyval held on 6 December 2018 where the NBS also took active part, Moneyval’s second report on enhanced follow-up of Serbia with regard to ML/FT activities was adopted, concluding that the country achieved general progress in removing compliance deficiencies listed in the
45 RS Official Gazette, No 55/2018. 46 Financial Action Task Force. 47 International Cooperation Review Group.
67 National Bank of Serbia Annual Report on Activities and Results in 2018
Moneyval report from June 2016. The group particularly underlined Serbia’s progress in areas in which the NBS was also involved, pertaining to: risk assessment and application of the risk-based approach, customer due diligence, correspondent banking, electronic transfer, countries exposed to higher ML/FT risk, transparency and beneficial ownership of legal arrangements, regulation and supervision of financial institutions, fines, targeted financial sanctions related to the proliferation of weapons of mass destruction and politically exposed persons.
III.3 Bank resolution function
Legal framework
In the course of the global financial crisis and its aftermath, the existing mechanisms at the global level proved insufficient and inappropriate to address the problems of banks facing serious difficulties in their operation. These mechanisms did not allow for prompt and efficient intervention of competent authorities, and did not ensure the conditions for preserving banks’ critical functions to a sufficient degree or for safeguarding the stability of the financial system as a whole. This led to the growing national and international awareness of the need to define clear rules and mechanisms for crisis response. At the EU level this eventually led to the adoption of the Directive on establishing a framework for recovery and resolution of credit institutions and investment firms48 in May 2014. The Directive became effective on 1 January 2015. In line with the Republic of Serbia’s strategic commitment to EU accession, the NBS drafted the Law Amending the Law on Banks whose implementation started on 1 April 2015. Amendments to this Law were part of the amendments to the set of financial laws (the Law on the National Bank of Serbia, Law on Banks, Law on Deposit Insurance, Law on Deposit Insurance Agency and Law on Bankruptcy and Liquidation of Banks and Insurance Undertakings). These amendments aligned the bank resolution framework with the EU Directive, as well as with the international regulatory trends. The NBS was a assigned a new role – that of the bank resolution authority. Bank resolution is conducted in order to: ensure the continuity of critical functions of a bank; avoid a significant adverse effect on the stability of the financial system; protect budgetary funds and other public funds; protect depositors and investors; protect client funds and other assets.
48 Directive 2014/59/EU on establishing a framework for recovery and resolution of credit institutions and investment firms.
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The main objective of bank resolution is to minimise the use of budgetary and other public funds with a view to preserving financial stability. This is achieved by envisaging that losses incurred by a failing bank are borne first by bank shareholders and creditors, observing the prescribed limitations and protective mechanisms (the losses may not exceed those entailed by a bankruptcy procedure).
Activities
In accordance with the deadlines set in the Law on Banks, in late 2015 and early 2016 the NBS developed the first resolution plans for all banks operating in the territory of the Republic of Serbia and in early 2017 also for all banking groups subject to NBS’s consolidated supervision. In line with its obligation to update resolution plans at least once a year and also in case of changes to the bank’s legal or organisational structure, business or financial position, when these changes have a material effect on the implementation of the resolution plan, as well as in case of other changes affecting the contents of the resolution plan and its applicability, the NBS on two occasions (2016/2017 and 2017/2018 ) updated resolution plans for banks and on one occasion (2018) for banking groups. When developing and updating resolution plans, the NBS assessed banks’ critical functions and core business lines and considered resolution options for each individual bank and banking group subject to NBS’s consolidated supervision. On those occasions the NBS identified no impediments to resolution that would require the issuance of special decisions. On the other hand, the NBS indicated to some banks that they need to ensure continuity of operations as regards outsourced activities and to improve information system risk management in the context of planning potential resolution. The third cycle of regular annual updates of banks’ and banking groups’ resolution plans commenced late in 2018 and finished in early 2019. In line with the provisions of the Law on Banks, the minimum requirement for capital and eligible liabilities is integral to the resolution plan, along with the deadline for the bank to reach the prescribed level of the requirement. The first resolution plans were accompanied by decisions setting the special minimum requirements for capital and eligible liabilities for each individual bank. In updating the resolution plans, the NBS started from the assessment of resolution options, re- examined the previously defined minimum requirements for capital and eligible liabilities and set new requirements for those banks that in the meantime underwent operational changes which had a bearing on the manner of calculation of this requirement. In accordance with the Decision on the Minimum Requirement for Capital and Eligible Liabilities of a Bank49 and NBS decisions, all banks were obliged to comply
49 RS Official Gazette, Nos 30/2015 and 78/2017.
69 National Bank of Serbia Annual Report on Activities and Results in 2018
with at least 75% of the prescribed minimum requirement for capital and eligible liabilities as at 31 December 2018, which they did. For the purpose of monitoring compliance with the set minimum requirement for capital and eligible liabilities, and drawing up and updating resolution plans, banks and ultimate parent companies of banking groups supervised by the NBS on a consolidated basis submit reports prescribed by the Decision on the Information and Data Submitted to the National Bank of Serbia for the Purpose of Drafting and Updating Resolution Plans of Banks and Banking Groups, on a semi-annual basis50. After the supervision of submitted reports, their analysis indicated that in both reporting periods considered in 2018 (31 December 2017 and 30 June 2018), all banks held capital and eligible liabilities at the level ensuring compliance with minimum 75% of the set special requirement and as at 31 December 2018 all banks fully (100%) complied with this requirement. In 2018, the NBS improved the system of bank reporting which informs resolution plans drafting and updating, by amending the Decision on the Information and Data Submitted to the National Bank of Serbia for the Purpose of Drafting and Updating Resolution Plans of Banks and Banking Groups and developing the Guidelines for electronic submission of information and data for the purpose of drafting and updating resolution plans of banks and banking groups. The improved reporting system aims to increase security and reliability of communication in the process of report submission and exchange of other necessary information and data. In July 2018, the NBS signed the Cooperation Arrangement with the Single Resolution Board (SRB), the European regulatory authority in charge of resolution of financial institutions. The aim of the Arrangement is to provide the basis for exchange of information and coordination when planning and carrying out the resolution of financial institutions that operate in Serbia and within the EU Banking Union. By this Agreement, the NBS and SRB reaffirmed their commitment to further improving their mutual communication and cooperation toward enhancing and facilitating the resolvability of banks and banking groups with a cross-border element, all of which contributes to safeguarding financial stability in case of a crisis. In addition, the NBS also has successful cooperation with the central bank of Hungary in the field of bank resolution, including the exchange of information and taking part in the resolution college organised by this central bank.
III.4 Stability of the financial system
III.4.1 Financial stability function
In addition to its primary objective which is to preserve price stability, the NBS is also mandated to safeguard and strengthen the stability of the financial system.
50 RS Official Gazette, Nos 78/2015, 78/2017 and 46/2018.
70 Price and Financial System Stability
The NBS sets and carries out measures and activities, within its scope of authority, aimed at preserving and strengthening the stability of the financial system. Besides adopting its own measures, the NBS may propose that other institutions take specific measures aimed at maintaining and strengthening financial stability. The NBS’s regulatory and other recommendations and measures in this field, as well as a detailed analysis of financial stability and potential risks, are published in the Annual Financial Stability Report and submitted to the National Assembly, in accordance with the Law on the National Bank of Serbia. In 2015, the NBS published a consultation document Macroprudential Framework. This document sets out in more detail objectives, instruments and the decision-making process of macroprudential policy, without prejudice to the achievement of the primary objective of the NBS – price stability. In terms of preserving financial stability, one of the most important international regulatory standards adopted in response to the global financial crisis of 2007–2008 is Basel III. With a view to implementing this standard in the Republic of Serbia, in 2016 the NBS Executive Board adopted the regulatory package transposing Basel III into the domestic regulations. An integral part of this set of regulations is the Decision on Capital Adequacy of Banks which introduced capital buffers into the banking regulations. Capital buffers represent additional CET 1 capital that banks are obligated to maintain above the regulatory minimum so as to limit systemic risks in the financial system. They have been applied as of 30 June 2017 and include capital conservation buffer, countercyclical buffer, capital buffer for global systemically important banks, capital buffer for systemically important banks and systemic risk buffer. Capital conservation buffer is the requirement for a bank to maintain additional CET 1 capital equal to 2.5% of its total risk-weighted assets. On the other hand, the countercyclical buffer is additional CET 1 capital applied in the financial cycle upturn phase which may range from 0% to 2.5% of bank’s risk-weighted assets. The NBS sets the countercyclical buffer rate on a quarterly basis, taking into account the deviation of the credit-to-GDP ratio from its long-term trend and additional optional indicators reflecting the characteristics of the domestic financial system and pertaining to the real estate market, the country’s external position and movements in the banking sector. The Decision on the Countercyclical Buffer Rate for the Republic of Serbia from June 2017 set the 0% rate for this capital buffer. The said rate was kept at the same level during 2017 and 2018. Capital buffer for systemically important banks, identified as such in the Republic of Serbia, is determined based on at least one of the following criteria: bank’s size, importance for the Serbian economy, cross-border activities, connectedness with the financial system, replaceability in the financial system and complexity of bank’s operations. The identified systemically important banks are required to maintain additional CET 1 capital at 0% to 2% of their risk-weighted assets. The capital buffer for systemically important banks was determined in June 2018 and the list of these banks was published on the NBS website. The Decision on
71 National Bank of Serbia Annual Report on Activities and Results in 2018
compiling the list of systemically important banks and the accompanying buffer rate is re-examined at least once a year. The application of the capital buffer for global systemically important banks is postponed in the Republic of Serbia until the day of Serbia’s accession to the EU. The systemic risk buffer was set in June 2017 with a view to mitigating the systemic risk of euroisation and incentivising banks to reduce the degree of euroisation. Since euroisation is a major systemic risk, it was decided that all banks headquartered in Serbia whose FX and FX-indexed receivables exceeded 10% of their total household and corporate receivables were obliged to maintain systemic risk buffer at 3% of their FX and FX-indexed receivables to corporates and households in Serbia. The NBS re-examines the need for maintenance of the systemic risk buffer at least every two years. Bearing in mind that in the previous period, since the adoption of the Strategy of Dinarisation of the Serbian Financial System in 2012, the macroeconomic and financial stability was ensured, in December 2018 the NBS and the Serbian Government signed the new Memorandum on the Dinarisation Strategy. Starting from the results of the past measures and aware of the gradual and long-term nature of the dinarisation process, the Serbian Government and the NBS defined further measures and activities promoting the use of the dinar and mitigating FX risk in the financial system. With a view to resolving the existing and preventing the emergence of new NPLs, in December 2018 the Serbian Government adopted the NPL Resolution Programme for the Period 2018–2020. The programme covers three areas of activity: 1. resolution of NPLs of state-owned financial creditors, 2. improvement of the bankruptcy framework; and 3. preventing the emergence of new NPLs. Aware of the importance of preventive measures in precluding the development of systemic risks, in 2018 the NBS published some of the possible measures that could be undertaken51 in relation to: NPL resolution: development of banks’ NPL reduction plans which should contain the following elements: the established objective in terms of the percentage share of NPLs in total loans, timeframe for reaching this objective, methods of reducing the share of NPLs and sources of funding for the implementation of the plan; promotion of the consensual financial restructuring framework; simulating annuity plans to interest risk and foreign exchange risk when informing bank clients on loan terms in order to enable better understanding of the underlying risks; limiting the euroisation risk: considering the introduction of different insured amounts and insurance premiums for FX and dinar deposits;
51 A detailed overview of measures can be found in the Annual Financial Stability Report for 2017.
72 Price and Financial System Stability
limiting the potential risk of cross-border deleveraging of domestic banks: strengthening the domestic dinar sources of funding.
III.4.2 Financial stability assessment
International environment risks
Having risen at a stable rate in the first half of the year, the global economy slowed down in the second part, its growth equalling 3.6% at the level of 2018 (compared to 3.8% in 2017).52 The downturn in global growth was a result of the poorer performance of several advanced economies, notably in Europe and Asia, as well as the slower industrial and trade activity, which had an adverse effect on financial conditions. In view of this, the IMF made slight downward revisions of its growth projections for 2019 and 2020. The risks to the projection were assessed as tilted to the downside, and they include the still present protectionist measures and geopolitical tensions, tighter financial conditions, China’s subdued growth, uncertainty surrounding the Brexit deal, as well as a possible turn in capital flows towards emerging countries. According to the IMF’s April 2019 report, the euro area’s GDP growth slowed down from 2.4% in 2017 to 1.8% in 2018 and was dominantly driven by consumption and fixed investment. The euro area’s slowdown is mainly attributable to dampened external demand, as well as factors specific to certain economies and sectors. Still, it was estimated that the negative effects of these factors would be exhausted over the medium term and that macroeconomic fundamentals would continue to support growth in the euro area. The ECB’s projection from March 2019 anticipates the euro area’s growth of 1.1% in 2019 to accelerate to 1.6% in 2020. The unemployment rate in the euro area decreased in Q4 2018 to 7.9%, its lowest level since October 2008. According to medium-term expectations, euro area growth will remain propped by favourable labour market trends, mainly in the form of rising employment and wages. As for Serbia’s key individual trade partners in the euro area, according to Eurostat, the German economy slowed down to 1.4% in 2018 (from 2.2% in 2017), largely owing to poorer export performance. In addition, Italy’s economic growth decelerated significantly, to 0.9% in 2018 (from 1.7% in 2017), as the Italian economy entered technical recession in H2. Inflation in the euro area continued up, from 1.5% y-o-y on average in 2017 to 1.8% y-o-y on average in 2018, though it still remains below the target of “below, but close to, 2%.” Inflation movements during 2018 – growth in Q2 and Q3 and its slowdown at year-end – were largely dictated by the movements in prices of energy and, to a lesser degree, food. Though cost-push pressures strengthened in conditions of high utilisation of economic capacities and favourable labour market trends in the euro area, they did not spill over onto consumer prices, hence core inflation remained
52 IMF WEO, April 2019.
73 National Bank of Serbia Annual Report on Activities and Results in 2018
the same as in 2017 – 1.0% y-o-y on average in 2018. With declining global oil prices, as well as with the global economic activity slowing down as anticipated, expectations in terms of inflation movements in the euro area going forward also decreased. Primary commodities’ price indices were slightly lower at end-2018 than at end- 2017. The price of Brent oil rose for the major part of 2018, only to plummet as of October, ending the year 12% lower than in 2017. The price of oil was driven up by the implementation of the agreement on capping production between OPEC countries and other leading exporters, and by the decrease in global oil inventories, notably in the USA (below the five-year average for the first time since 2014), as well as by the rising geopolitical tensions in the wake of the US decision to back out of the nuclear deal with Iran and announce a reintroduction of sanctions. At end-June 2018, OPEC countries and Russia agreed to increase the supply by one million barrels a day. Coupled with Libya’s announcement on increasing production, this resulted in the fall in the price of oil. Also, oil production was reduced in Venezuela and Africa, while geopolitical tensions in the Middle East are rising. On the other hand, global oil demand was reduced due to the slowdown in the global economy. During 2018, the ECB maintained its interest rates record-low. In June 2018, the first hint at monetary policy normalisation was observed in the announced reduction of the asset purchase programme as of October, from EUR 30 bn to EUR 15 bn a month until the end of the year, after the programme was implemented for almost four years. And yet, the ECB assessed that a significant monetary incentive is still needed in the form of reinvestments of matured securities and unchanged key interest rate in order to support a sustainable return of inflation to the target in the medium term, bearing in mind the slowdown in euro area growth. The ECB’s December release gave a more precise guidance on the reinvestment of principal payments from securities purchased under its asset purchase programme, linking the reinvestment period with policy rate hikes – the ECB stated that it would continue the reinvestment for an extended period of time beyond the date when it starts raising the key interest rates. In the press release following March and April 2019 meetings, the ECB announced that interest rates would remain record-low at least through 2019. Favourable labour market developments and robust economic growth resulted in stronger inflationary pressures in the USA, driving the Fed to continue with monetary policy normalisation. The federal funds range was increased four times in 2018 by a total of 100 bp, to 2.25–2.50% at year-end. Also, in accordance with the previously announced plan, the Fed unwound its balance sheet during the year by increasing the amount of maturing securities without reinvesting the proceeds (by USD 10 bn each quarter), this amount coming at USD 50 bn per month by the end of the year. According to BIS data, and compared to the beginning of the crisis (Q3 2008), the cross-border exposure of euro area banks to countries in the region, excluding the Czech Republic and Turkey, was reduced in Q4 2018. Percentage-wise, the exposure was reduced the most in the case of Hungary, Romania, Croatia and Bulgaria, and the least in the case of Poland and Serbia. Relative to end-2017, the
74 Price and Financial System Stability cross-border exposure of banks in the euro area was reduced in Q4 2018 regarding all countries in the region, with the exception of Serbia, where the exposure of banks has increased. The November 2018 CESEE Bank Lending Survey published by the EIB shows that, during 2018, the risk of deleveraging in the banking sector of CESEE countries was slightly lower than in the second half of 2017. In H2 2018, around 20% of the banking groups expressed expectations of a reduction in the LtD ratio at the banking group level in the next six months, i.e. the first half of 2019.
Domestic macroeconomic environment
Macroeconomic conditions at home remained favourable in 2018 as well. Inflationary pressures stayed low even in conditions of strong economic growth and positive labour market developments that are characterised by rising wages and employment and declining unemployment rate. Lending growth continued at a faster pace, propped by both corporate and household lending. For the second year in a row, the consolidated government budget recorded a surplus, despite a significant increase in government capital expenditures. The current account deficit of EUR 2.2 bn (5.2% of GDP) is attributable to the increased import of energy and equipment driven by the needs of the ongoing investment cycle. At the same time, the current account deficit remained more than fully covered by the net inflow of FDI, which equalled EUR 3.2 bn in 2018. In December 2018, Standard & Poor’s upgraded its outlook on Serbia to positive from stable, and affirmed its ‘BB’ long-term foreign and local currency sovereign credit rating. It stated that such decision was based on the strong economic growth and the achieved monetary policy results in terms of the preservation of price and financial stability. A comparison of indicators of the vulnerability of the financial system53 in 2018 and 2017 reveals that the fall in financial system vulnerability is indicated by the further decline in the share of public debt in GDP (by 4.1 pp), as well as by the lower currency risk. Such positive developments were largely facilitated by the December payment of the matured eurobond of USD 1.0 bn, issued in the international market in 2013, as well as the government’s preference towards borrowing in dinars in the domestic market. In addition, relative to the previous year, the degree of euroisation contracted from 69.2% to 67.8%, measured by the share of FX and FX-indexed deposits in total deposits. Measured by the share of FX and FX-indexed loans in total loans, the degree of euroisation was 67%, the same as in 2017. On the other hand, the share of private external debt in GDP increased (from 29.8% to 31.5%), while the share of total external debt in GDP declined (from 65.3% to 62.9%), and is within the bounds of sustainability. The share of the current account deficit in GDP (5.2%) remained at the level from 2017, as did the FX reserves coverage of the import of goods and services (5.3 months).
53 The following were used as the basic indicators of the vulnerability of the Serbian financial system: change in the current account deficit, private external debt, public debt, degree of euroisation and FX reserves adequacy (measured by the inverse scale of the coverage of imports by gross FX reserves). The farther position from centre of the graph indicates a higher risk for each of the indicators.
75 National Bank of Serbia Annual Report on Activities and Results in 2018
As regards 2019, the NBS expects the current account deficit to edge down to 5.0% of GDP and be more than fully covered by the net FDI inflow, thus contributing to the sustainability of the country’s external position. The Fiscal Strategy for 2019, with Projections for 2020 and 2021, envisaged that the share of public debt in GDP will continue to move within sustainable bounds and on a downward path in the following years, which will further bolster Serbia’s resilience to risks from the international environment.
Chart III.4.2.1 Key macroeconomic risks
Balance of payment deficit (in % of GDP**)
Private external debt Degree of (in % of GDP**) euroisation (in %)*
Coverage of imports Public debt by FX reserves (in % of GDP**) (inverted scale)
2008 2018
Balance of payment deficit (in % of GDP**)
Private external debt Degree of euroisation (in % of GDP**) (in %)*
Coverage of imports Public debt by FX reserves (in % of GDP**) (inverted scale)
2017 2018
* Share of FX and FX-indexed loans in total corporate and household loans. ** GDP is harmonised with ESA 2010 methodology . Source: NBS.
76 Price and Financial System Stability
Financial stability assessment
Several methods were used to assess the financial stability of the country, as follows: (a) comparison of selected financial soundness indicators, (b) financial stress index and composite systemic stress indicator, and (c) exposure of the financial system to large-scale shocks in stress tests and assessment of systemic risk components by network modelling. The comparison of selected financial soundness indicators is used to assess the financial soundness of the Serbian banking sector relative to other countries in the region.
Chart III.4.2.2 Financial soundness of the Serbian banking sector compared to the regional average
2008 2017 CAR CAR 5 5 4 4 3 3 ROE C/А ROE C/А 2 2 1 1 0 0
ROA NPL/L ROA NPL/L 2018 CAR 5 Р/NPL 4 Р/NPL 3 ROE C/А 2 1 0
ROA NPL/L
Р/NPL Serbia Region Notes: 1) The Chart shows standardised v alues of the most common Financial Soundness Indicators: CAR – Capital Adequacy Ratio (Regulatory Capital to Risk-Weighted Assets); C/A - Capital to Assets; NPL/L – Gross NPLs to Total Gross Loans; P/NPLs – Prov isions to Gross NPLs; ROA – Return on Assets; ROE – Return on Equity . 2) Greater distance f rom the network centre indicates greater risk. 3) The region ref ers to CEE countries: Bosnia and Herzegov ina, Bulgaria, Hungary , North Macedonia, Poland, Romania, Turkey and Croatia. The region’s FSIs are non-weighted av erages of the indiv idual countries’ FSIs.
Sources: NBS and IMF: GFSR.
Financial soundness indicators show that the capitalisation of the Serbian banking sector is above the regional average owing to the NBS’s prudential regulations. Profitability indicators and the reduction of the NPL ratio are showing signs of noticeable progress made since the last year. In 2018, the Serbian banking sector recorded positive results, with return on assets above the region’s average. At
77 National Bank of Serbia Annual Report on Activities and Results in 2018
end-2018, the share of NPLs in total loans was within the regional average and at its lowest level since 2008. The financial stress index (FSIX) is a composite indicator of financial soundness which aims to identify episodes of elevated financial stress and their duration. Positive values of the financial stress index point to the above-average level of financial stress and the negative values to that below the average. The negative values of this indicator in 2018 suggest a lower level of financial stress in almost all observed segments, therefore financial soundness can be assessed as satisfactory.
A methodology for identifying crisis periods and estimating the level of systemic stress of the Serbian financial system was developed, and on the basis of this methodology, the composite systemic stress indicator (SSI) was constructed.54 This indicator is used by the European Systemic Risk Board55 and the ECB56 for analysing risk accumulation in different segments of the financial system and assessing the level of the total systemic stress. This indicator gives decision-makers significant and timely information about trends in the financial markets, i.e. stress in the financial system and possible implications for financial and macroeconomic stability. Additionally, it enables the identification of early warning alerts, which provides timely information on the potential occurrence of a systemic crisis. The SSI covers 25 indicators which capture the level of financial stress in six key segments of the Serbian financial system: the FX market, government securities market, money market, capital market, banking sector and the international environment.
54 For a more detailed analysis of the systemic stress indicator see the Annual Financial Stability Report for 2015. 55 https://www.esrb.europa.eu/pub/rd/html/index.en.html. 56 https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf?6d36165d0aa9ae601070927f3ab799fc.
78 Price and Financial System Stability
In 2018, the SSI indicated a period of low risk, with a low and stable systemic component. Low inflationary pressures, favourable fiscal developments, the inflow of capital to Serbia, cautious monetary policy stance, coupled with a stable banking system, have boosted the resilience of the financial system and, by extension, macroeconomic stability of the country.
Chart III 4.2.4 Systemic stress indicator (in %) (in %) 0.24 0.22 0.22 0.20 0.20 0.18 0.18 0.16 0.16 0.14 0.14 0.12 0.12 0.10 0.10 0.08 0.08 0.06 0.06 0.04 0.04 0.02 0.02 0.00 0.00 123456789101112
20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 2018
Systemic risk FX market Government securities Money market Capital market Banking sector International environment SSI
Source: NBS.
In addition, the quarterly macroprudential stress-tests of the NBS indicate high resilience of the banking sector even to the strongest shocks. Under the most unfavourable macroeconomic scenario (which implies high depreciation of the dinar and a decrease in real wages), on the whole, the Serbian banking sector would remain adequately capitalised. Also, the domestic banking sector would remain liquid even in case of an assumed extremely high deposit withdrawal. In addition, the results of network modelling indicate that there is no significant systemic risk component in the Serbian banking sector arising from bank interconnectedness.
79
IV OTHER FUNCTIONS AND ACTIVITIES OF THE NATIONAL BANK OF SERBIA
IV.1 Foreign exchange reserve management
The NBS manages FX reserves pursuant to the Law on the National Bank of Serbia and in accordance with the FX Reserves Management Strategy, which defines investment principles, goals and framework of FX reserves investment, methods of risk assessment and yield measurement, and reporting on investment. During 2018, NBS FX reserves were managed in accordance with the Strategic and Tactical Guidelines for the Management of FX Reserves of the National Bank of Serbia, adopted by the NBS Executive Board. The Guidelines specify the eligible currencies, types of assets, currency structure, benchmark of success in FX reserve management, as well as the necessary limits to ensure market and credit risk hedging. In Q2 2018, the Executive Board adopted the Strategic Guidelines for the Management of FX Reserves of the National Bank of Serbia, defining the new structure of the strategic benchmark as the framework for reserve investment in particular classes of assets. Based on credit criteria and the analysis of banks and securities issuers aimed at assessing the credit quality, the NBS extended the list of securities issuers and banks where NBS FX reserves can be invested. In Q2, securities lending through the custody bank Deutsche Bundesbank (Frankfurt) began. The profit from this source and profit recorded through the custody bank Clearstream Luxembourg, through which these transactions have been taking place since 2017, largely covered the costs that the NBS pays for custody services. As at 31 December 2018, the NBS portfolio was invested fully in accordance with the defined limitations as to the allowed currency structure, types of assets and maturity. In line with the Guidelines, in 2018 FX reserves were invested in government securities with the maturity of up to ten years (in local currencies) and up to five
81 National Bank of Serbia Annual Report on Activities and Results in 2018
years (sovereign bonds in non-local currencies), with the minimum combined credit rating of A- according to Standard & Poor’s, Moody’s and Fitch. Reserves were also invested in up to five-year securities with the minimum combined credit rating of А+ or АА (according to Standard & Poor’s, Moody’s and Fitch) issued by supranational financial institutions, subnational-municipal units of the most advanced economies and state financial agencies, as well as up to five-year covered bonds . In line with the security principle, FX reserves were also invested in short-term deposits with central banks, international financial institutions and organisations and foreign commercial banks with the minimum composite credit rating of AA-, according to Standard & Poor’s, Moody’s and Fitch.
Stock and changes in FX reserves in 2018
On 31 December 2018, gross NBS FX reserves stood at EUR 11,261.8 mn, up by EUR 1,300.1 mn from end-2017. This level of FX reserves covered 168% of money supply (M1) or more than five months’ worth of the country’s imports of goods and services (almost twice the level prescribed by the standard on the adequate level of FX reserves). In 2018, FX reserves were boosted mainly by the FX inflow from NBS interventions in the IFEM worth EUR 1,520.0 mn net57. Through the disbursement of loans for the Republic of Serbia, FX reserves recorded an inflow of EUR 692.2 mn, of which: the Abu Dhabi Fund for Development (EUR 334.7 mn) for budget support; the EIB (EUR 227.6 mn) for the construction of Corridor 10, municipal and regional infrastructure, reconstruction of schools, development of SMEs, construction of the Belgrade bypass and upgrade of facilities of judicial authorities; the World Bank Group (EUR 107.4 mn) for the Competitiveness and Jobs Project, healthcare, land administration and Inclusive Early Childhood Education and Care Project for Serbia, improvement of the efficiency and sustainability of infrastructure, construction of Corridor 10, development policy in the field of disaster risk management, provision of support to financial institutions and flood remedy measures; the Council of Europe Development Bank (EUR 19.0 mn) for the removal of earthquake damage in Kraljevo and investment in scientific infrastructure; the EBRD (EUR 3.5 mn) for the upgrade of the Belgrade public transport and transport infrastructure. In addition, the FX inflow from the sale of government securities in the domestic financial market came at EUR 567.3 mn.
57 Transactions in respect of NBS interventions in the IFEM are disclosed on the execution day and not on the trading day.
82 Other Functions and Activities of the National Bank of Serbia
An inflow of EUR 466.5 mn originated from temporary payment transactions with Kosovo and Metohija, pursuant to the Law on Temporary Performance of Specific Payment Transactions in the Territory of the FRY (requiring that banks sell to the NBS all FX inflows arising from resident transactions with Kosovo and Metohija).58 The FX inflow from donations amounted to EUR 330.8 mn and from privatisation – EUR 121.2 mn. In 2018 liabilities to foreign creditors worth EUR 1,293.9 mn were regularly settled. A total of EUR 905.8 mn was paid from FX reserves for the matured dollar eurobond of the Republic of Serbia (issued in 2013 in the international financial market) – FX funds were secured throughout the year, mainly from dinars, which helped reduce debt and improve its currency structure. A total of EUR 840.0 mn was paid on account of matured euro-denominated government securities in the domestic financial market. A total of EUR 11.3 mn was paid on account of unpaid FX savings of citizens under the Law on the Settlement of the Public Debt of the Republic of Serbia. As at 31 December 2018, NBS net FX reserves stood at EUR 8,854.0 mn, up by EUR 580.0 mn from end-2017, this being their highest end-year level on record (since 2000).
Structure and profitability of FX reserves
On 31 December 2018, NBS FX reserves consisted of: 57.8% – foreign securities, 21.7% – FX funds in accounts abroad, 13.4% – foreign cash, 6.5% – gold (in the NBS vault and the account abroad) and 0.6% – SDR holdings with the IMF. The major portion of FX reserves – EUR 6,508.8 mn was invested in securities denominated in the euro, US dollar, pound sterling and Canadian dollar. Of this, 55.2% was invested in long-term and 44.8% in short-term securities. As regards long-term securities, funds were invested in the following types of assets: government securities with the maturity of one to ten years (the USA, including floating rate notes of Canada, UK, Germany, France, the Netherlands, Finland and Ireland), public sector securities (supranational, subnational, agencies, sovereign), including floating rate notes and covered bonds. As for short-term securities, funds were invested in the following types of assets: government discount securities (T-bills) with up to one year maturity (the USA), government coupon securities with up to one year maturity (the USA, Canada, UK, France, Germany, Austria and Ireland), government-guaranteed public sector securities (supranational, subnational, agencies, and sovereign) and covered bonds. A portion of FX reserves worth EUR 2,445.4 mn was held in current accounts abroad and was placed on term deposits. Of this amount, 53.5% were investments with central banks (the Fed, Bundesbank, Bank of Canada, Bank of Austria, Central Bank of Luxembourg and Reserve Bank of Australia) and international financial
58 FRY Official Gazette, No 9/01.
83 National Bank of Serbia Annual Report on Activities and Results in 2018
organisations (BIS), while 46.5% went to top-tier foreign commercial banks with composite credit rating of AAA (up to six months), foreign commercial banks with composite credit rating of AA- at least (up to three months), including current accounts of commercial banks abroad. At end-2018, NBS FX reserves (excluding gold) consisted of: 63.6% – EUR, 31.7% – USD, 1.8% – GBP, 1.7% – CAD, 0.6% – SDR and 0.6% – other currencies. In 2018, the NBS income from investment in foreign securities and interest on foreign assets totalled EUR 77.3 mn net.
Risk management
In 2018, the NBS remained committed to maintaining its portfolio risk at a very low leve l, sustaining high levels of security and liquidity.
Chart IV.1.1 Sovereign bond indices in local currency (Dec 2017 = 100)
102
101
100
99 Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2017 2018
US Treasury UK Gilts German Gov. Canadian Gov. French Gov. Dutch Gov.
Sources: Bof A Merrill Ly nch and NBS.
Chart IV.1.2 Composition of total yield on US treasuries (Dec 2017 = 100)
Index
103
102
101
100
99
98 Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2017 2018
Profit/loss from price change Coupon yield Total yield
Sources: Bof A Merrill Ly nch and NBS.
84 Other Functions and Activities of the National Bank of Serbia
Chart IV.1.3 Composition of total yield on German gov. bonds (Dec 2017 = 100)
Index 102
101
100
99
98 Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2017 2018
Profit/loss from price change Coupon yield Total yield
Sources: Bof A Merrill Ly nch and NBS.
The yield rates on US Treasuries, UK gilts and Canadian bonds with the maturities of up to six years increased, while those for European government bonds mainly declined somewhat. US Treasuries in the NBS portfolio recorded a change in the yield curve slope for the second year in a row, since the increase in the yield rates in case of shorter maturities was higher than for longer maturities. The highest yield in original currencies was recorded for Canadian and US Treasuries.
Chart IV.1.4 Portfolio yield in original currency (by quarter in %)
2.0
1.6
1.2
0.8
0.4
0.0
-0.4 EUR portfolio USD portfolio GBP portfolio CAD portfolio
Q1 Q2 Q3 Q4 Total 2018
Source: NBS.
The yield structure shows that positive yields on US Treasuries originated from interest collected, i.e. coupon redemption, whereas this effect in the case of German government bonds was not sufficient to compensate for the drop in prices. In such an environment, thanks to its cautious approach to investment and low portfolio duration, which in 2018 moved around one year, the NBS achieved a positive yield in US, GBP and CAD portfolios, while the EUR portfolio recorded a negative yield. The highest yield of 1.93% was recorded in the US portfolio,
85 National Bank of Serbia Annual Report on Activities and Results in 2018
followed by the CAD portfolio – 1.81%, GBP portfolio – 0.46%, while the yield in the euro portfolio was -0.27%.
Chart IV.1.5 Portfolio and benchmark yield in original currency in 2018
-0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
EUR
USD
GBP
CAD
Strategic benchmark yield Tactical benchmark yield Portfolio yield Performance
Source: NBS.
The EUR, US and GBP portfolios recorded a higher, and the CAD portfolio a slightly lower yield relative to benchmarks.
Chart IV.1.6 Total portfolio and benchmark yield recalculated in RSD, by quarter
-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%
Q1
Q2
Q3
Q4
Total 2018
Strategic benchmark yield Tactical benchmark yield Portfolio yield Performance
Source: NBS.
In all four quarters, US and CAD portfolios recorded positive results, most notably in Q4. Negative yields were recorded in the GBP portfolio only in Q1, while the EUR portfolio saw negative yields in all quarters due to market developments. The American market saw new rate hikes by the Fed, which took place four times in the year, and the federal funds rate target range was raised by 100 bp in total, equalling 2.25–2.50%. Long-term yield rates did not mirror the increases in short- term rates for the second year in a row. The Bank of England raised its key rate from 0.5% to 0.75%. The Bank of Canada raised its rate three times, by 75 bp in total, to 1.75%. The ECB did not raise its rates in 2018, but starting from October it narrowed
86 Other Functions and Activities of the National Bank of Serbia the scope of the asset purchase programme and wound it up in December, while continuing to reinvest the principal payments from maturing securities. The euro lost 4.65% against the US dollar and gained 0.70% and 3.46% against the pound sterling and Canadian dollar, respectively. The yields in original currencies and the dinar’s slight appreciation against the euro and depreciation against the US dollar, resulted in a positive yield of the total portfolio calculated in dinars – 2.00%.
The structure of the investment portfolio by type of assets and the currency structure were in line with the Strategic Guidelines for the Management of FX Reserves of the National Bank of Serbia. In 2018, the NBS invested in highly liquid bonds with low market and credit risk. Currency risk was largely offset by matching the currency structure of FX reserves and external debt of the country, while interest rate risk was offset by maintaining low portfolio duration. This is also confirmed by low value-at-risk (VaR) which estimates the value of market risk for the given level of confidence, calculated by individual portfolios and different calculation methods.
Table IV.1.1 Value-at-Risk (VaR) as at 31 December 2018 (degree of probability 95%, one day reference period)
EUR portfolio USD portfolio GBP portfolio CAD portfolio
Parametric VaR 0.02% 0.03% 0.03% 0.05%
Historical VaR 0.01% 0.03% 0.03% 0.05%
Monte Carlo VaR 0.01% 0.03% 0.03% 0.05%
Source: NBS. Stress testing indicates the percentage by which the market value of the NBS portfolio would decrease in case of an abrupt 1.00 pp rise in market yield rates.
87 National Bank of Serbia Annual Report on Activities and Results in 2018
Table IV.1.2 Stress test as at 31 December 2018 (one day reference period)
Scenario Change in market value
EUR portfolio USD portfolio GBP portfolio CAD portfolio
Rise in market interest rates by 100 bp -0.82% -0.83% -0.71% -1.27%
Source: NBS. For the purpose of credit risk management, the NBS set high criteria for depositing funds with banks with the minimum composite credit rating of AA-. The minimum eligible combined credit rating for government bonds and issuers is A- according to Standard & Poor’s, Moody’s and Fitch. For securities in the portfolio which are not fully guaranteed by the government (public sector bonds), the minimum combined credit rating is A+ according to Standard & Poor’s, Moody’s and Fitch, while for bonds covered with collateral, the minimum combined credit rating is AA according to Standard & Poor’s, Moody’s and Fitch. In 2018, Standard & Poor’s upgraded Poland’s rating from BBB+ to А-, and Fitch upgraded the Czech Republic’s long-term rating from А+ to АА-. Moody’s upgraded the ratings of covered bonds of three Swedish issuers which are kept in the NBS portfolio – from Аа3 to Аа2. The credit rating of other issuers and bonds in the NBS portfolio remained the same as in 2017, according to all rating agencies. In addition to financial indicators from bank balance sheets, other credit risk indicators were also monitored, such as five-year CDS59 spread. All other indicators: the tracking error, limitations of the structure and duration of the portfolio, as well as credit limits, were within the framework prescribed by the Strategic Guidelines for the Management of FX Reserves of the National Bank of Serbia in 2018.
IV.2 Issue of money and cash management
IV.2.1 Issue of banknotes and coins
During 2018, currency in circulation included banknote series issued by the NBS from 2003 onwards – banknotes in denominations of 10, 20, 50, 100, 200, 500, 1000, 2000 and 5000 dinars and coins in denominations of 1, 2, 5, 10 and 20 dinars.
59 CDS (Credit Default Swap) is the market risk indicator. It includes the implicit probability of the issuer’s bankruptcy according to market assessment.
88 Other Functions and Activities of the National Bank of Serbia
Table IV.2.1.1 Denominational structure of currency in circulation
Denomination 31 December 2017 31 December 2018
(RSD mn) In % (RSD mn) In %
RSD 5000 13,964 8.6 16,326 9.0
RSD 2,000 82,274 50.9 97,218 53.9
RSD 1,000 47,578 29.4 48,046 26.7
RSD 500 9,544 5.9 10,099 5.6
RSD 200 3,620 2.2 3,690 2.0
RSD 100 2,217 1.4 2,269 1.2
RSD 50 1,192 0.7 1,236 0.7
RSD 20 765 0.5 807 0.5
RSD 10 576 0.4 623 0.4
Total: 161,730 100.0 180,314 100.0 Source: NBS. As at 31 December 2018, currency in circulation (excluding currency kept in the NBS vaults, cash vaults of banks and the Ministry of Finance – Treasury Administration) totalled RSD 182.6 bn (banknotes and coins), up by 11.4% from end-2017. Of this amount, banknotes accounted for 98.7% and coins for 1.3%. These percentage shares remained unchanged from end-2017. At end-2018 there were 288.6 mn pieces of banknotes in circulation, by 18.1 mn or 6.7% more than at end-2017. In nominal terms, the share of 5000- and 2000-dinar banknotes increased by 0.4% and 3.0% y-o-y respectively. The share of 1000- and 500-dinar banknotes fell by 2.7% and 0.3% respectively, and the share of 200- and 100-dinar banknotes by 0.2% each. The share of 50-, 20- and 10-dinar banknotes remained unchanged from the year before. In 2018, 500-, 1000-, 2000- and 5000-dinar banknotes accounted for 95.2% of the nominal value of cash payment transactions, thus slightly increasing their share from end-2017 (by 0.4 pp). There were 765.2 mn circulating coins at end-2018, up by 4.0% compared to end-2017. The denomination structure of circulating coins shows the prevalence of 1-dinar coins (44.5%), followed by 5-dinar coins (25.3%) and 2-dinar coins (24.6%), while 10- and 20-dinar coins held smaller shares (3.0% and 2.5%, respectively). To meet the needs of cash payment operations and replace banknotes unfit for circulation, in 2018 the NBS planned the production of an additional quantity of banknotes in denominations of 2000, 200, 50, 20 and 10 dinars (total 90.0 mn pieces). Of this, the production of 10-, 20- and 50-dinar banknotes was carried out in entirety, and 1 million fewer 200-dinar and 2 million fewer 2000-dinar banknotes were delivered. In the course of the year, the production of 200-, 50- and 20-dinar banknotes planned for 2017 was completed, in the quantity of 53.3 mn pieces (13.3
89 National Bank of Serbia Annual Report on Activities and Results in 2018
mn pieces of 200-dinar banknotes and 20 mn pieces of 20- and 50-dinar banknotes each). According the proposed programme of the production and issuance of banknotes, coins, commemorative coins and blank bills of exchange for 2018, the additional production of 1-, 2- and 5-dinar coins was planned in the quantity of 85.0 mn pieces – the quantity produced exceeded the plan (85.34 mn pieces), due to surplus delivered coin blanks. The deviations in the production of banknotes and coins were within the permitted bounds. In the process of expert analysis of suspect counterfeits, 3,854 counterfeit banknotes were detected in 2018, down by 34% from 2017. In nominal terms, this is a 41% decrease (RSD 4,197,970.00 in 2018 relative to RSD 7,126,600.00 in 2017). In denomination terms, the dominant share among counterfeits related to 1000-, 500- and 2000-dinar banknotes, which accounted for 98% of the total number of detected banknote counterfeits.
Table IV.2.1.2 Overview of detected banknote counterfeits (in pieces)
Denomination 5,000 2000 1000 500 200 100 50 20 10 Total in 2018
Pieces 45 794 1,782 1,199 4 25 3 0 2 3,854
Share in % 1.2 20.6 46.2 31.1 0.1 0.6 0.1 0 0.1 100 Source: NBS. In value terms, most counterfeits were in the denomination of 1000 dinars, followed by 2000-, 500- and 5000-dinar notes. In percentage terms, these four denominations taken together accounted for 99.9% of the total number of detected banknote counterfeits.
Table IV.2.1.3 Overview of detected banknote counterfeit (RSD thousand)
Denomination 5000 2000 1000 500 200 100 50 20 10 Total in 2018
Amount 225 1,588 1,782 599.5 0.8 2.5 0.2 0 0 4,198
Share in % 5.4 37.8 42.4 14.3 0 0.1 0 0 0 100
Source: NBS. A comparison of the number of detected dinar counterfeits with that of genuine dinar banknotes in circulation reveals that 10.5 in every one million circulating banknotes were found to be counterfeit, i.e. in nominal terms, there was RSD 18,276 worth of counterfeits in every RSD 1 billion. The largest share of detected counterfeits was produced on commercial paper, using inkjet or laser printers, or colour photocopying machines of the newer generation. They were therefore considered bad and medium-quality counterfeits. One type of a 1000-dinar banknote counterfeit was produced on security paper with threads that fluoresce under a UV lamp, which qualifies as a good quality counterfeit. The counterfeits detected did not include those made by intaglio, letterpress and offset techniques, which in the majority of cases belong to the category of higher
90 Other Functions and Activities of the National Bank of Serbia quality counterfeits that are hard to distinguish from the originals (very good quality and dangerous counterfeits). In February 2018, the NBS signed the Framework Agreement on cooperation with Mish International Monetary Inc concerning the production of numismatic money with the portrait of Nikola Tesla. It was envisaged the individual contracts be signed based on the Framework Agreement, stipulating the production of numismatic money in the following five years. In 2018, the NBS and Mish International Monetary Inc signed an individual contract about the production of 210,000 pieces of numismatic money with the portrait of Nikola Tesla, in the denomination of 100 dinars. Apart from that quantity and according to the same conceptual design, the plan for 2018 envisaged the production of 500 pieces of numismatic money with the portrait of Nikola Tesla, for the numismatic market in the Republic of Serbia. The project will be completed in 2019.
Cash management
In 2018, a total of 555.7 mn pieces of banknotes and coins worth RSD 455,181.9 mn nominally were paid out to banks. Relative to the previous year, the quantity increased by 9.5% and the nominal value by 13.6%. A total of 446.4 mn pieces of banknotes and coins were paid in by banks, in the nominal amount of RSD 423,218.8 mn. Relative to the previous year, the quantity increased by 3.9% and the nominal value by 7.3%. Regarding coins, as observed in earlier years, there was a significant imbalance between in-payments and out-payments, both in terms of quantity and the nominal value. Such imbalance was offset by the additional production of coins for the purpose of cash payment transactions, as it was the case in the years before. A total of 430.7 mn pieces of banknotes were processed in the NBS count rooms, in the nominal amount of RSD 418,883.3 mn, down by 3.8 mn pieces relative to 2017. Of the total banknotes processed, 81% were fit for circulation. In nominal terms, this means 89% or RSD 371,236.1 mn fit for circulation. In 2018, the velocity of money (the quantity of processed relative to the quantity of circulating banknotes) equalled 1.5. During 2018, a total of 89.3 mn pieces of banknotes unfit for circulation, worth RSD 48,980.1 mn nominally, were destroyed. The renewal index (the number of destroyed banknotes relative to the number of banknotes in circulation) was 30.9. In addition, around 4.3 mn pieces of damaged banknotes in the denominations of 10, 20, 50, 200 and 2.000 were destroyed.
IV.2.2 Activities of NBS branches
In 2018, the NBS branches performed vault and teller operations as part of cash management and organised education of financial service consumers about financial products and services of institutions supervised by the NBS.
91 National Bank of Serbia Annual Report on Activities and Results in 2018
Belgrade Branch
In the process of managing cash and other valuables in 2018, the Belgrade Branch received from and delivered to banks dinar and foreign cash, and provided them with uniform blank bills of exchange, received foreign cash from government bodies, sold commemorative coins and performed safe custody operations. In 2018, total in-payments from banks increased by 7.2% and out-payments to banks by 11.9% from 2017. In-payments of foreign cash rose by 27.5% in nominal terms, while out-payments edged down by 32.1%. The NBS received EUR 1.2 mn from government bodies, by 17.6% less than in the previous year. The Belgrade Branch processed 350 mn pieces of banknotes, i.e. RSD 348.1 bn, as well as all foreign cash received from banks operating in the territory of the Republic of Serbia, i.e. 6.3 mn pieces of banknotes in the equivalent of EUR 541.7 mn.
Table IV.2.2.1 Cash management and foreign cash operations – Belgrade Branch (RSD, unless specified otherwise)
Type of operation Turnover Total turnover Index In 2017 In 2018 In 2018 2018/2017
Cash in-payments by banks 240,631,680,000 258,004,787,785 258,004,787,785 107.2
Cash out-payments to banks 231,795,415,520 259,444,100,730 259,444,100,730 111.9
Foreign cash in-payments by 23,685,016* 30,207,445* 3,570,356,917** 127.5 banks
Foreign cash in-payments by 1,396,553* 1,150,780* 136,016,018** 82.4 government bodies
Foreign cash out-payments to 83,661,100* 56,834,409* 6,717,520,245** 67.9 banks
TOTAL 527,872,781,695 * EUR.
** In the dinar equivalent at the middle exchange rate for foreign cash as at 31 December 2018. Source: NBS. A total of 61.9 mn banknotes, worth RSD 40.1 bn (17.7% of the total volume of banknotes processed), were found to be unfit for circulation and destroyed. A total of 19,679 dinar banknotes were sent for expert analysis as being suspect counterfeits and to be checked against the degree of damage and alert colour. Also, 177 foreign currency banknotes were sent for analysis as suspect counterfeits. In addition, the Branch handed over 2.3 mn blank bills of exchange worth RSD 114.3 mn to commission banks and organised ten sales of commemorative coins in the total amount of RSD 273,113.00. It also received 18 and issued 17 safe custody items (as at 31 December 2018, the number of items in safe custody was 246). Given that it holds an electronic database of account statements and payment orders from accounts of government bodies, legal entities and entrepreneurs, the Belgrade Branch processed 81 applications requesting copies of account statements, payment orders and statements on balance and changes in accounts (until 31
92 Other Functions and Activities of the National Bank of Serbia
December 2002, these records were kept by the National Bank of Yugoslavia – Accounts and Payment Bureau, ZOP), and issued 31 fee payment notifications in respect of data found and ten in respect of the sale of commemorative coins.
Novi Sad Branch
In 2018, the Novi Sad Branch performed vault and teller operations as part of cash management and organised education of financial service consumers about financial products and services of institutions supervised by the NBS. In 2018, the Novi Sad Branch processed 3,315 cash in-payment and out-payment transactions with banks and the Treasury Administration and 106 foreign cash in- payment and out-payment transactions with banks and customs, judicial and other government bodies, in the total amount of RSD 124,080.6 mn. The Novi Sad Branch processed all foreign cash in-payments from customs, judicial and other government bodies at its tellers upon receipt. In the reporting period, as part of vault operations, the Branch received three and issued one safe custody items.
Table IV.2.2.2 Cash management and foreign cash operations – Novi Sad Branch (RSD, unless specified otherwise)
Turnover Total turnover Index Type of operation In 2017 In 2018 In 2018 2018/2017
Cash in-payments 51,977,517,500 58,396,370,000 58,396,370,000 112.3
Cash out-payments 54,241,394,000 64,828,954,000 64,828,954,000 119.5
Foreign cash in-payments by banks 8,994,416* 4,912,030* 580,575,421** 54.6
Foreign cash in-payments by 1,205,247* 474,352* 56,065,845** 39.4 government bodies
Foreign cash out-payments to 11,390,754* 1,850,000* 218,660,010** 16.2 banks
TOTAL 124,080,625,276 * EUR. ** In the dinar equivalent at the middle exchange rate for foreign cash as at 31 December 2018. Source: NBS. In addition, as part of its teller operations, the Branch handed over 438,000 blank bills of exchange worth nominal RSD 21.9 mn to commission banks. In 36 transactions with natural persons, it sold 193 commemorative coin packs and vacuum sets of coins issued by the National Bank of Yugoslavia and the NBS, in the total amount of RSD 250.2 thousand. The Branch received 761 pieces of dinar and foreign currency banknotes which were suspect counterfeits, stained with colour or unfit for replacement, and they were sent for expert analysis. The Novi Sad Branch processed cash in-payments received at its tellers from banks and the Treasury Administration, as well as cash paid in to cash tellers of other branches in the NBS system. In total, RSD 75,303.4 mn, i.e. 87.4 mn pieces of banknotes were processed. In the processing procedure, the Branch cancelled 6.9 mn pieces of banknotes, worth RSD 2,225.4 mn and destroyed 4.8 mn banknotes, worth
93 National Bank of Serbia Annual Report on Activities and Results in 2018
RSD 2,624 mn. In the course of processing, 19 suspect counterfeits were sent for further expert analysis. In the processing procedure, the Branch also set aside 397 non-circulating coins and one non-circulating banknote whose replacement term expired. In 2018, the Novi Sad Branch processed 137 applications requesting copies of statements of changes in accounts (until end-2002, these records were kept by the National Bank of Yugoslavia – Accounts and Payment Bureau, ZOP). Of this, 16 requests were submitted by natural and 121 by legal persons.
Niš Branch
In 2018, through dinar and foreign cash receipt from and delivery to clients (banks and government bodies), as part of cash management, the Niš Branch generated a turnover of RSD 109.5 bn. A total of 1,331 cash in-payment transactions from banks and the Treasury Administration were worth RSD 46.8 bn, up by 8.4% from the year before, while 2,020 out-payment transactions amounted to RSD 59.9 bn, up by 12.9% relative to the year before. In-payments of foreign cash from banks in 68 transactions, worth EUR 14.8 mn, declined by 2.5% relative to the previous year, while out-payments in 64 transactions, worth EUR 6.3 mn, edged up by 21.3% relative to 2017. The NBS received EUR 2.3 mn from government bodies, through 140 transactions, by 31.5% less than in the previous year.
Table IV.2.2.3 Cash management and foreign cash operations – Niš Branch (RSD, unless specified otherwise)
Type of operation Turnover Total turnover Index In 2017 In 2018 In 2018 2018/2017
Cash in-payments 43,171,079,000 46,804,819,000 46,804,819,000 108.42
Cash out-payments 53,074,856,000 59,923,760,500 59,923,760,500 112.90
Foreign cash in-payments by 15,228,300* 14,841,850* 1,754,226,524** 97.46 banks
Foreign cash in-payments by 3,376,338* 2,312,583* 273,334,822** 68.49 government bodies
Foreign cash out-payments to 5,200,877* 6,309,823* 745,787,005** 121.32 banks
TOTAL 109,501,927,851 * EUR. ** In the dinar equivalent at the middle exchange rate for foreign cash as at 31 December 2018. Source: NBS. Branch tellers received 399 pieces of dinar banknotes and 11 pieces of foreign currency suspect counterfeit banknotes and sent them for expert analysis. In addition, the Branch handed over 335,000 blank bills of exchange to commission banks, worth RSD 16.7 mn nominally.
94 Other Functions and Activities of the National Bank of Serbia
During 2018, through two transactions, the Niš Branch sold commemorative coins issued by the NBS to natural persons in the total amount of RSD 47,309.00. Since the Niš Branch keeps a part of the electronic database of copies of payment orders and changes in accounts (until end-2002, these records were kept by the National Bank of Yugoslavia – Accounts and Payment Bureau, ZOP), in 2018 it processed 26 applications and issued four copies.
Kragujevac Branch
In 2018, the Kragujevac Branch performed vault and teller operations as part of cash management and organised education of financial service consumers about financial products and services of institutions supervised by the NBS.
Table IV.2.2.4 Cash management and foreign cash operations – Kragujevac Branch (RSD, unless specified otherwise)
Type of operation Turnover Total turnover Index In 2017 In 2018 In 2018 2018/2017
Cash in-payments 36,434,295,000 40,061,669,500 40,061,669,500 109.96
Cash out-payments 40,252,547,500 51,621,151,500 51,621,151,500 128.24
Foreign cash in-payments by banks 22,258,475* 19,243,363* 2,274,461,592** 86.45
Foreign cash out-payments to 4,746,964* 6,280,521* 742,323,667** 132.31 banks
Foreign cash in-payments by 7,924* 63,750* 7,534,906** 804.52 government bodies
In-payments through the consolidated FX treasury 1,640* 2,110* 249,391** 128.66 account
Out-payments through the consolidated FX treasury 54,440* 54,540* 6,564,528** 102.02 account
Purchase of foreign cash from 115,982* 119,206* 14,098,520*** 102.78 natural persons
Sale of foreign cash to natural 67,036* 63,661* 7,527,997*** 94.96 persons
TOTAL 94,735,581,601
* EUR. ** In the dinar equivalent at the middle exchange rate for foreign cash as at 31 December 2018. *** In the dinar equivalent at the daily middle exchange rate. Source: NBS. Through 3,309 dinar in-payment and out-payment transactions with banks and the Treasury Administration, 154 foreign cash in-payment and out-payment transactions with banks, customs, judicial and other government bodies, 45 in- payments and out-payments through the consolidated treasury account system and 2,277 transactions of buying and selling foreign cash from/to natural persons, the Kragujevac Branch generated a turnover of RSD 94.7 bn in 2018, up by 18.54% from 2017.
95 National Bank of Serbia Annual Report on Activities and Results in 2018
In addition, the Kragujevac Branch handed over 287,000 blank bills of exchange to commission banks, worth RSD 14.3 mn nominally. The Branch sold commemorative coins and performed 11 transactions worth RSD 56,420.20. It received 227 pieces of dinar and foreign currency banknotes suspect of being counterfeit, stained with colour or unfit for replacement, and sent them to further expert analysis. In 2018, the Kragujevac Branch processed 12.32 mn pieces of banknotes in the nominal amount of RSD 18.42 bn, and cancelled 1.1 mn pieces. In 2018, the Branch also processed ten applications for the issuance of copies of payment orders and statements on changes in accounts (until 31 December 2002, these records were kept by the National Bank of Yugoslavia – Accounts and Payment Bureau, ZOP).
Užice Branch
In 2018, the Užice Branch participated in cash management activities through the receipt and handover of dinar and foreign currency cash. In 2018, banks paid at the Branch tellers dinar cash worth RSD 19,586 mn and submitted requests for dinar cash out-payments worth RSD 19,192. Dinar and foreign currency in-payments and out-payments declined in 2018 relative to 2017. In 2018, the Branch received EUR 3,520 from government authorities, down by 32.2% from 2017.
Table IV.2.2.5 Cash management and foreign cash operations – Užice Branch (RSD, unless specified otherwise)
Type of operation Turnover Total turnover Index In 2017 In 2018 In 2018 2018/2017
Cash in-payments 22,049,087,500 19,585,870,500 19,585,870,500 88.8
Cash out-payments 21,194,851,000 19,192,126,000 19,192,126,000 90.6
Foreign cash in-payments by banks 157,351* 202,728* 23,961,355** 128.8
Foreign cash out-payments to banks 2,024,860* 1,445,529* 170,853,722** 71.4
Foreign cash in-payments by 5,190* 3,520* 416,045** 67.8 government bodies
TOTAL 38,973,227,622 * EUR. ** In the dinar equivalent at the middle exchange rate for foreign cash as at 31 December 2018. Source: NBS.
In 2018, it supplied commission banks with 213,000 blank bills of exchange, worth RSD 10,650 mn, up by 2.9% relative to 2017. Also, it received 192 suspect/stained with colour counterfeit dinar and foreign currency banknotes and sent them to further expert analysis. During 2018, the sale of commemorative coins equalled RSD 37,877.27. In the reporting period, the Užice Branch processed cash in-payments received at its tellers from banks and the Treasury Administration, as well as cash paid in to cash tellers of other branches in the NBS system. A total of 40.5 mn banknotes, in
96 Other Functions and Activities of the National Bank of Serbia the nominal amount of RSD 27,007.5 mn, were processed. In the processing procedure, the Branch cancelled 7.8 mn pieces of banknotes, worth RSD 1,177.5 mn and destroyed 3,434 banknotes, worth RSD 1.717 mn. In the course of processing, 45 suspect counterfeits were set aside and sent for further expert analysis. In the processing procedure, the Branch also set aside 11 non-circulating banknotes whose replacement term expired. In 2018, the Užice Branch processed nine applications requesting copies of payment orders and statements of changes in accounts (until 31 December 2002, these records were kept by the National Bank of Yugoslavia – Accounts and Payment Bureau, ZOP).
IV.3 Payment system
IV.3.1 NBS as the payment system operator
The NBS operates five payment systems: the RTGS (Real Time Gross Settlement) and clearing systems, IPS system, DinaCard clearing system and the system of interbank and international clearing of foreign exchange payments. At the beginning of the year, the RTGS and clearing system included 33 participants – 29 banks, the Ministry of Finance – Treasury Administration, Central Securities Depository and Clearing House, Association of Serbian Banks and the NBS. At end-2018, as one bank was delicensed and two banks merged, the system included 31 participants, of which 27 banks. On 22 October 2018, the NBS launched the IPS (Instant Payments Serbia) system. At end-2018, the system included 26 participants – 24 banks, the NBS and the Ministry of Finance – Treasury Administration. At end-2018, the DinaCard clearing system had 24 participating banks and seven processing houses. Eighteen banks participated in the payment card settlement in the Visa system and 19 banks in the MasterCard system. At end-2018, the system of interbank and international clearing of foreign exchange payments included 19 participants – 13 banks from the Republic of Serbia, the NBS and five banks from Bosnia and Herzegovina. The availability of the NBS RTGS and clearing systems, and the central switch in the DinaCard system was 100%.
RTGS system
The RTGS is a system for real-time gross settlement of interbank payments. A total of 175.3 mn payments, worth RSD 48,419.4 bn, were processed through the RTGS in 2018, up by 21.3 mn (13.8%) from 2017.
97 National Bank of Serbia Annual Report on Activities and Results in 2018
Table IV.3.1.1 Value of turnover and number of payments in RTGS (turnover in RSD bn, number of payments in mn)
Number of Number 2018 Value of turnover Daily average turnover business days of payments
January 21 12.4 4,282.2 203.9
February 18 13.0 3,576.9 198.7
March 22 14.3 4,389.4 199.5
April 19 14.4 3,625.4 190.8
May 21 15.3 4,443.3 211.6
June 21 15.0 4,350.6 207.2
July 22 15.2 3,980.7 180.9
August 23 15.0 4,370.6 190.0
September 20 14.1 3,761.5 188.1
October 23 15.7 3,722.8 161.9
November 21 14.8 3,701.3 176.3
December 21 16.1 4,214.7 200.7
Total 252 175.3 48,419.4
Monthly average: 4,035.0 Daily average: 192.5
Source: NBS.
Clearing system
The clearing system is a system for the exchange and processing of individual or aggregate payment orders of payment system participants, on a multilateral net basis. A total of 48.1 mn payments, worth RSD 406.1 bn, were effected in the clearing system in 2018.
98 Other Functions and Activities of the National Bank of Serbia
Table IV.3.1.2 Value of turnover and number of payments in clearing system (turnover in RSD bn, number of payments in mn)
Number of business Number 2018 Value of turnover Daily average turnover days of payments
January 21 3.7 28.8 1.4
February 18 3.9 28.3 1.6
March 22 4.0 31.9 1.4
April 19 3.9 31.4 1.7
May 21 4.3 33.6 1.6
June 21 3.8 32.6 1.6
July 22 3.8 33.6 1.5
August 23 3.9 34.3 1.5
September 20 3.5 31.0 1.6
October 23 4.4 40.3 1.8
November 21 4.6 39.3 1.9
December 21 4.5 41.1 2.0
Total 252 48.1 406.1
Monthly average: 33.8 Daily average: 1.6
Source: NBS.
NBS IPS system
Individual instant credit transfers up to RSD 300,000.00 are effected in the NBS IPS system. The system operates 24/7/365. Payments are effected almost instantaneously and the recipient has access to funds within a few seconds. A total of 818.0 thousand payments worth RSD 13,173.2 mn were carried out in the IPS system. The average daily number of payments was 11,521 and the average daily value of transactions RSD 185.5 mn. The average transaction time was 1.33 seconds. The IPS is used for the transfer of dinar funds among participants for the purpose of instant payments. The IPS infrastructure enables instant payments via standard means of payment (e.g. e-/m-banking or tellers of payment service providers), as well as instant payments at merchants’ points-of-sale, and bill presentment (BP) and central addressing scheme (CAS) services, i.e. making instant payments to the registered alias of the payment service user, such as, for instance, the mobile phone number. Instant payments will also be possible at points-of-sale, at least by scanning the QR code. In using the QR code, two options are possible: the buyer generates the code through the bank’s mobile application and shows it to the merchant who scans it, or vice versa – the merchant generates the QR code and shows it to the buyer, who then scans it with his mobile phone. The NBS standardised the IPS QR code
99 National Bank of Serbia Annual Report on Activities and Results in 2018
specification, which payees can use on printed invoices/bills and which is used for instant payments at merchants’ points-of-sale. IPS participants can be the NBS, a bank headquartered in Serbia and licensed by the NBS in accordance with the law governing banks, the Ministry of Finance – Treasury Administration, a payment institution with the head office in Serbia and licensed by the NBS in accordance with the law governing payment services, an electronic money institution with the head office in Serbia and licensed by the NBS in accordance with the law governing payment services, the public postal operator with the head office in Serbia and incorporated in accordance with the law governing postal services.
Table IV.3.1.3 Value of turnover and number of payments in NBS IPS system (turnover in RSD bn, number of payments in thousand)
Number of business Number 2018 Value of turnover Daily average turnover days of payments
October 10 108.2 1,993.7 199.4
November 30 335.2 5,247.6 174.9
December 31 374.6 5,931.9 191.3
Total 71 818.0 13,173.2
Monthly average: 4,391.0 Daily average: 185.5
Source: NBS. The fee of RSD 4 per transfer order in the NBS IPS, which the NBS as the payment system operator charges against system participants, equals the fee charged for retail payments in RTGS and clearing systems. The fee for the execution of transfer orders based on requests for payment at a point-of-sale equals RSD 1 for up to 600 dinars and RSD 2 for sums above 600 dinars. These fees are charged against the acquirer – merchant’s payment service provider. The multilateral interchange fee is determined by the IPS system rules and equals 0.2% of the value of an executed instant payment at the point-of-sale and is paid by the acquirer to the issuer.
System of interbank and international clearing of foreign exchange payments
The interbank and international payments clearing enables the processing of euro payments between banks in the Republic of Serbia and payments with banks from Bosnia and Herzegovina. Payment transactions between banks in Serbia and those in Bosnia and Herzegovina are settled on a multilateral net basis. During 2018, 55,763 payments worth EUR 467.3 mn were processed in the system (1.7% more than in 2017).
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Table IV.3.1.4 Value of turnover and number of payments in international clearing (turnover in EUR mn, number of payments in thousand)
Number of business Number 2018 Value of turnover Daily average turnover days of payments
21 3.5 29.2 1.4 January
18 3.7 23.1 1.3 February
22 4.5 34.7 1.6 March
19 4.6 34.9 1.8 April
21 4.8 36.3 1.7 May
21 4.9 39.6 1.9 June
22 5.2 47.9 2.2 July
23 4.5 41.4 1.8 August
20 4.4 39.7 2.0 September
23 5.4 45.6 2.0 October
21 5.0 44.6 2.1 November
21 5.3 50.3 2.4 December
252 55.8 467.3 Total Monthly average: 38.9 Daily average: 1.9
Source: NBS.
National card system – DinaCard
In 2018, a total of 44.2 mn transactions were carried out in the national DinaCard system (up by 4% relative to 2017), with the turnover of RSD 131.6 bn (up by 5% relative to 2017). Of this, 73% of transactions and 34% of trading were recorded at points-of-sale (payments for goods and services), while the rest were cash withdrawal transactions. Debit cards dominated, accounting for 99% of turnover. Interbank transactions accounted for 37% of total transactions and 70% of total turnover. At end-2018, 2.2 mn DinaCard payment cards were issued in the market. As a result of intensive cooperation with banks and processors, the issuance of chip-based DinaCards was ensured, as well as their acceptance at ATMs and points- of-sale. The certification began in Q4 2018. In cooperation with the Institute for Manufacturing Banknotes and Coins – Topčider, technical preparations were carried out for the production and personalisation of chip-based DinaCards, whereafter, the certification for their issuance started in banks. In August 2018, the NBS signed a cooperation agreement with UnionPay International, defining cooperation between the two card systems, and the business and technical conditions of cooperation. The agreement envisages the
101 National Bank of Serbia Annual Report on Activities and Results in 2018
acceptance of UnionPay cards in Serbia and the issuance of the joint DinaCard– UnionPay card, which will be accepted in the global UnionPay network. After the agreement was concluded, the first steps were taken – the NBS acceded to the UnionPay system as a member and the technical infrastructure was set up for the linking of the two card systems. Within cooperation with Discover Financial Services (DFS), in 2018 the NBS began to extend the valid agreement from 2010 (envisaging the acceptance of DinaCards abroad), in order to enable the use of the national card on global websites. After the certification of the new DFS service agent, enabling card acceptance abroad, the NBS, together with DFS, ensured the acceptance of chip-based DinaCard–DFS cards in the international network DFS-DCI-Pulse. In cooperation with DFS, certification was carried out for the issuance of chip-based DinaCard– DFS cards in domestic banks. An additional advantage for all holders of the domestic card are online payments on domestic websites. Also important is the new service for holders of the most popular card in the DinaCard system – DinaCard PostCard. This includes postponed interest-free payments, for clients of the Postal Savings Bank. Three co-brand programmes were implemented: the issuance of the joint loyalty DinaCard of the Postal Savings Bank and insurance of the Automobile and Motorcycle Association of Serbia (AMSS) for its members, including two special co-brand programmes of Unicredit bank in cooperation with the Frikom company and the shopping mall “Ušće“. Furthermore, for the purpose of harmonisation with the requirements from the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions, changes were implemented in the DinaCard clearing system to ensure the new method of calculation of interchange fees.
Regulatory activities
Several important regulations in the field of payment systems were adopted in the course of 2018. In June 2018, on the NBS proposal, the National Assembly adopted the Law Amending the Law on Payment Services60 and the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions61. The Law Amending the Law on Payment Services standardises the terminology in the field of payment services, to enable payment service users to familiarise themselves, in the simplest and fastest possible way, with the most important payment services, fees for those services and comparative fees. In addition, to ensure that payment service users are better informed, payment service providers must, at least once a year and free of charge, submit a report on all fees charged for services linked to a payment account.
60 RS Official Gazette, No 44/2018. 61 RS Official Gazette, No 44/2018.
102 Other Functions and Activities of the National Bank of Serbia
To implement the Law Amending the Law on Payment Services, in December 2018 the NBS passed a number of bylaws62: The Decision on Establishing the List of Representative Services Linked to a Payment Account, with 14 most important payment services for consumers and 18 payment services for legal persons and entrepreneurs. The list is mandatory for all payment service providers and must be easily available to users. In advertising and contracting services with users, payment service providers must use the terms and definitions determined in the list; the Decision on Compiling the Fee Information Document Linked to the Payment Account, defining the contents and form of the fee information document as determined by the NBS, which contains the list of services from the list of representative services, which the payment service provider offers and data on individual fees for each service; the Decision Defining the Form and Contents of the Statement of Fees, setting out the form and contents of the statement of fees charged for the services linked with the payment account which the payment service provider rendered to the payment service user during the calendar year, and which it must submit to the user in the form defined by the NBS. In this way, the payment service user will have insight into the annual, total amount of fees charged for individual services and aggregately for all services, which will help him track the sums he annually pays for fees for services linked to the payment account; the Decision on the Contents and Manner of Submitting and Publishing Data on Fees Charged to Payment Service Users by Payment Service Providers, which obliges payment service providers to submit to the NBS data on fees they charge against payment service users, for the purpose of publication of comparative data on the NBS website. The Law Amending the Law on Payment Services simplifies the switching procedure – the user wishing to change his payment account can address the new payment service provider and present the authorisation for switching. The new provider shall exchange all necessary information with the previous payment service provider, within the statutory deadlines, to enable the user to use the new payment account and services linked to it. The right to the payment account with basic features is guaranteed to all payment service users – consumers, who legally reside in Serbia and do not have an open payment account with services envisaged by the payment account with basic features. Under the Law, the payment account with basic features includes services which enable cash pay-ins and pay-outs to/from the payment account, and transfers from/to the payment account, through direct debit, by using the payment card (including online payments) and credit transfers, including standing orders (on devices, bank tellers and online). The introduction of payment accounts with basic features and guaranteeing the right to such accounts should encourage financial inclusion and facilitate access to the payment account and modern payment services, which implies lower costs and reduced risks for users,
62 RS Official Gazette, No 99/2018.
103 National Bank of Serbia Annual Report on Activities and Results in 2018
while at the same time increasing the share of cashless payments, which helps reduce the grey economy and diminish the money laundering risk. Importantly, the payer now bears losses arising from any unauthorised payment transaction up to RSD 3,000 instead of earlier RSD 15,000. With the adoption of the Law Amending the Law on Payment Services and relevant bylaws, Directive 2014/92/EU on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features63 has been transposed into the Serbian legal system. By proposing to the National Assembly the adoption of the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions, the NBS aimed to thoroughly regulate the market of payment cards, reduce the costs of acceptance of payment cards – primarily interchange fees as their main catalyst, increase market transparency and competitiveness, encourage state-of-the-art forms of payment; develop and increase the efficiency of cashless payments in the country, increase the share of cashless payments and reduce the grey economy. In addition, the introduction of clear and detailed rules about the transparency of fees that merchants pay to payment service providers for the acceptance of payment cards, conditions are being created for a reduction in merchant fees. Creating an environment conducive to market competition among payment service providers and card systems contributes to cost reduction and faster development of cashless payments, including a smaller final cost for buyers of products and services. Pursuant to the Law on Multilateral Interchange Fees, a multilateral interchange fee may not exceed 0.2% and 0.3% of the value of any debit and credit card transaction. A payment service provider may not charge or offer a fee contrary to these limitations. To monitor the implementation of the cap on the interchange fee, the NBS adopted the Decision on the Content, Deadlines and Manner of Submitting Data on Multilateral Interchange Fees64, defining in more detail the content, deadlines and manner of submitting data by payment service providers to the NBS. Another important novelty introduced by this Law is the fact that payment service providers are obliged to issue payment cards where the processing and netting of transfer orders are carried out in the country. This provides additional protection of payment service users from the risks arising from card payments effected in the country and the processing and netting of transfer orders abroad, in the systems that the NBS as the regulator is not authorised to oversee and therefore cannot guarantee their safety and stability. With the adoption of the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions, provisions of the Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on
63 Directive 2014/92/EU of the European Parliament and of the Council of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features. 64 RS Official Gazette, No 69/2018.
104 Other Functions and Activities of the National Bank of Serbia interchange fees for card-based payment transactions65 have been transposed to the domestic legal system. In H2 2018, the NBS adopted the Decision on General Rules on Instant Credit Transfers66, defining the general rules for instant credit transfers, i.e. the main terms concerning instant payments, participation of payment service providers in instant credit transfers, ensuring the continuity of instant credit transfers, conditions and manner of executing instant credit transfers, refunds in respect of effected instant credit transfers, the obligations of payment service providers in terms of the issuance and acceptance of payment instruments at merchants’ points-of-sale and the use of the standardised two-dimensional QR code etc. In addition, to ensure safe and sound operation of the IPS, as the system operator the NBS adopted the Operating Rules of the IPS Payment System, stipulating its operation, participants’ rights and obligations, manner of effecting payment transactions, format of messages and additional system functionalities. The NBS also adopted the Decision Amending the Decision on Implementation of the Provisions of the Law on Payment Services Relating to Payment System Licensing and Consenting to Amendments to Payment System Rules, as well as relevant internal documents concerning the conduct of NBS employees in relation to applications for licensing and granting consent in regard to the operation of payment institutions and electronic money institutions, which further improves the operation in this area.
Payment system oversight
The NBS oversight activities in 2018 included the monitoring of the operation of payment systems and operators and the analysis of data and information provided by operators, in accordance with regulations, for the purpose of adequately detecting potential risks and coordinating activities with operators to ensure successful management of these systems. According to the submitted reports, all payment systems in the Republic of Serbia showed high reliability, in accordance with their operating rules. In systems carrying out netting based on transfer orders, in 2018 there were no cases of the non- settlement of monetary obligations in respect of net positions of participants at the moment this is expected from them. Due to the delicensing of one bank and status changes in two banks (merger), the NBS stepped up the monitoring of implementation of procedures in the systems with changed participants. At the same time, all procedures were implemented in the appropriate way, without delays in operation and within the envisaged schedule. In addition, to ensure alignment with the Law Amending the Law on Payment Services, the NBS adopted the necessary amendments to the regulations governing the issuance of operating licenses to payment systems and consents to amendments
65 Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions. 66 RS Official Gazette, Nos 65/2018 and 78/2018.
105 National Bank of Serbia Annual Report on Activities and Results in 2018
to the operating rules of these systems, i.e. initial capital, capital and capital requirements of payment system operators. Within the oversight function, the NBS assessed it was necessary to improve the criteria for the determination of important payment systems, in terms of their importance for financial stability and trust of end- users in payment methods. In 2018, as there were no applications for payment system operating licenses, the number of operators remained unchanged. Given that in October 2018 the NBS launched the new payment system for instant credit transfers – the NBS IPS system, the number of payment systems increased. Based on data from the submitted reports, the NBS also carried out formal oversight of the legality and regularity of operation of payment systems whose operator was licensed by the NBS, in accordance with the Law on Payment Services and regulations adopted based on the Law. No irregularities and illegalities were ascertained based on which it would be possible to impose against the operator of these payment systems measures prescribed by the Law on Payment Services. Comprehensive monitoring of the establishment of the NBS IPS system for instant credit transfers, ensured consistency in the application of requirements and standards of payment system oversight to the payment systems operated by the NBS. In addition, given the functional connection of the IPS and RTGS systems, the subject of oversight in 2018 also included the monitoring of regulatory changes in the operating rules of the RTGS system, bearing in mind the importance of this payment system for the stability of the overall financial system. The NBS particularly made sure to clearly, precisely and comprehensively define the manner in which transfer orders are effected based on instant credit transfers in the operating rules of the NBS IPS system, including the rights and obligations of system participants, which is particularly important for adequate liquidity risk management, bearing in mind the nature of instant credit transfers; to provide appropriate conditions for participation in the system, i.e. timely provision of technical documentation, training, testing of functionality and provision of other information to future participants, necessary for the management of risks that they will be exposed to during their participation in the new payment system. As the oversight function also includes the oversight of the security and efficiency of use of payment instruments for the initiation of transactions in payment systems – provided the use of these instruments is regulated by special rules – the oversight activities also concerned the monitoring of the introduction of standards and rules for the execution of instant credit transfers, particularly at merchants’ point-of-sale, for the purpose of smooth, secure and efficient use of these payment instruments.
IV.3.2 Payment institutions and electronic money institutions
In 2018, the development of the payment services market continued, reflected primarily in enhanced competition, i.e. a higher number of providers of international remittance services in the territory of the Republic of Serbia, as well as in the wide
106 Other Functions and Activities of the National Bank of Serbia distribution of the network of agents providing payment services as agents of payment institutions. Nine payment institutions and one electronic money institution (which, in addition to the provision of payment services, implements the activities relating to the distribution of electronic money through a wide network of distributors) continued to develop their network of agents. At end-2018, 13 payment institutions and one electronic money institution operated in Serbia, which also provided payment services through the network of 2,263 agents (vs. 1,359 in 2017). Other payment service providers were commercial banks and one public postal operator. Most payment institutions (77%) were owned by one or more natural persons. Domestic legal and natural persons had a qualifying holding in the capital of 11 payment institutions, and foreign legal and natural persons in two payment institutions. The electronic money institution was owned by domestic persons (one natural person and two legal persons). In 2018, the NBS adopted two decisions on the issuance of licenses for the provision of payment services, one decision on issuing a supplemented license, and one decision on the delicensing of a payment institution ascertained not to have started to provide payment services within the statutory deadline of 12 months from the day of license issuance. The NBS also adopted one decision on rejecting the application for the license for the provision of payment services, one decision on the suspension of the procedure for the issuance of a supplemented license as a payment institution gave up on the request, and one decision granting to a payment institution the previous consent for the inclusion of profit from the current year in core capital. The NBS also checked the documentation and the fulfilment of the prescribed conditions in relation to the change of the ownership structure, i.e. persons with a qualifying holding in capital, and in relation to the change of a member of the governing body, and/or person to directly manage the activities of the provision of payment services.
On-site and off-site supervision of payment services provision
In 2018, the NBS adopted (based on the Law on Payment Services and the Decision on Detailed Conditions and Manner of Supervision of Payment Institutions, Electronic Money Institutions and Public Postal Operator) two decisions on on-site supervision for the purpose of verifying payment institutions’ compliance with regulations. It also adopted one conclusion on the suspension of supervision of one payment institution. Off-site supervision of payment service providers and the electronic money issuer proceeded in line with the provisions of the Decision on Capital and Capital Adequacy of Payment and Electronic Money Institutions and other relevant NBS bylaws. Supervision under the Law on Payment Services continued with a view to detecting unauthorised payment service provision. Twelve reports on unauthorised payment service provision were drafted and sent to natural persons. They reported that natural persons had provided payment services without an NBS licence. The
107 National Bank of Serbia Annual Report on Activities and Results in 2018
number of concluded supervision procedures under the Law on Payment Services was 22. They resulted in the prohibition of further service provision and the imposition of fines.
IV.4 Other activities
IV.4.1 Economic research and statistics
The main objective of economic analysis at the NBS is to provide analytical support to the NBS Executive Board and the Council of the Governor in their decision-making. In addition, it aims to enhance external communication with markets and the professional and general public. In 2018 the NBS economic analysis and research focused primarily on areas that are of key importance for the performance of statutory tasks of the NBS, i.e. preservation of price and financial stability. In addition, the NBS analyses gave insight into many significant issues and challenges for monetary and economic policy. The projections produced were regularly considered and discussed with the IMF, European Commission, ECB and other international institutions. In making monetary policy decisions in 2018, the NBS relied on the analyses of macroeconomic developments at home, inflation and economic growth projections, as well as factors from the international environment. In the area of monitoring and analysing inflation, the focus was on headline inflation and various indicators of core inflation which are especially relevant for monetary policy. The intensity of inflationary pressures on both the demand and supply side was regularly assessed. A special emphasis was placed on movements in food prices, given their volatility and susceptibility to supply-side shocks. Given the significance of global oil prices and their volatility, the factors behind their movements were regularly analysed and their impact on prices at home was assessed. Monetary conditions were also regularly assessed. Medium-term projections of inflation and economic activity were prepared on a quarterly basis, along with the analysis of the key risks to their achievement and their impact on monetary policy, while short-term inflation projections were made monthly. In addition to expert assessments, econometric models developed in the previous years were used for inflation projections, including the analysis of factors behind the deviation from those projections. In the real sector, the focus was on the annual and quarterly GDP growth analyses and projections, on the production and expenditure side. In addition to the real growth, a significant element of the real sector were the analyses and projections of deflators and nominal GDP. Expert assessments and econometric models were used for the purposes of projections of GDP and its components. The available labour market indicators (wages, employment, productivity, unit labour costs, etc.)
108 Other Functions and Activities of the National Bank of Serbia and their impact on macroeconomic developments were also monitored and analysed. In terms of the balance of payments, the analyses and projections of current and financial account components were made. As for the current account, special attention was given to foreign trade developments, i.e. dynamics, structure and factors of growth in exports and imports of goods and services and terms of trade. As regards financial account, emphasis was placed on foreign direct and portfolio investments and factors determining their pace. To gain a thorough insight into the factors driving the current account deficit, analyses and projections of savings and private sector and government investments were made. Also, the international investment position of the country was analysed and external sustainability of the country assessed. This analysis and assessment showed that the share of external debt would decline in the medium run even under the assumption of various scenarios and potential macroeconomic shocks, and that the current account deficit was below the level necessary for further lowering of the share of external debt in GDP. In terms of fiscal developments, the NBS continuously monitored the execution of the central government and consolidated budget, public debt and the monetary effect of fiscal policy, and assessed the impact of fiscal trends on other macroeconomic indicators. In addition, trends in the money, loan and capital markets were monitored, liquidity of the banking sector analysed and annual loan and deposit projections prepared. Given that trends in the international economic environment have a significant bearing on the economic developments in small and open economies such as Serbia, international indicators in the area of prices, economic activity, balance of payments, fiscal trends and decisions of leading central banks were monitored on a regular basis. The emphasis was on the euro area, largest economies in the euro area, countries in the region and leading world economies (USA, China). Projections and analyses of macroeconomic developments were presented to the public on a quarterly basis in the Inflation Report. In addition, the Inflation Report contained text boxes presenting various current topics: the analyses of inflation in Serbia and other inflation targeting countries, global prices of primary commodities and rising trade tensions in the world, the analyses of agricultural season, financial results of manufacturing and the Serbian economy in the previous period, lending to SMEs. Special emphasis was put on the most important measures and results of the NBS in the past six years. At the end of the year, ten years into inflation targeting regime as the monetary strategy of the NBS, a short analysis of the achieved results was prepared and published, including an assessment of the adequacy of the monetary policy implemented in the period observed. To strengthen the transparency of monetary policy conduct and the efficiency of communication with the public, the NBS continued to publish the monthly Report on the Results of the Inflation Expectations Survey. Also, the NBS continued to carry out the survey on bank lending activity, which is the main source of data concerning terms, standards and demand in the lending market. As previously, the survey results
109 National Bank of Serbia Annual Report on Activities and Results in 2018
were published on a quarterly basis in the Report on the Results of the Bank Lending Survey. The Trends in Lending publication is also released on a quarterly basis, giving a detailed overview of lending market trends, conditions of corporate and household borrowing and an assessment of loan supply and demand. The NBS continued to upgrade the medium-term projections model – the model structure was reviewed regularly, and the possibility for integration of new variables was considered to obtain a more accurate inflation projection, i.e. to ensure greater reliability of the model. At the end of the year the NBS started designing the model for forecasting the yield curve for leading central banks based on the Nelson-Siegel-Swenson model. Yield curve forecasting is one of the elements in the decision-making on the investment of FX reserves. Under an IPA project we started to work with the National Bank of Romania on the design of the model for short-term projection of inflation and GDP and we are also building staff knowledge on the Bayesian evaluation technique. The construction of these projection models is important for the conduct of monetary policy as monetary policy measures are adopted based on the projected profiles for inflation and other relevant macroeconomic variables. The NBS continued to organise research seminars which gathered leading world experts from European and US universities and other central banks and international institutions. Seminars of this kind are highly important for raising the standard of economic research and development of economics in Serbia, while at the same time their quality makes the NBS recognisable at the European level. The NBS produces official statistics in accordance with the Law on Official Statistics and Article 68 of the Law on the National Bank of Serbia and the five-year statistical programme and annual plans. Data are collected, verified, processed and published for different statistical fields (monetary, financial, balance of payments and international investment position statistics). These statistics are used by the NBS to prepare reports and analyses, as well as by government institutions, domestic and international financial market agents, domestic and international financial institutions, scientific institutes, the media and the general public. In 2018 the NBS cooperated with other government institutions in coordinating statistical activities, preparing the Official Statistics Plan for 2019 and aligning its statistics with EU statistical standards and requirements. Since January 2018, under monetary statistics reporting, banks have provided data on the stock of loans and deposits indexed to the NBS key policy rate and BELIBOR and recorded FX indexation for EURIBOR rates with different maturities. Also, legal persons have been classified by size in accordance with the provisions of the law governing accounting. Consistent with its transparency policy and efforts to strengthen competition, as of September 2018 the NBS expanded the coverage of data published on its website by including the statistics on interest rates on loans and deposits for microenterprises, small, medium-sized and large enterprises, classified in accordance with the provisions of the law governing accounting. Furthermore, the NBS also started
110 Other Functions and Activities of the National Bank of Serbia publishing data on the type of interest rate indexation for dinar corporate and household loans and deposits – NBS key policy rate and BELIBOR, with one-, three- and six-month maturities. In June 2018, the National Summary Data Page (NSDP) for the Republic of Serbia was developed as a joint effort of the Statistical Office of the Republic of Serbia, National Bank of Serbia, Ministry of Finance and Belgrade Stock Exchange within the e-GDDS. The NSDP is on the website of the Serbian Statistical Office. Development activities in the area of government finance statistics continued in 2018. The quality of excessive deficit procedure (EDP) reporting was further enhanced. In cooperation with the Statistical Office of the Republic of Serbia, the NBS submits this Report to Eurostat twice a year (April and October). In addition, regular quarterly reporting to the World Bank and the IMF on the stock of public sector debt started in December 2018. The NBS also took part in a project managed by the Statistical Office on the calculation of UN SDG indicators. On this occasion the NBS provided the data and metadata under its remit. As of November 2016, the NBS regularly submits to the ECB data in the field of statistics of bank interest rates. The data are submitted on a monthly basis, in accordance with the set timeframe and the relevant ECB regulations. In the area of balance of payments statistics, the NBS submitted reports to Eurostat within the prescribed deadlines (monthly, quarterly and annual) – balance of payments and the international investment position, international trade in services and foreign direct investments. The EU Economic and Financial Committee published the Progress Report on the Action Plan on Economic, Monetary and Financial Statistics for Candidate Countries 2019. The data submitted for 2018 in the fields of balance of payments, international trade in services, foreign direct investments and the international investment position, including their coverage and method of submission, were assessed as largely aligned with EU statistical standards.
IV.4.2 International cooperation
Relations with international institutions and the European Union
Cooperation with the IMF concerned the signing and implementation of a new cooperation programme for the Republic of Serbia in the form of a Policy Coordination Instrument (PCI). The new cooperation programme was approved by the IMF Executive Board on 18 July in order to sustain macroeconomic and financial stability in Serbia and advance structural and institutional reforms aimed at boosting comprehensive growth, creating jobs and improving the living standards. The programme builds on the precautionary stand-by arrangement, successfully completed by the Republic of Serbia on 22 February.
111 National Bank of Serbia Annual Report on Activities and Results in 2018
During 2018 further progress was made in the process of Serbia’s accession to the EU. The most significant activities of the NBS concerned preparations for the opening of negotiations on individual chapters, and also fulfilment of the closing benchmarks for those opened. Of negotiating chapters where the NBS is the lead institution (Financial services and Economic and monetary policy), the best progress was made on the Economic and monetary policy chapter opened on 10 December on the ninth Intergovernmental conference on Serbia’s accession to the EU. The negotiating chapter on Statistics was also opened at the same conference. The role of the central bank in this chapter is significant given that it is one of the main statistics producers in the Republic of Serbia. In 2018, the NBS continued to carry out activities aimed at fulfilling the conditions for closing the chapters, the most significant progress being recorded under the negotiating chapter Financial control as the NBS met all the requirements for closing the subchapter Protection of the euro against counterfeiting. In 2018 all the plans envisaged by the National Programme for the Adoption of the Acquis were implemented in terms of the remaining required alignment of the domestic legislation under NBS competence with the EU acquis. The NBS also played an important part in the preparation of the fifth Economic Reform Programme – the most important strategic document under the economic dialogue with the European Commission and EU member states. Within the framework of the accession process, the NBS continued to fulfil the remaining obligations in the areas under its jurisdiction, as defined by the Stabilisation and Association Agreement, but also to take part in the bodies established for the monitoring of its implementation. The implementation of the IPA project “Strengthening of the Institutional Capacities of the National Bank of Serbia in the Process of EU Accession” commenced on 10 September 2018 with envisaged duration of 18 months (until March 2020). Project purpose is to build institutional and human capacities of the NBS by further aligning the functions and tasks of the NBS with EU regulations and international standards.
International Monetary Fund
The three-year stand-by arrangement, successfully completed in February 2018, was signed out of caution and throughout its duration there was no need for drawing down the funds approved. Total funds available under the arrangement amounted to SDR 935.4 mn (around EUR 1.2 bn). There were eight reviews of Serbia’s performance under the agreed economic programme, all of them concluded positively by the IMF Executive Board. The main objectives of the agreed programme were achieved at macroeconomic level, primarily by ensuring public finance sustainability, increasing the resilience of the financial sector and strengthening competitiveness and economic growth. Significant macroeconomic improvements achieved during the arrangement
112 Other Functions and Activities of the National Bank of Serbia overperformed the initial plans and expectations. The authorities implemented decisive fiscal consolidation, ensuring a sound fiscal position and laying the foundation for macroeconomic stability. Despite fiscal consolidation measures, economic activity was constantly rising owing to investment, exports and employment growth. Significant progress was also made in the implementation of structural reforms, which strengthened the growth potential of the Serbian economy, enabling job creation and reduction of fiscal risks. During the arrangement, the NBS pursued a cautious, accommodative monetary policy in the inflation targeting regime, keeping a watchful eye on trends in the domestic and international environment and thus providing a crucial contribution to the country’s economic recovery. Cooperation with the IMF under this arrangement contributed to the increase in FDI inflows and improvement of the country’s credit rating. Before the new arrangement was concluded, IMF representatives visited Serbia from 7 to 18 May, building on the dialogue initiated during their March visit to Belgrade and continued during the Spring Meetings of the IMF and World Bank Group in Washington D.C. The talks centred on the basics of the economic programme that was to be supported by new advisory arrangement of this international financial institution. The new cooperation programme for the Republic of Serbia in the form of the Policy Coordination Instrument was approved by the IMF Executive Board on 18 July. The arrangement will last 30 months and Serbia’s progress in the implementation of the agreed economic agenda will be monitored through five semi- annual reviews. The PCI is the IMF’s new support mechanism for member countries. It is advisory and does not involve financial assistance. The PCI is designed for countries committed to reforms and is agreed with a view to obtaining support for a specific economic programme when the country has no current or potential balance of payments problems. The first review of Serbia’s performance under PCI took place from 24 September until 4 October. The IMF assessed that good economic results were achieved and that growth accelerated in 2018 owing to domestic demand and exports. On 21 December the IMF Executive Board adopted the decision on successful completion of the first review of the implementation of the PCI-supported economic programme. The decision was adopted without the formal Board meeting which is a possibility used when estimated that there is no need for formal discussion. The Board gave a positive assessment of the implementation of the agreed economic programme and confirmed that the Republic of Serbia continued to achieve good macroeconomic results. Intense economic activity, underpinned by the recovery of private consumption, high FDI inflows and exports, continued. The Board concluded that inflation was still moving within the NBS target tolerance band, while lending was on the rise, as well as private sector wages. The dinar kept relative stability
113 National Bank of Serbia Annual Report on Activities and Results in 2018
against the euro, and the IMF applauded efforts aimed at increasing the use of the dinar for bank credit and deposit activity, which yield results gradually. The IMF concluded that in 2019 Serbia will remain committed to further implementation of structural reforms. Measures include curbing of the grey economy, public administration enhancement, restructuring of state-owned enterprises and financial institutions. The focus is placed on reforms aimed at stimulating growth driven by private sector and faster convergence to the EU income levels. NBS representatives were part of the delegation of the Republic of Serbia at the regular Spring Meetings of the IMF and the World Bank Group, as well as the Annual Meetings of the Boards of Governors of these institutions, held in Bali, Indonesia. The delegation was headed by NBS Governor Jorgovanka Tabaković, who represents the Republic of Serbia in the IMF.
World Bank
In 2018 the following loans of the International Bank for Reconstruction and Development were approved under the current World Bank Country Partnership Framework for fiscal years 2016–2020: the second public expenditure and public utilities development policy loan in the amount of USD 200 mn, financial assistance to state-owned financial institutions in the amount of USD 50 mn and additional financing for the second Serbia health project in the amount of USD 31.1 mn. In the period from March 2002 until the end of 2018, the World Bank approved to the Republic of Serbia funds for programme and project loans in the total amount of around EUR 2.79 bn, of which EUR 2.17 bn was used. In 2010 the World Bank Group implemented a voting power reform. Serbia took part in the IBRD general capital increase and by settling liabilities in the amount of USD 5.5. mn on 2 February 2018, it subscribed additional 760 shares with this institution. Now Serbia has 3,606 shares. With this subscription, Serbia has maintained the 0.18% share in the total IBRD voting power. In 2018 the NBS received three World Bank technical missions under the Remittances and Payments Program with a view to preparing the National Retail Payments Strategy 2019–2024. This programme is financed by the Swiss State Secretariat for Economic Affairs (SECO) and is implemented in several selected countries to increase the efficiency of remittances payments through the development of innovative payment mechanisms.
European Union
In 2018 the NBS continued to actively participate in Serbia’s EU accession process and the most important effort was the preparation for the opening and the very opening of negotiations on the chapters Economic and monetary policy (led by the NBS) and Statistics. The opening of negotiations on those chapters at the ninth Intergovernmental conference on Serbia’s accession to the EU, the last stage of
114 Other Functions and Activities of the National Bank of Serbia alignment of domestic regulations with the EU acquis in these areas commenced, as well as the establishment of institutional and administrative preconditions that will help maintain macroeconomic stability, improve competitiveness and encourage economic growth. Having opened Chapter 17 Serbia started preparing for efficient participation in economic dialogue with the EU by coordinating national economic policies, jointly planning of economy integration, boosting economic growth, providing jobs and improving the competitiveness of the domestic economy. In the Common Position on the chapter Economic and monetary policy, the EU concluded that alignment of Serbia’s legislative framework with the EU acquis is satisfactory and that Serbia has adequate institutional and administrative framework in this area. Bearing in mind that Serbia will continue aligning its legislation with the acquis, the EU defined three benchmarks for closing the chapter provisionally. The first benchmark is the alignment with the acquis to ensure full central bank independence, ban on monetary financing of the public sector and ban on privileged access of the public sector to financial institutions. Given that the Law on the National Bank of Serbia is already largely aligned with the requirements from the relevant articles of the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and European Central Bank, the remaining alignment will ensure full integration of the national central bank into the ESCB when Serbia becomes a full- fledged EU member state. The second benchmark refers to the alignment with the requirements concerning national budget framework established by the Council Directive 2011/85/EU. The third benchmark is the fulfilment of criteria of a functional market economy. In the Common Position on the chapter Statistics, two closing benchmarks were established. The first benchmark stipulates that Serbia needs to deliver the most important data from national accounts in accordance with the European System of Accounts (ESA) 2010 and other relevant requirements along with the detailed description of the used methodology. Also, Eurostat should verify the delivered data and presented methodology and confirm that they have been properly adjusted to EU rules. The second benchmark sets forth that Serbia needs to present to the European Commission the plan for the delivery of the remaining tables from ESA 2010 - Transmission programme and for resolving outstanding methodological issues. The most important activities under the negotiating chapter Free movement of capital (where the NBS is co-chairing the negotiating group) concerned the finalisation of the proposals for the Negotiating position following the wrap-up of intensive consultations with the EC. After receiving opinions of competent institutions on the documents necessary for the adoption of the Negotiating Position and discussions by relevant committees in the Assembly, on 20 September, the Government adopted the Negotiating Position and submitted it to the General Secretariat of the Council on 24 September. Of the opened chapters where the NBS is a member of the negotiating group, the negotiations went the furthest on Financial control. After the third monitoring mission on 30 November, the European Commission concluded that Serbia met all
115 National Bank of Serbia Annual Report on Activities and Results in 2018
the requirements set by closing benchmarks as it had ratified the 1929 Geneva Convention and has adequate administrative capacity in the technical expertise centre i.e. Counterfeits and Currency Analysis Division of the NBS. The adoption of the Decision on Handling Suspected Counterfeit Money also contributed to the full alignment of the Republic of Serbia’s legislative framework with the acquis. In line with the above NBS decision, commercial banks started training their staff on how to recognise counterfeit money and manually process euro notes and coins to prevent those unfit from returning into circulation. A high level of alignment with the acquis in the area of protection of the euro against forgery has also been confirmed in the EC Progress Report for Serbia. To define new plans for attaining internal readiness for EU membership, on 1 March the Government of the Republic of Serbia adopted the third revised National Programme for the Adoption of the Acquis (NPAA). For the negotiating groups chaired by the NBS (Financial services and Economic and monetary policy), co- chaired by the NBS (Free movement of capital) and all the other groups the NBS is a member of (Freedom of movement for workers, Right of establishment and freedom to provide services, Company law, Competition, Statistics, Consumer and health protection, Financial control, Financial and budgetary provisions), the NBS defined plans for the remaining alignment of legislation under its remit with the EU acquis. By adopting the Decision Amending the Decision on the Manner and Conditions of Using Foreign Financial Loans for Purposes under Article 21, paragraph 2 of the Law on Foreign Exchange Operations67, as well as the Law on Financial Collateral and the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions68, the NBS met all of its commitments regarding the remaining legislative alignments planned for 2018. Also, by adopting the Law on the Protection of Financial Service Consumers in Distance Contracts69 in 2018, the NBS met the obligation planned by the third revised NPAA for the first quarter of 2019. Furthermore, in 2018 the NBS implemented measures and activities planned to establish or strengthen institutional structures and administrative capacities relevant for the transposition and implementation of the EU acquis, primarily by engaging in activities supported by the PLAC II project and IPA funds, as well as by participating in seminars and workshops in the country and abroad whereof it reported quarterly to the Ministry for European Integration. In addition to the accession process, the NBS continued to participate in the bodies established to monitor the implementation of the Stabilisation and Association Agreement. Regarding the scope of competence of the NBS, developments in the banking and insurance industry and competition policy were discussed on the fifth meeting of the Subcommittee for internal market and competition, held in Belgrade on 20 June. The economic situation and outlook for Serbia, as well as statistics, were addressed on the fifth meeting of the Subcommittee for economic and financial matters and statistics, held in Brussels on 7 November
67 RS Official Gazette, No 32/2018. 68 RS Official Gazette, No 44/2018. 69 RS Official Gazette, No 44/2018.
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(balance of payments, foreign debt, monetary policy and exchange rate policy, financial sector development and capital flows and liberalisation, development of the national statistics system, legal framework and administrative capacities, and development of economic statistics). On the fifth meeting of the Stabilisation and Association Committee held in Belgrade on 18 November, the European Commission gave a positive assessment of the abolishment of restrictions on capital movements implemented through amendments to the Law on Foreign Exchange Operations70 and relevant NBS bylaws. The headway made by the Republic of Serbia in the European integration process was also confirmed by the EC in the Progress Report published on 17 April as a part of the Enlargement package. The assessment for economic criteria was that Serbia made good progress and that it is moderately prepared in terms of the development of a functional market economy. As regards the ability to assume the obligations of membership, Serbia was largely assessed as moderately prepared in the areas that are under the remit of the NBS. Preparing for the regular reporting on the reform process in the Republic of Serbia, and for the purposes of the 2018 Progress Report, by end-October the NBS compiled and submitted materials falling within its scope of competence. At end- 2018, the preparation of the second part of information was initiated. In accordance with the European Commission requirement, it was prepared by updating the material submitted during the first round of reporting, with information on measures and activities carried out after October. The NBS also gave a significant contribution to the fifth Economic Reform Programme (ERP), for the period 2019–2021, in the chapters Macroeconomic Framework and Fiscal Framework, sections Monetary and Exchange Rate Policy and Inflation, External Sector and its Medium-Term Sustainability and the Financial Sector. The NBS Governor participated in the Annual ministerial dialogue on economic policy between the EU, i.e. ministers of finance and governors of central banks of member states and the Western Balkans and Turkey, held in Brussels on 25 May within the framework of the Economic and Financial Affairs Council (ECOFIN). At the meeting, Joint Conclusions were adopted, with individual recommendations for the Western Balkans and Turkey. The Annual ministerial dialogue was preceded by meetings organised by the Economic and Financial Committee (EFC), with active participation of NBS representatives. In 2018 the NBS continued to actively participate in the Policy and Legal Advice Centre project II (PLAC II), which ended successfully in December. The overall objective of the IPA project was to assist Serbia in effective accession negotiations by improving the alignment of national legislation with the EU acquis, implementing the regulations and strengthening institutional capacities for negotiations. Support was provided to negotiation groups Financial services and Free movement of capital through the implementation of seven project tasks for sub-areas Banking and
70 RS Official Gazette, Nos 62/2006, 31/2011, 119/2012, 139/2014 and 30/2018.
117 National Bank of Serbia Annual Report on Activities and Results in 2018
financial conglomerates and Insurance and occupational pensions (Financial services), and Movement of capital and current payments - Voluntary pension funds and Payment system (Free movement of capital). The most important accomplishments under the remit of the NBS are the following: working versions of amendments to the Law on Insurance and the Law on Voluntary Pension Funds and Pension Schemes, working version of the Law on Financial Conglomerates, recommendations concerning the alignment of the Law on Payment Services with the Directive on Payment Services in the Internal Market (PSD2), drafts of several bylaws, draft methodology for implementation of the first and second quantitative impact study to ascertain the impact of Solvency II on the Serbian insurance market (QIS1 and QIS2), tables of concordance of the domestic legislation with relevant EU regulations and improved administrative capacities of the NBS. As the European Commission approved the IPA project “Strengthening of the Institutional Capacities of the National Bank of Serbia in the Process of EU Accession” in December 2017, in March 2018 the Consortium of German, Romanian and Croatian central banks was selected as the twinning partner, with a possibility of hiring experts from other central banks from the ESCB. The Consortium hired GIZ to perform financial, organisational and staff-related activities during project implementation. IPA project implementation commenced on 10 September 2018. Its planned duration is 18 months, meaning it will last until March 2020. The project kick-off conference took place on 29 November 2018. It was ceremonially opened by the NBS governor in the presence of ambassadors of Germany, Romania, Croatia, head of the EU Delegation to Serbia, representatives of the Ministry of Finance and Ministry for European Integration. The purpose of the IPA project is to strengthen institutional and staff capacities of the NBS by harmonising its roles and tasks with EU regulations and international standards. The successful project implementation will assist the NBS with the fulfilment of criteria for closing the accession negotiations with the EU, primarily on chapters: 17 - Economic and monetary policy, 9 - Financial services, 4 - Free movement of capital, 18 - Statistics, 28 - Consumer and health protection and 32 - Financial control. Project activities will cover the following competences of the NBS: financial stability, foreign exchange reserve management, liberalisation of the movement of capital, economic analyses and research, accounting and financial reporting, financial sector supervision, insurance and voluntary pension funds, protection of financial service consumers, information technologies and support to the EU accession process. The said project worth EUR 800,000 will be financed from EU pre-accession funds (IPA 2014), with no co-financing by the NBS. The NBS participates in sectoral working groups for public administration reform and competitiveness in the programming of international development aid and pre-accession assistance of the EU (IPA II) for the period 2014–2020. Funds of the Serbian Revolving Credit Fund (initially EU grant) were used during 2018 to finance small- and medium-sized enterprises and entrepreneurs. A
118 Other Functions and Activities of the National Bank of Serbia total of 1,151 loans in the amount of EUR 117.2 mn were disbursed through intermediary banks. During 2018, the NBS, as the agent of the Republic of Serbia, carried out the supervision of the spending of funds under nine loans from the Revolving Credit Fund in two intermediary banks, including two loans with final beneficiaries. It was noted that the funds were used for authorised purposes.
European Bank for Reconstruction and Development
The EBRD has been providing assistance to Serbia from 2001. By 31 December 2018 loans in the amount of EUR 4.73 bn were approved, of which EUR 4.08 bn were used through more than 200 projects. Significant resources were approved for infrastructure projects, for support to financial institutions and stimulation of economic activity, as well as for energy projects. On 27 February the EBRD adopted a new Country Strategy which will be the basis for prioritising investment and activity in Serbia in the 2018–2023 period. The Strategy was defined in accordance with the main reform goals of the Serbian Government as regards EU accession, macroeconomic stability, public debt reduction, financial sector strengthening, including dinarisation, acceleration of the process of state-owned company privatisation and restructuring, improvement of business environment, entrepreneurship development and strengthening of innovations and digitalisation. The EBRD Strategy priorities for Serbia are the following: 1) foster competitiveness and governance by boosting private companies and reforming SOEs and public utilities; 2) enhance integration by improving the transport network, supporting regional economic connectivity and advancing energy interconnections; 3) support the green economy through investments in energy efficiency and renewable energy as well as promoting sustainable practices across industries. In November the EBRD published its regular annual Transition Report 2018– 2019: Work in Transition which analyses the social impact of new labour market trends in different EBRD regions as one of the most significant challenges faced by the world today. The Report stresses the importance of demographic and skills composition of labour market, as well as labour force migrations, both between countries and within one country. For Serbia, the Report noted growth acceleration and continued progress towards EU membership. Significant reduction in the NPL ratio throughout the year was pointed out, greatly as a result of NBS activities.
Bank for International Settlements
The NBS is a member of the Bank for International Settlements (BIS) and holds 2,920 of its shares. Also, NBS representatives participate in regular annual meetings of this institution’s Assembly and of its various committees, whose principal aim is to ensure global monetary and financial stability and to support international cooperation of central banks in these areas.
119 National Bank of Serbia Annual Report on Activities and Results in 2018
The NBS has been an active member of the Central Bank Governance Network within the BIS, which aims to enhance the exchange of relevant information between 60 central banks – member institutions.
European Investment Bank
From 2001 through 2018, EIB provided to Serbia’s public and private sectors financial support worth EUR 4.82 bn, of which around EUR 4.25 bn was disbursed. The infrastructure is given priority so as to ensure better connections within the country and across the region. Another important aspect of EIB’s operations in Serbia is the support to SMEs development, whereby this institution contributes to economic growth and job creation. To disburse the second tranche of the fifth Apex loan for SMEs and other priorities III/B worth EUR 150 mn, in 2018 sixty-five new projects worth EUR 76.6 mn were sent to EIB for approval. In 2018, 84 projects, worth EUR 89.8 mn were approved for financing, and nine drawdowns were made totalling EUR 68.1 mn. Having considered the modalities for faster and more simple loan use in early 2018, the NBS initiated some changes to the Financial Agreement on Apex loan for SMEs and other priorities III/B, Side Letter to this Agreement and Intermediary Financial Agreement the NBS signed with intermediary banks. Assessing this initiative as justified, in mid-2018 the Serbian Government adopted a conclusion enabling the financing of the purchase, construction, modification and refurbishment of retail facilities, as well as procurement of fixed assets for projects of companies classified under G Sector - Wholesale and retail trade, repair of motor vehicles and motor cycles. To implement these changes, the NBS prepared annexes to intermediary financial agreements which were signed by 13 intermediary banks. To make the disbursement of Apex III/B loan more efficient, the NBS also suggested changes involving a reduction in the minimum amount of individual tranches disbursed from EIB (from EUR 5 mn to EUR 3 mn, that is from EUR 2.5 mn to EUR 2 mn for projects promoting youth employment) and at the same time an increase in the maximum number of total loan tranches (from 20 to 45), the removal of the obligation of the NBS as the agent to obtain EIB’s consent concerning the on- lending by intermediary banks and the removal of limit regarding the funding of projects of companies of medium market capitalisation, so-called midcaps. The Ministry of Economy, the Ministry of Finance and EIB gave their consent to the said changes and the procedure for amending the Financial Agreement and the Side Letter was initiated. In 2018, the NBS carried out supervision of the spending of funds under 19 EIB Apex loans in nine intermediary banks, including the use of funds under two loans with final beneficiaries.
120 Other Functions and Activities of the National Bank of Serbia
Cooperation with other central banks
The second annual informal dialogue between the representatives of the Austrian central bank and the NBS was organised in Belgrade on 8 and 9 June 2018, with a view to exchanging experience and deepening the relations between the two central banks in discussions covering subjects of mutual interest. The dialogue centred on cooperation with the EU, preparation for membership in the ESCB, monetary policy workings and instruments, financial market development and dinarisation.
Relations with the Paris Club creditors
In terms of the Paris Club creditors, further activities were taken towards concluding a new bilateral agreement with the Russian Federation. As the Government’s debt servicing agent, the NBS successfully carried out activities relating to the settlement of obligations towards the Paris Club creditors.
Bilateral financial cooperation
Loan of the KfW (German development bank) intended for agriculture, energy efficiency, renewable energy sources and municipal infrastructure was disbursed through three intermediary banks. During 2018, a donation from the Kingdom of Denmark (Programme for Local Economic Development in the Balkans - LEDIB) was used for financing SMEs and entrepreneurs, farmers and cooperatives in Serbia’s five southern districts – Nišava, Jablanica, Pčinja, Toplica and Pirot. The donation was worth DKK 15 mn (c. EUR 2 mn). From January 2010 to December 2018 as many as 387 dinar loans and dinar loans with an FX clause (depending on the choice of final beneficiaries), worth RSD 276.8 mn, were disbursed. Financial agreement on the donation of the Kingdom of Denmark was effective until 31 December 2018 and, in accordance with the contractual obligations, intermediary banks returned all the loan assets to a special dinar account of the Ministry of Economy with the NBS. Given that the Ministry of Economy should decide on the future purpose of these funds, the NBS provided to that Ministry detailed information on the Programme implementation including proposals for continued use in line with the changed (significantly more favourable) market conditions. The Committee for the Distribution of Financial Assets and Liabilities of the Former SFRY in line with Annex C to the Agreement on Succession Issues had a meeting in September 2018. With active participation of NBS representatives, the Committee discussed topical issues relevant for successor states (debts and receivables of the former SFRY). In July 2018, the NBS and Československa obchodni banka concluded Annex 1 to the Banking arrangement governing calculation method, interest rate, and accounting of interest on the Serbian debt to the Republic of Slovakia. This banking
121 National Bank of Serbia Annual Report on Activities and Results in 2018
arrangement was concluded in 2017 and relates to the technical procedure of the accounting separation of the debt of the former SFRY to the Czech Republic and the Republic of Slovakia and the recording of the Republic of Serbia’s debt to the said countries. In December 2018 the Serbian Government and the Government of the Czech Republic signed the Agreement on servicing the debt of the Republic of Serbia to the Czech Republic from the period of clearing payments. NBS representatives participated in the drafting of the Agreement, under which Serbia committed to pay the debt to the Czech Republic in the amount of USD 9.80 mn (70% reduction from the initial debt amount - USD 32.76 mn) as a one-off payment and within 45 days from the ratification date. In March 2018 NBS representatives participated in multisectoral meetings organised by the Ministry of the Interior of the Republic of Serbia concerning the visit of the Counter-Terrorism Committee Executive Directorate (CTED) of the UN Security Council. The objective of the visit was to look into the implementation of recommendations from the Committee’s previous report, to obtain information about the implementation of the resolutions concerning fight against terrorism financing and consider the provision of technical assistance with the implementation of the said resolutions. The NBS took an active part in the preparation of the draft Factual Presentation Central European Free Trade Agreement (Goods), developed by the World Trade Organisation (WTO) – Committee on Regiоnal Trade Agreements under the WTO transparency mechanism.
IV.4.3 Foreign exchange operations and foreign credit transactions
In November and December 2018, all the necessary activities (legal, operational, organisational, etc.) were undertaken so that the NBS could take over the issuing and revoking of authorisations for performing exchange operations, as well as the supervision of exchange and foreign exchange operations of residents and non- residents, from the Tax Administration – Ministry of Finance starting from 1 January 2019 in accordance with the Law Amending the Law on Foreign Exchange Operations.71
Foreign exchange operations
In 2018 the NBS adopted 715 decisions (up by around 10% from the previous year) pursuant to the decision governing the conditions under which residents may hold foreign exchange in bank accounts abroad. Of those decisions, 485 were for the financing of investment works abroad (EUR 40.6 mn), 228 for the payment of current spending of representative offices/branches abroad (EUR 7.9 mn), one
71 RS Official Gazette, No 30/2018.
122 Other Functions and Activities of the National Bank of Serbia decision was issued on account of return of tax generated abroad (EUR 3.3 mn), and one on account of a foreign financial loan intended for payments abroad (EUR 3.0 mn). The Tax Administration received 20 notifications of reasonable doubt that economic entities were holding foreign exchange in bank accounts abroad without NBS approval. At the request of legal and natural persons, 55 opinions were issued regarding the application of regulations in the area of foreign exchange operations. NBS representatives, as members of the working group established by the Ministry of Finance, took part in the drafting of the Law Amending the Law on Foreign Exchange Operations72, which was adopted in April 2018 for the purposes of alignment with the provisions of the Stabilisation and Association Agreement between the European Communities and their member states and the Republic of Serbia. The Law brought full liberalisation of residents’ investments in long-term debt securities issued by legal persons with headquarters in EU member states, liberalisation of residents’ investments in short-term securities of the issuers coming from EU member states and investments of non-residents with headquarters/residence in EU member states in short-term securities in the Republic of Serbia. In order to advance the IT sector, as one of the strategic priorities of the Serbian Government, the Law stipulates that online sale and purchase of software and other similar products in the Republic of Serbia may be performed also in foreign currency on condition that it is paid by a credit card or electronic money through a domestic payment service provider. In 2018 the NBS passed the following secondary legislation: Decision Amending the Decision on Terms and Conditions under which Residents May Hold Foreign Exchange in Bank Accounts Abroad73 – residents may hold foreign exchange in bank accounts abroad not only for the purchase and sale of long-term but also short-term securities, pursuant to the law governing foreign exchange operations; Decision Amending the Decision Specifying Issuer Credit Rating for Long- Term Debt Securities that Residents May Invest in Abroad74 – there are no restrictions on residents’ investment in long-term debt securities issued by legal persons with headquarters in EU members states; Decision on Terms and Manner of Performing Exchange Operations75 – comprehensively regulates the area of exchange operations and at the same time concretizes some solutions. In order to protect citizens’ interests, the amendments to this decision limit the minimum/maximum buying/selling exchange rate for the euro applied by authorised exchange dealers and the public postal operator to ±1.25% of the NBS official middle exchange rate, while lowering the fee chargeable by
72 RS Official Gazette, No 30/2018. 73 RS Official Gazette, No 37/2018. 74 RS Official Gazette, No 37/2018. 75 RS Official Gazette, Nos 84/2018 and 86/2018.
123 National Bank of Serbia Annual Report on Activities and Results in 2018
authorised exchange dealers and the public postal operator when buying foreign cash from 3% to 1%; Decision on Detailed Conditions and Manner of Conducting Supervision of Exchange Operations76 – regulates the supervision of the work of the public postal operator and legal persons and entrepreneurs authorised to perform exchange operations; Decision on Detailed Conditions and Manner of Performing the Supervision of Foreign Exchange Operations of Residents and Non-Residents77 – regulates the manner of supervising foreign exchange operations, supervision procedure and taking of measures against supervised entities; Decision on the Procedure and Conditions for Obtaining a Certificate for the Performance of Exchange Operations, Single Training Programme for the Performance of Exchange Operations and Eligibility Requirements for Trainers78– prescribes the conditions to be met by applicants in order to be issued the certificate for performing exchange operations by the NBS; Decision Amending the Decision on Guidelines for the Application of the Provisions of the Law on the Prevention of Money Laundering and Terrorism Financing for Obligors Supervised by the National Bank of Serbia79 – the list of obligors now also includes authorised exchange dealers and the public postal operator and their work is now supervised by the NBS; Decision Amending the Decision on the Conditions of Opening and Manner of Maintaining Foreign Exchange Accounts of Residents and Dinar and Foreign Exchange Accounts of Non-Residents80 – the authorisation for performing exchange operations is issued by the NBS and not the Tax Administration; Decision Amending the Decision on Cases and Conditions of Payment, Collection of Payment, Pay-in and Pay-out in Foreign Cash81 – for the purposes of alignment with the anti-money laundering law, the amount up to which exports of goods and services may be paid in foreign cash was reduced from EUR 15,000 to EUR 10,000.
Documentary control and foreign payment transactions
In 2018 as part of regular activities, documentary control and foreign payment transactions were carried out for the needs of budget beneficiaries, these operations being assigned to the NBS by law. Implemented were also activities concerning the provision of cover for foreign payment orders for budget beneficiaries and for the needs of the NBS, which relate to the collection of payments and payments under foreign loans, transfers based on the maturity of financial instruments and foreign currency-denominated T-bills of
76 RS Official Gazette, No 84/2018. 77 RS Official Gazette, No 84/2018. 78 RS Official Gazette, No 84/2018. 79 RS Official Gazette, No 103/2018. 80 RS Official Gazette, No 96/2018. 81 RS Official Gazette, No 29/2018.
124 Other Functions and Activities of the National Bank of Serbia the Serbian Government, transfers based on the FX required reserves and transactions of the Central Securities Depository and Clearing House, purchase of foreign currency assets from banks in line with special laws governing temporary payment operations with AP Kosovo and Metohija, and transfers in respect of donations. Also, activities on the realisation of letters of credit for the needs of the import of goods were performed, as well as payment of services for budget beneficiaries. In this context, letters of credit worth EUR 183 mn were opened in 2018, while total payments made amounted to EUR 227 mn. In line with the banking arrangement between the NBS and Vnesheconombank from May 2013, signed on the basis of the agreement concluded in January 2013 between the governments of the Russian Federation and the Republic of Serbia on approving to the Serbian Government a state export loan in the amount of USD 800 mn, payments totalling USD 139 mn were made based on the opened letters of credit. Furthermore, activities were implemented in connection with the Protocol on the Manner and Conditions of Maintaining Bank Accounts Opened with the NBS for the Purpose of 2014–2020 IPA Programme Management, concluded with the Ministry of Finance on 7 April 2017. At the request of the Ministry of Finance, 45 new FX special purpose accounts were opened to enable the implementation of various projects. The said operations performed by the NBS for the Republic of Serbia were carried out timely and in line with domestic regulations, as well as international banking standards and practices.
Foreign credit transactions
In 2018, a total of 813 borrowing transactions of domestic persons abroad in the amount of EUR 3.69 bn were recorded, with the average interest rate of 2.37% and the average payment period of five years and six months. Of the total contracted amount, company borrowing amounted to EUR 3.04 bn, of which EUR 1.81 bn intended for the conversion of euros into dinars, EUR 740.82 mn for the imports of goods and services, and the remaining EUR 489.55 mn for other purposes. Bank borrowing amounted to EUR 652.34 mn. By activity, the largest share of debtors was from the financial sector and insurance (27.52%), followed by manufacturing (13.52%) and construction (13.37%). In 2018, a total of 173 lending transactions in the amount of EUR 287.84 mn were recorded, with the average interest rate of 2.16% and the average payment period of five years and five months. Companies approved to non-residents EUR 151.19 mn and banks EUR 136.65 mn. The dominant collateral in lending transactions were bills of exchange (41%). Creditors from the financial sector and insurance made up the largest share (48%), while wholesale and retail trade creditors accounted for 25% of total lending transactions. Total liabilities arising from defaults in foreign trade operations where realisation was not completed within a period longer than one year amounted to EUR
125 National Bank of Serbia Annual Report on Activities and Results in 2018
351.2 mn at end-2018. Of this amount, EUR 266.9 mn related to the unpaid imports of goods and services and EUR 84.3 mn to advance payments for which exports were not executed. Total receivables arising from defaults in foreign trade operations where realisation was not completed within a period longer than one year amounted to EUR 393.5 mn at end-2018. Of this amount, EUR 269.2 mn related to the unpaid imports of goods and services and EUR 124.3 mn to advance payments for which imports were not executed. The NBS adopted two pieces of secondary legislation to regulate foreign credit operations:82 Decision on Conditions and Manner in which Residents May Grant Financial Loans to Non-Residents and Issue Warranties and Provide Other Collaterals under Foreign Credit Operations and Credit Operations between Non- Residents, which, with the aim of preserving the public interest and/or financial stability, prescribes the conditions and/or limitations under which resident legal persons may approve financial loans to non-residents and issue warranties for other non-residents’ liabilities in favour of non-residents; Decision Amending the Decision on the Manner and Conditions of Using Foreign Financial Loans for Purposes under Article 21, Paragraph 2 of the Law on Foreign Exchange Operations which abolishes restrictions on short-term borrowing of domestic legal persons and entrepreneurs from non-residents from the EU, in line with the amendments to the Law on Foreign Exchange Operations which abolish those restrictions for natural persons and branches of foreign legal persons. In 2018, 17 opinions were prepared concerning the implementation of regulations in the area of foreign credit operations. In 2018, six cases of breaching the Law on Foreign Exchange Operations, the provisions on foreign credit operations in specific, were reported to the Tax Administration and two cases to the Administration for the Prevention of Money Laundering. Besides, due to the verification and signing of contracts which are not in compliance with the said regulations, information about this was also sent to the Chamber of Public Notaries, Chamber of Bailiffs, Republic Geodetic Authority, and Business Registers Agency so that they could take measures under their remit. The NBS invited these institutions to establish cooperation so as to ensure that foreign exchange regulations are observed. Concerning requests for initiating misdemeanour proceedings against banks filed by the NBS to the Misdemeanour Court on account of breaching regulations on foreign credit operations, in 2018 there was a court hearing under one request and two explanatory papers were produced concerning the defence of the defendant banks and their responsible persons.
82 RS Official Gazette, No 32/2018.
126 Other Functions and Activities of the National Bank of Serbia
Performance of foreign credit liabilities of the Republic of Serbia with the NBS as the agent
Chart IV.4.3.1 Settlement of foreign credit liabilities of the Republic of Serbia, where the NBS is an agent, in 2018 – by creditor and by quarter (in EUR bn)
1,000 900 800 700 600 500 400 300 200 100 0 EIB IDA IBRD EBRD EUROFIMA London Club Euro - bonds Paris Club banks consolidated debt EUROFOND - CEB Foreign governments Foreign European Community and their development
Q1 Q2 Q3 Q4
Source: NBS.
During 2018, all the liabilities under foreign credits and loans in respect of which the Republic of Serbia is the debtor or guarantor and the NBS the agent were serviced in time, as well as all liabilities under credits in respect of which the NBS is the debtor. In 2018, in the capacity of the Government’s agent, the NBS paid EUR 2.1 bn (EUR 1.7 bn of which was the repayment of principal and EUR 434.87 mn interest and other expenses). A total of EUR 9.68 mn was paid on account of commitment fees, this amount being included in the liabilities paid in 2018. Overall in 2018, EUR 469.09 mn worth of loans were disbursed. These loans were granted by international financial organisations (EBRD, World Bank, EIB, Council of Europe Development Bank (CEB)) and the Abu Dhabi Fund for Development. As for the settled liabilities arising from credits and loans where the Republic of Serbia is the debtor or guarantor and the NBS is the agent, the debt to the London Club creditors (EUR 145.71 mn) was fully repaid in April and the liability arising from the fourth eurobond series issued in the international financial market (EUR 905.82 mn) was settled also in its entirety in December 2018.
127 National Bank of Serbia Annual Report on Activities and Results in 2018
IV.4.4 Legislative activities
Current legislative activity
In the course of 2018, the NBS took part in preparing and giving opinion on the following drafts and proposals of laws: Proposal of the Law Amending the Law on the National Bank of Serbia, Proposal of the Law on Multilateral Interchange Fees and Special Operating Rules for Card-Based Payment Transactions, Proposal of the Law on the Protection of Financial Service Consumers in Distance Contracts, Proposal of the Law Amending the Law on Payment Services, Proposal of the Law on Financial Collateral, Draft Law Amending the Law on Foreign Exchange Operations, Draft Law Amending the Law on the Budget System, Draft Law on the Budget of the Republic of Serbia for 2019, Draft Law Amending the Law on Public Debt, Draft Law Amending the Law on Bankruptcy, Draft Law Amending the Law on Tax Procedure and Tax Administration, Draft Law Amending the Law on Factoring, Draft Law Amending the Law on Audit, Draft Law Amending the Law on Accounting, Draft Law on the Central Registry of Ultimate Beneficial Owners, Draft Law on Alternative Investment Funds, Draft Law Amending the Law on Free Access to Information of Public Importance, Draft Law Amending the Law on the Republic Administrative Fees, Draft Law on Trade, Draft Law Amending the Law on Electronic Trade, Draft Law on Health Insurance, Draft Law on Charges for Usage of Public Goods, Draft Law Amending the Law on Corporate Income Tax, Draft Law Amending the Law on Registered Charges on Movable Assets, Draft Law Amending the Law on Court Taxes, Draft Law on Public Procurements, Draft Law Amending the Law on Legalization of Facilities, Draft Law on the Prevention of Corruption, Draft Law on Personal Data Protection, Draft Law on Tourism, Draft Law on the Hospitality Industry, Draft Law on Commodity Stock Exchanges, Draft Law on Ratification of Loan Agreement (Assistance to State-Owned Financial Institutions Project) signed by the Republic of Serbia and IBRD, Draft Law on Ratification of the Agreement on Cooperation in the EU Accession Process between the Government of the Republic of Serbia and Council of Ministers of Bosnia and Herzegovina, Draft Law Amending the Law on Guarantee of the Republic of Serbia in Favour of OTP banka a.d. Novi Sad, Banca Intesa A.D. Beograd, NBG Bank Malta LTD, “Aik Banka” a.d. Niš and Unicredit Bank Srbija A.D. Beograd in respect of the liability of public enterprise “Srbijagas” Novi Sad, Draft Law Amending the Law on Voluntary Pension Funds and Pension Schemes, and Draft Law Amending the Law on Enforcement and Security Interest. In 2018, the NBS adopted 64 pieces of secondary legislation published in the RS Official Gazette, of which 62 decisions, one of them amending the Statute of the National Bank of Serbia, and two guidelines. These regulations cover the following functions and activities of the NBS: monetary policy operations (determining the 2019 Monetary Policy Programme, determining NBS interest rates applied in the implementation of monetary policy, the terms and manner of operation of the FX market, types of
128 Other Functions and Activities of the National Bank of Serbia foreign currency and foreign cash bought and sold in the FX market, implementation of the Decision on Banks’ Required Reserves with the NBS, submission of data on loans in the international money market to the NBS, banks’ required reserves with the NBS); financial stability (setting and maintaining the systemic risk buffer rate); foreign exchange operations (cases and conditions of payment, collection of payments, pay-in and pay-out in foreign cash, determining the issuer credit rating for long-term debt securities in which residents can invest abroad, operations with financial derivatives, conditions and manner under which residents may hold foreign exchange in bank accounts abroad, conditions and manner of opening and maintaining residents’ FX accounts and non-residents’ dinar and FX accounts, terms and manner of performing exchange operations, detailed conditions and manner of supervising exchange operations, detailed conditions and manner of supervising FX operations of residents and non-residents, procedure and conditions for obtaining the certificate for performing exchange operations, single training programme for the performance of exchange operations and eligibility requirements for trainers); international operations (conditions and manner under which residents may approve financial loans to non-residents and give warranties and other collateral for foreign credit operations and credit operations between non-residents, conditions and manner of using foreign financial loans for the purposes under Article 21, paragraph 2 of the Law on Foreign Exchange Operations, filling in the forms for reporting on foreign credit operations); payment system operations (general rules for the execution of instant credit transfers, form, contents and manner of using payment orders for the execution of dinar payment transactions, detailed conditions and manner of opening, maintaining and closing of current accounts, contents, deadlines and manner of delivering data on interchange fees, minimum value of payment transactions which must be executed in an important payment system, manner and criteria for determining important payment systems, establishing the list of representative services linked to a payment account, preparing the fee information document linked to a payment account, defining the layout and contents of the statement of fees, contents and manner of delivering and publishing data on the fees charged by payment service providers to payment service users, initial capital, own funds and capital requirements of a payment system operator, implementation of the provisions of the Law on Payment Services on payment system licensing and consenting to amendments to payment system operating rules); bank supervision (implementation of the provisions of the Law on Banks pertaining to the issuance of a preliminary bank founding permit, bank operating licences and some NBS consents and approvals, forms and contents of positions in the financial statements of banks, bank reporting, consolidated supervision of a banking group, bank risk management, management of concentration risk arising from bank exposure to specific products, capital adequacy, classification of balance sheet assets and off-balance sheet items);
129 National Bank of Serbia Annual Report on Activities and Results in 2018
bank resolution (information and data submitted to the NBS for the purposes of drafting and updating resolution plans of banks and banking groups); supervision of payment institutions and electronic money institutions (implementation of the provisions of the Law on Payment Services pertaining to NBS licences and consents) financial leasing supervision (implementation of the provisions of the Law on Financial Leasing pertaining to NBS licences and consents); insurance supervision (implementation of the provisions of the Law on Insurance pertaining to NBS licences for insurance and reinsurance operations and some consents, implementation of the provisions of the Law on Insurance pertaining to insurance agency and brokerage activities, insurance/reinsurance undertaking governance system); voluntary pension fund supervision (detailed conditions and manner of issuing individual licences and approvals to voluntary pension fund management companies); financial services consumer protection (conditions and manner of calculating effective interest rate and layout and contents of forms presented to consumers); money issuance and cash management (issuance and main features of numismatic money with the portrait of Nikola Tesla, release into circulation of 1-, 2- and 5-dinar coins); supervision of the implementation of regulations governing the area of anti-money laundering and fight against terrorism financing in supervised financial institutions (guidelines for the application of the provisions of the Law on the Prevention of Money Laundering and Terrorism Financing); single tariff used by the NBS to charge fees for the services provided.
Court representation
In the course of 2018, 34 administrative proceedings were conducted before the Administrative Court, of which 11 were finally disposed of. Proceedings conducted before commercial courts included 13 litigations and seven enforcement proceedings, of which six were finally disposed of, 56 bankruptcy proceedings, three liquidation proceedings, and three economic offence proceedings. A total of 55 litigations, six non-litigious proceedings, seven enforcement and five criminal proceedings were conducted before general jurisdiction courts, 18 of them being finally disposed of. Twenty two proceedings were conducted before misdemeanour courts. Five litigations and one bankruptcy proceedings were conducted before foreign courts.
130 Other Functions and Activities of the National Bank of Serbia
Compliance
In 2018, 55 general internal acts were adopted by the NBS in the area of labour relations, office administration, protection of confidential data and security of information, internal organisation and job classification, accounting and finance, rules of procedure, etc. Furthermore, the Statute of the National Bank of Serbia was amended for the purposes of alignment with the Law Amending the Law on the National Bank of Serbia, and so were other NBS83 general internal acts – all within the statutory deadline. The NBS continued examining the compliance of operations in certain segments of its operations in order to identify compliance risks and formulate the relevant mitigating measures. Necessary activities were undertaken to ensure regular annual reporting of organisational units on compliance risk identification and assessment. The NBS invested continuous efforts in improving ethical and professional conduct standards, as well as in making sure that all of its obligations under the Law on the Anti-Corruption Agency are fulfilled.
Activities regarding the implementation of the Law on Free Access to Information of Public Importance
In 2018, the NBS received 57 requests for the supply of information of public importance, of which 52 were granted or partially granted84, three rejected and one dismissed. The majority of requests were submitted by citizens (33), the media (9), NGOs and other civic organisations (3), and others (12). Concerning the above requests, four complaints were filed (one for not addressing the request and three for other reasons). Pursuant to Article 43 of the Law on Free Access to Information of Public Importance,85 the NBS submitted to the Commissioner for Information of Public Importance and Personal Data Protection the annual report, outlining activities and measures undertaken in 2018 for the purposes of implementing the said Law.
IV.4.5 Enforced collection
The NBS has performed enforced collection pursuant to Article 57 of the Law on Payment Transactions since 2003. In 2018, the NBS received, checked and recorded 454,232 execution titles issued by Tax Administration units, customs, courts, public bailiffs and other competent bodies, down by 2.6% from last year. This was mostly a result of the reduced number
83 Amendments to these acts were required primarily due to the fact that the Administration for Supervision of Financial Institutions ceased to exist. 84 One request submitted in 2018 was decided upon by end-January 2019. The request was partially granted and a complaint was filed against the decision on partial rejection in February 2019. 85 RS Official Gazette, Nos 120/04, 54/07, 104/09 and 36/10.
131 National Bank of Serbia Annual Report on Activities and Results in 2018
of decisions of the Tax Administration on interim measures for securing the collection of tax receivables, as a reflection of amendments to the Law on Tax Procedure and Tax Administration initiated by the NBS and adopted in the course of 2018. These amendments repealed the provisions of Article 87a of the Law, making this type of decisions integral to the decision on enforced collection of due tax liabilities. At the same time, 35,650 decisions were returned to the issuing bodies due to their inadequacy. Somewhat less than two thirds of execution titles (65.22%) were decisions received from commercial, general jurisdiction and misdemeanour courts, and public bailiffs. Observed by type of court decisions received, a significant proportion related to the postponement and suspension of enforcement (17,351). The number of decisions received from organisational units of state-level tax administrations and tax units of local governments pertaining to interim measures for securing the collection of tax receivables by banning tax payers from settling their monetary liabilities to third persons by assignation, cession, compensation or otherwise, (43,025), dropped by two and a half times from 2017, as a result of the 2018 amendments to tax regulations. In addition to the said decisions, the NBS also enforces court decisions on the institution, suspension and closing of bankruptcy proceedings against debtors. In 2018, the NBS received 465 decisions on instituting bankruptcy proceedings, 343 decisions on closing, seven decisions on suspension and 37 decisions on suspension of the proceedings in order to sell the debtor’s assets. In addition, the NBS received 95 decisions on instituting a preliminary bankruptcy procedure with safeguard measures, and 30 decisions on the adoption of the pre-pack reorganisation plan. Pursuant to the Law on Companies, in 2018 the NBS submitted 4,667 initiatives to the Business Registers Agency to strike off from the register the entrepreneurs whose accounts were blocked for longer than two years. As of October 2015, the NBS has been keeping the Single Register of Accounts of Natural Persons – Consumers in accordance with the Law on Payment Services. Based on 30,213 requests received in 2018 from authorised persons and bodies, the NBS submitted account data for 31,570 natural persons. In 2018, a number of meetings were initiated and held with government bodies to resolve specific problems relating to NBS handling of their orders, and to analyse the possibilities and methods of electronic data exchange. In addition, in cooperation with the Legal Department, the Enforced Collection began to negotiate an agreement on data exchange with the Ministry of Justice. The NBS also established contacts with other competent registration bodies for the purposes of obtaining, linking and updating data on economic entities falling under their remit.
IV.4.6 Public debt administration
On behalf of and for the account of the Republic of Serbia, the NBS administers public debt under frozen FX savings, FX deposits placed with Dafiment banka a.d.
132 Other Functions and Activities of the National Bank of Serbia
Beograd and Banka privatne privrede Montenegro d.d. Podgorica – Jugoskandik, as well as under the economic development loan. In 2018 payments of matured bonds of А2002–2016 series issued based on frozen FX savings continued. The payments were made from budget funds transferred to special accounts with the NBS opened for that purpose. For these payments, the NBS made advance transfers of funds upon banks’ requests and monitored on a daily basis the reports on the conversion of savings into bonds and payments of bonds, i.e. the NBS made accounting records of public debt changes in the off-balance sheet records. From 26 August 2002 until 31 December 2018 the total amount of FX savings converted to bonds was EUR 3,717.8 mn (of which EUR 2.3 mn in 2018). The А2002–А2016 bonds were paid (upon or before maturity) in the nominal amount of EUR 3,645.7 mn. In 2018, EUR 4.0 mn and RSD 865.5 mn was secured from the budget for the payment of matured bonds in the amount of EUR 11.5 mn. The payment of bonds of the Republic of Serbia issued on account of the loan for economic development of Serbia (2004–2007 maturity) also continued. In 2018, the NBS provided expert, administrative and technical assistance to the Committee in charge of issuing certificates based on which entitlement to the payment of due liabilities is determined to the depositors of Dafiment banka a.d. Beograd undergoing liquidation and citizens who deposited their FX assets based on the Contract on Business and Technical Cooperation with Jugoskandik d.d. Beograd with Banka privatne privrede Crne Gore d.d. Podgorica, that is, based on the requests/complaints of depositors, data/calculations as well as available documents were supplied to the said Committee for consideration and the conclusions adopted by the Committee were implemented in the prescribed manner. Also, there was daily communication with the citizens of the Republic of Serbia, former SFRY republics and other countries on the possibility of exercising their rights in respect of frozen FX savings deposited with banks with headquarters in the Republic of Serbia and branches in the former SFRY republics.
IV.4.7 Communication with the public
The NBS informs the public about its operations in intensive cooperation with the media, by publishing information on the official website and its subdomains, as well as on social networks. By issuing press releases, answering journalist queries, making television and radio appearances, engaging in interviews, organising press conferences and posting on social networks, the central bank continued to inform the general public about its activities in a timely, responsible and consistent way. Total 338 press releases were published and 426 answers provided to journalist queries. As many as 93 statements and ten interviews were given for both the print and electronic media. Also, 29 television and radio appearances were made by the Governor, Vice-Governors and other members of the NBS staff. The NBS also published 1,075 tweets on its official Twitter account and 996 posts on its Facebook account.
133 National Bank of Serbia Annual Report on Activities and Results in 2018
The NBS presented to the professional community and the media four Inflation Reports and the Annual Financial Stability Report for 2017. Media coverage was provided for the start of negotiations with the IMF during their three visits to Serbia and the conference Mediation in the Area of Financial Services, organised by the NBS in cooperation with the Ministry of Justice. Media support was also provided to the cultural, humanitarian and other socially responsible activities implemented by the NBS. In order to educate members of press, briefings were organised about the implementation of the Law on Multilateral Interchange Fees, with the special emphasis on Article 9 relating to the novelties regarding the use of the DinaCard and on instant payments. In 2018, the NBS used its website, regular publications, statistical analyses and press releases to transparently inform the general public about the instruments and measures applied to preserve and strengthen financial stability, as well as about the instruments and measures applied to implement monetary and foreign exchange policies. The NBS also presented its activities in the field of supervision of financial institutions, payment services providers and electronic money institutions. Press- conferences presenting the Inflation Report were broadcast live on the NBS website. Around 900 press releases were published in Serbian and 550 in English. The NBS published the Annual Report on Activities and Results, Annual Financial Stability Report, Annual Monetary Policy Report for 2017 and Semi-Annual Monetary Policy Report for 2018, monthly issues of the Statistical Bulletin, quarterly reports on the banking sector, financial leasing supervision, supervision of the insurance sector and voluntary pension funds sector, and activities in the field of financial consumer protection. Also published quarterly were the Report on Dinarisation of the Financial System and the Inflation Report. Available to the public were also the following quarterly reports: Trends in Lending, Report on Detected Counterfeits and Report on the Results of the Bank Lending Survey, as well as the monthly Report on the Results of the Inflation Expectations Survey. Printed and electronic materials intended for the public are available in both Serbian and English. Launched in late 2017, the DinaCard website (NBS subdomain) was upgraded and expanded during 2018. Through its other subdomains (Tvoj novac and Centar za posetioce), the NBS informed the public about its activities in the field of financial education, exhibitions and workshops for younger and older students. For the visitors of exhibitions, the NBS upgraded an application on its website allowing them to schedule a visit to the Visitor Centre electronically. The NBS pays special attention to financial education of children and youth and implements it intensively through exhibitions, tournaments and cultural manifestations. Financial education programmes focus on developing awareness of the importance of money, its role, value and benefits of financial product management. In cooperation with vocational educational institutions, the NBS organised workshops and tournaments in educational games across Serbia. It also participated in “Global Money Week”, “Market of Ideas”, “Global Savings Week”
134 Other Functions and Activities of the National Bank of Serbia and organised the prize tournament “Moneture” for the students of nine faculties of economics in Serbia. The NBS opened its doors to the wider public in the manifestation “Open Door Day” and other cultural manifestations: the “International Day of the Francophonie”, “Days of Belgrade”, “Museum Night” and “European Heritage Days”. In 2018, the NBS organised fifteen exhibitions and cultural events in the exhibition hall of the Slavija building. The 134th anniversary of the National Bank of Serbia was marked with the opening of an exhibition titled ”Banknote Design Ideas – Selection from the Collection of the Institute for Manufacturing Banknotes and Coins – Topčider”.
IV.4.8 Financial consumer protection and education
In 2018, the NBS continued to actively assist financial services consumers in exercising their rights, by dealing with complaints against financial institutions, mediating in disputes and providing education and information.
Handling of complaints
In 2018, the NBS received 1,938 complaints in relation to the operation of financial institutions. Of this number, 60.7% pertained to insurance undertakings, 38.9% to banks, 0.2% to financial lessors and payments institutions each and 0.1% to VPF management companies and other. In 2018, a total of 1,177 complaints against insurance undertakings were received, up by 16% relative to the year before. The highest number of complaints against insurance undertakings related to motor third party liability insurance (36%) and accident insurance (26%). A total of 753 complaints against banks were received, up by 1.35% compared to the previous year. Of the total number of complaints against banks, the majority involved loans (44%), payment accounts (30%) and payment cards (20%).
Table IV.4.8.1 Number of complaints by type of financial services provider in 2018
Financial services Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Total In % provider
Banks 75 78 71 54 59 66 69 78 54 48 45 56 753 38.9
Insurance 95 85 108 92 96 96 104 88 97 93 103 120 1,177 60.7 undertakings
Lessors 0 0 0 0 2 0 0 0 1 0 0 0 3 0.2
VPF 1 0 0 0 0 0 0 0 0 0 0 0 1 0.1 mng companies
Payment institutions 0 0 0 0 1 0 0 0 1 1 0 0 3 0.2
Other 0 0 0 0 0 0 0 0 0 1 0 0 1 0.1
TOTAL 171 163 179 146 158 162 173 166 153 143 148 176 1,938 100
Source: NBS.
135 National Bank of Serbia Annual Report on Activities and Results in 2018
In addition, the NBS received 658 complaints, which were not first addressed to relevant financial institutions. The NBS accordingly forwarded such complaints to relevant financial institutions for further handling. The total number of such complaints is down by 1.35% relative to 2017, the majority concerning banks (83%). Also, in the observed period, 1,148 consumers approached the NBS and received answers about financial services and the protection of rights of financial services consumers. Most of the queries concerned bank operations (85%), primarily loans (52%) and current accounts (20%).
Measures to remove irregularities in the complaint procedures
Acting upon complaints of financial services consumers in 2018, the NBS issued decisions ordering the removal of detected irregularities and/or imposing fines on banks (26 decisions). It also issued decisions stating that certain banks engaged in unfair business practice and ordering the discontinuation of such practice (two decisions), as well as one decision establishing that a particular bank negotiated unfair contract terms and prohibiting their implementation, as well as future negotiation of such terms.
Mediation
Table IV.4.8.2 Number of mediation procedures in 2018
Financial services provider In progress Settlement Cancellation Abandonment Total In %
Banks 5 15 22 7 49 43.0
Insurance undertakings 6 20 33 5 64 56.1
Lessors 0 0 1 0 1 0.9
VPF mng companies 0 0 0 0 0 0
TOTAL 11 35 56 12 114 100 Source: NBS. In 2018, the NBS received 341 mediation proposals. In that period, 114 mediation procedures were held, which is by 24% more relative to 2017. One hundred and three mediations were concluded, of which 35 ended in settlement between the financial institution and the consumer. In the observed period, the highest number of mediations related to motor third party liability insurance (42%) in the case of insurance undertakings, and disputable relations concerning loans (39%) in the case of banks.
Informing financial services consumers
In 2018, 61 journalist queries were answered, by giving 23 telephone statements and 38 replies to queries by the print and electronic media.
136 Other Functions and Activities of the National Bank of Serbia
The NBS Information Centre received 15,081 telephone calls and e-mails by consumers in 2018. The majority of telephone calls related to banking services.
Financial education of citizens
In 2018, 67 educational panels were held in 43 towns across Serbia, 140 presentations or workshops, with the participation of 2,745 consumers – citizens, students and entrepreneurs, which is significantly more than the average number of visitors in the period since 2011, when the NBS started organising and holding educational panels across Serbia. In the observed period, 1,425 consumers addressed the regional offices to enquire about financial education. The majority of consumers’ queries related to banking services (44%). The information on financial services on the official NBS website and the website www.tvojnovac.nbs.rs was updated on a regular basis.
IV.4.9 Social responsibility
Cultivating philanthropy, the NBS organised numerous humanitarian activities in the headquarters and branch offices during 2018 and provided assistance to those in need. The employees engaged actively in humanitarian and voluntary campaigns aimed at collecting funds, food and clothes for socially vulnerable groups, children with developmental disabilities, children deprived of parental care and the elderly. Owing to cooperation with humanitarian organisations, centres, associations and schools for children with developmental disabilities, humanitarian and voluntary actions organised by the NBS are becoming increasingly successful. The total cash value of the humanitarian activities of NBS employees in 2018 amounted to RSD 344,150. In humanitarian actions of food gathering “Humaneness against Hunger”, organised by the NBS in Belgrade, Kragujevac and Užice, 1,000 kg of food was collected and distributed to the most vulnerable categories of the population. The Užice Branch was host to a humanitarian campaign, in which the employees collected hygiene products for 35 most vulnerable families in Kremna. Before the New Year’s and Easter holidays, the Belgrade head office and the Novi Sad Branch organised humanitarian exhibitions of artwork made by children, young people and the elderly with developmental disabilities, in order to collect funds for programmes supporting their development. As part of the traditional humanitarian campaign “A Present for an Unknown Friend”, organised in cooperation with the humanitarian organisation ”Mali veliki ljudi”, NBS employees donated 160 New Year’s Day parcels to children with developmental disabilities from the Residential Centre “Kolevka” in Subotica. In cooperation with the Belgrade Centre for Residential and Day Care of Children and Youth with Developmental Disabilities, the NBS organised a creative
137 National Bank of Serbia Annual Report on Activities and Results in 2018
workshop for employees’ children, where the youngest were able to learn the basics of sculpting, make clay objects and paint them. In a humanitarian action called “To Children, with Love”, realised in the Niš Branch, funds were collected to procure the most necessary items for children deprived of parental care residing in the “Duško Radović” Home in Niš. NBS volunteers successfully carried out the project of renovating children resort “Šuplja stena” on mount Avala. In June 2018, for the first time, the NBS volunteers took part in the traditional manifestation “Day of the Danube” organised by the Republic Water Directorate, when they cleaned the coastal area at Zemunski kej. In September, the NBS employees at the headquarters and Novi Sad Branch took part in renovating the premises of the Red Cross in Irig, creating hygienic conditions for taking over the meals of the National Cuisine, which is used by socially vulnerable groups. In 2018, NBS employees joined the ecological and humanitarian action “Bottle Cap for Handicap”, gathering 1,100 kg of plastic bottle caps, and thus helping the purchase of orthopaedic aids for people with disabilities across Serbia. In the campaign of collecting bed linen, towels, clothes and cups for the socially vulnerable citizens and beneficiaries of the Residential Institution for Persons with Mental Health Problems “Čurug”, employees at the NBS head office and Novi Sad Branch donated 70 clothing packages and around fifty cups. The NBS and the Institute for Manufacturing Banknotes and Coins – Topčider, as its integral part, recognise the importance of cultural development and preservation of cultural heritage for the welfare of the entire community. In this context, the NBS’s participation in activities aimed at protecting national and cultural heritage continued in 2018 through donation of plaquettes to the “Dositej Obradović” Foundation. The NBS, and especially the Institute for Manufacturing Banknotes and Coins – Topčider, stayed committed to preserving the environment in which they operate, with a special emphasis on the treatment and disposal of waste in a safe and responsible manner. Numerous activities in the field of environmental management result in the reduction of water, air and soil pollution. Waste is classified and characterised by origin and composition, sorted and stored in a manner that does not affect human health and the environment. The waste that must undergo further treatment and processing is handed over to the authorised operators for further disposal in accordance with law. During 2018, about 100 tonnes of hazardous waste and about 200 tonnes of non-hazardous waste were handed over for further disposal. The Institute for Manufacturing Banknotes and Coins pays particular attention to wastewater treatment. Technological wastewater from the process of galvanic production of printing forms and gold foil, as well as technological wastewater from the recycling of the wipe solution, are treated in a specialised wastewater treatment plant. Over 150 tonnes of wastewater with high content of heavy metals and organic matter is processed annually, with a treatment efficiency of more than 99%. Dangerous chemicals are used, stored and marked in accordance with regulations,
138 Other Functions and Activities of the National Bank of Serbia and the Institute strives to use ecological materials. The stored flammable substances are being controlled periodically, and the wastewater content and soil and groundwater quality are monitored. For this purpose, the NBS is submitting the following reports to the Ministry of Environment Protection: Report on the quantities of hazardous and non-hazardous waste handed over to operators for final disposal; Annual report on the quantity and type of imported products that become special waste streams after use; Annual report on the quantity of imported hazardous chemicals for the purposes of the Ecoregister. Atmospheric emissions from fuel combustion for the production of heat energy are measured, monitored and controlled regularly. The external quality control of wastewater, air and soil is carried out by accredited laboratories. Everyday activities at the Institute are focused on rationalising costs and informing, educating and raising awareness of employees with a view to acting, changing habits and engaging in NBS’s efforts to improve the impact in the environment. In accordance with the plan for 2018, certification was carried out according to the requirements of the latest ISO 14001: 2015 standard by the internationally recognised certification company SGS. Alongside taking care of the environment, the NBS pays great attention to occupational safety and health. Based on the analysis of the processes that regulate occupational safety and health, it was concluded that occupational safety and monitoring and protection of workers’ health was at a high level in 2018.
IV.5. Management
IV.5.1 Human resources management
Organisational changes and number of employees in 2018
The Rulebook on Internal Organisation of the NBS was amended in 2018: main organisational units changed their names as follows: Monetary Operations Department to Monetary and FX Operations Department (with a change in the scope of activities by integrating a part of the operations performed by the FX Operations Department); FX Operations Department to Department for FX Matters and Foreign Credit Relations (with a change in the scope of activities by integrating a part of operations performed by the International Relations Department); Directorate for Economic Research and Statistics to Economic Research and Statistics Department (with a change in organisational structure); Bank Resolution Department to Bank Resolution Centre; Enforced Collection to Enforced Collection Department;
139 National Bank of Serbia Annual Report on Activities and Results in 2018
Table IV.5.1.1 Comparative overview of the number of staff
31 December 2017 31 December 2018 Change Organisational unit Indefinite Definite Indefinite Definite (in %) Total Total term term term term 1 2 3 4 (2+3) 5 6 7 (5+6) 8
Main organisational 1,163 95 1,258 1,390 84 1,474 17.17 units
Administration for 196 27 223 - - - - Supervision of Financial Institutions
Belgrade Branch 94 2 96 89 3 92 -4.17
Novi Sad Branch 106 1 107 101 5 106 -0.93
Niš Branch 36 3 39 38 - 38 -2.56
Kragujevac Branch 40 5 45 40 9 49 8.89
Užice Branch 30 15 45 42 3 45 -
Institute for 533 9 542 542 2 544 0.37 Manufacturing Banknotes and Coins
Total in NBS: 2,198 157 2,355 2,242 106 2,348 -0.30 Source: NBS. the Administration for Supervision of Financial Institutions, established in accordance with the Law on the National Bank of Serbia86, ceased to operate on the day of coming into force of the Law Amending the Law on the National Bank of Serbia87, with the other main organisational units continuing to operate in the NBS; established new main organisational units, as follows: Centre for Cooperation with Domestic and International Institutions and Financial Organisations, Reporting and Analysis Centre and AML Supervision Centre; the International Relations Department ceased to operate, its activities being transferred to the Department for FX Matters and Foreign Credit Relations and the Centre for Cooperation with Domestic and International Institutions and Financial Organisations; there are two new smaller organisational units within the Payment System Department: Division for Administration and Technological Development of Payment Systems and Unit for Supervision of Payment Services and Electronic Money Issuance; in the Legal Department, within the Representation Division, a new smaller organisational unit was set up – Group for Legal Representation Abroad and Succession Issues; in the Bank Supervision Department, within the Division for Off-Site Supervision, a new unit was established – Group for Banking Sector Analysis and Reporting.
86 RS Official Gazette, Nos 72/2003, 55/2004, 85/2005 – other law, 44/2010 and 76/2012. 87 RS Official Gazette, No 44/2018
140 Other Functions and Activities of the National Bank of Serbia
Staff qualification and age structure
In terms of staff qualification structure, as at 31 December 2018, the employees with secondary education (44.25%) and employees with an MSc/MA degree (37.91%) accounted for the dominant share of NBS employees, while employees with a PhD degree (0.94%) accounted for the smallest share.
Table IV.5.1.2 Staff qualification structure
31 December 2018
Higher education Secondary Primary Total Organisational unit education education PhD MSc/MA BSc/BA
Main organisational units 19 685 197 428 61 1,390
Belgrade Branch 1 11 9 67 1 89
Novi Sad Branch - 17 10 70 4 101
Niš Branch - 12 5 20 1 38
Kragujevac Branch - 11 3 25 1 40
Užice Branch - 9 6 24 3 42
Institute for Manufacturing 1 105 57 358 21 542 Banknotes and Coins
Total in NBS: 21 850 287 992 92 2,242
Source: NBS. As regards the gender structure, women (56.15%) continued to outnumber their male colleagues (43.85%).
Table IV.5.1.3 Staff gender structure
31 December 2018
Organisational unit Men Women
Main organisational units 546 39.28% 844 60.72%
Belgrade Branch 26 29.21% 63 70.79%
Novi Sad Branch 37 36.63% 64 63.37%
Niš Branch 17 44.74% 21 55.26%
Kragujevac Branch 18 45.00% 22 55.00%
Užice Branch 15 35.71% 27 64.29%
Institute for Manufacturing Banknotes and Coins 324 59.78% 218 40.22%
Total in NBS: 983 43.85% 1,259 56.15% Source: NBS. In terms of age structure, as in the several previous years, the two most prevalent age groups were 50 to 60 years (37.73%) and 40 to 50 (30.78%). The average age was 48.6 years.
141 National Bank of Serbia Annual Report on Activities and Results in 2018
Table IV.5.1.4 Staff age structure
31 December 2018 Average Organisational unit age Up to 20 20 to 30 30 to 40 40 to 50 50 to 60 Over 60 Total
Main organisational units - 89 262 456 459 124 1,390 47.45
Belgrade Branch - 2 5 17 47 18 89 53.7
Novi Sad Branch - 5 10 24 50 12 101 50.9
Niš Branch - - 5 11 18 4 38 51.5
Kragujevac Branch - - 4 9 17 10 40 54.0
Užice Branch - 7 4 9 15 7 42 48.0
Institute for - 13 76 164 240 49 542 49.9 Manufacturing Banknotes and Coins
Total in NBS: - 116 366 690 846 224 2,242 48.6
In % - 5.17 16.32 30.78 37.73 9.99 100.00 Source: NBS.
Education, professional development and training of NBS employees
Recognising the importance of human capital, the NBS continued to invest in the professional development of its employees in 2018. In order to improve professional capacities and skills of its employees and the efficiency of business operations, and to achieve organisational objectives, the NBS allowed its employees to attend academic and vocational studies, to participate in courses for acquiring various professional titles and certificates and to take part in seminars, workshops and conferences in the country and abroad. As part of the expert and technical cooperation with other central banks, and in partnership with the Central Bank of Armenia, the NBS organised a three-day seminar for Internal Audit staff in order to ensure continuous professional education and maintenance of the CIA and CISA titles. An online training on the Moodle platform and internal lectures on various topics regarding information security were carried out for all employees and persons hired by the NBS. During 2018, three trainees completed an internship programme and successfully passed the trainee exam.
142 Other Functions and Activities of the National Bank of Serbia
IV.5.1.5 Staff education, professional development and training
2018
Type of education, professional development and training Number of employees
Education
BSc/BA studies 1
MSc/MA studies 6
Professional development
Professional training, licenses, certificates 34
Internship training 3
Training
Seminars, workshops, counselling and conferences in the country 120
Seminars, workshops, counselling, study visits and conferences abroad 150
Online professional training 17
NBS professional training 16
Summer internship
Internship for domestic and foreign students July–August 40 Source: NBS.
From July to August, the NBS organised summer internship for 40 students attending final years of university studies in Serbia and abroad.
IV.5.2 Internal audit and risk management
The regulatory framework for internal audit at the NBS is established by the Law on the National Bank of Serbia, Statute of the National Bank of Serbia and internal general acts which regulate in more detail internal audit and the performance of internal audit work. Internal audit is carried out in accordance with the Annual Plan adopted by the Council of the Governor. Reports on conducted audits are submitted to managers of the audited organisational units, to the Governor and the NBS top management in charge of the audited operations. The Council of the Governor is also informed about the internal audit activities on a quarterly basis through the Audit Committee. In 2018, 13 audits were conducted. The audits covered business processes in the fields of: keeping personnel records, drafting the procurement plan and financial plan, cash operations, archival activities, FX reserve management, dealing with the Treasury Administration, compilation of the balance of payments, supervision of payment services providers, protection of confidential data. In the processes that were subject to internal audit in 2018, no high risks were detected – medium-risk findings accounted for 43% and low-risk findings for 57%.
143 National Bank of Serbia Annual Report on Activities and Results in 2018
A total of 32 recommendations on implementing activities necessary for eliminating deficiencies and improving business processes were agreed upon with the management of the main organisational units in charge of the implementation of recommendations. In 2018, the Internal Audit conducted follow-up audits to verify the status of implementation of 86 recommendations from previous years and determined that 78 of them were fully implemented. The monitoring of implementation of the project of designing the production information system at the Institute for Manufacturing Banknotes and Coins – Topčider ended, and the progress report was prepared on the activities in the last stage of the project. Compliance of data on the stock of net NBS FX reserves was analysed as a part of the regular quarterly activity. The activities in 2018 focused on improving the regulations and the work methodology of Internal Audit. The results are as follows: the proposal for the new Rulebook on Internal Audit of the NBS, the new NBS Internal Audit Manual and amendments to the working procedures.
IV.5.3 Information and communications technology
With regard to application development, in 2018 the NBS implemented new and upgraded existing application solutions to support its operation and apply the adopted regulations. It also continued to improve the infrastructure systems security, namely the entire NBS computer network, by implementing the projects aimed at establishing technical basics (Security Operation Centre and Network Operation Centre) and by reorganising and enhancing internet traffic security. Also, the software was updated and certain systems became available in upgraded versions. During 2018, business sectors submitted 446 new requests for application modification, of which 365 requests were implemented. In addition, 100 requests submitted before 2018 were implemented, bringing the total number of requests to modify the applications in 2018 to 465. Through the single system for registering user requests made by phone or e-mail (Service Desk), the NBS responded to 2,911 simpler requests, 5,001 more complex requests and 1,861 incidents reported by internal and external users through technical support regarding installation, use and maintenance of software for exchange transactions. Also, fees were charged in 118 cases for installing, use and maintenance of desktop and network versions of software for exchange transactions in the first year of operations (new authorised exchange dealers), as well as 2,509 individual fees for the use and maintenance of the desktop and network version of the software for exchange transactions (existing authorised exchange dealer).
144
V FINANCIAL STATEMENTS
V.1 Financial position and result of operations of the National Bank of Serbia
The NBS is a non-profit institution mandated to achieve legally defined objectives of ensuring price and financial stability in a sustainable manner, at the lowest possible cost to all economic agents. The success of the NBS, like the success of any other central bank in the world, is therefore not measured by the financial result achieved in a given year, but depends on whether it has delivered on its legally defined objectives and ensured stable conditions for doing business and investing. The statement of the financial position of the NBS as at 31 December 2018 (Balance Sheet) discloses assets – property of the Republic of Serbia used by the NBS for the purpose of meeting its objectives and exercising its functions, and liabilities – total liabilities and capital of the NBS, in the amount of RSD 1,480.9 bn. On the assets side, 90.2% of total assets were FX reserves managed by the NBS. Except for a small amount of dinar assets, FX reserves were disclosed within the following balance sheet items, depending on the form in which they are held: cash and current account balances held with banks (RSD 321.8 bn), deposits with banks (RSD 145.2 bn), gold and other precious metals (RSD 87.8 bn), securities (RSD 773.6 bn) and SDR holdings (RSD 8.1 bn). In addition to FX reserves, balance sheet assets also included the IMF membership quota of the Republic of Serbia in the amount of RSD 94.2 bn. The value of property, plant, equipment, investment property and intangible investment used by the NBS in its operations came at RSD 19.4 bn.
145 National Bank of Serbia Annual Report on Activities and Results in 2018
Table V.1.1 Balance sheet (RSD thousand)
31 December 2018 31 December 2017
ASSETS
Cash and current accounts held with banks 336,376,900 210,176,735
Gold and other precious metals 87,752,490 80,767,776
Deposits 145,221,006 163,435,360
Derivative receivables 43,481 37,172
Securities 783,908,048 740,424,758
Loans and investment 1,011,133 1,145,859
IMF membership quota and SDR holdings 102,229,960 100,405,431
Intangible investment 155,940 112,425
Property, plant and equipment 18,848,674 20,233,103
Investment property 407,692 467,609
Other assets 4,897,678 4,945,877
TOTAL ASSETS 1,480,853,002 1,322,152,105
LIABILITIES
Liabilities
Derivative liabilities 39,851 35,365
Deposits and other liabilities to banks and other financial 583,320,898 484,339,613 organisations
Deposits and other liabilities to the government and other depositors 284,237,166 268,460,430
Liabilities to the IMF 102,320,108 100,437,147
Provisions 1,294,195 1,412,699
Current tax liabilities 426,343 454,479
Cash in circulation 182,611,179 163,944,539
Other liabilities 2,110,458 4,755,384
Total liabilities 1,156,360,198 1,023,839,656
Capital
State-owned capital 171,128,873 171,128,873
Reserves 122,782,727 210,329,212
Profit 30,581,204 -
Loss - (83,145,636)
Total capital 324,492,804 298,312,449
TOTAL LIABILITIES 1,480,853,002 1,322,152,105
Source: NBS.
146 Financial Statements
In 2018, total NBS assets increased by 12% (RSD 158.7 bn) relative to 2017. Within liabilities, disclosed liabilities of the NBS came at RSD 1,156.4 bn and its capital at RSD 324.5 bn. The NBS liabilities as at 31 December 2018 related primarily to: liabilities to banks and other financial organisations, arising mainly from the conduct of monetary policy (determining bank required reserves and implementing open market operations) in the amount of RSD 583.3 bn or 20.4% more than a year earlier; liabilities to the government and other depositors in respect of transaction and other deposits in dinars and foreign currency in the amount of RSD 284.2 bn or 5.9% more than a year earlier; liabilities to the IMF in the amount of RSD 102.3 bn or 1.9% more than in 2017; liabilities to transactors for currency in circulation in the amount of RSD 182.6 bn, or 11.4% more than a year earlier. The NBS Balance Sheet for 2018 discloses profit of RSD 30.6 bn. The most significant income and expenses which the NBS generated in 2018 by carrying out its legal mandate were interest income and expenses. Interest income came at RSD 12.1 bn and interest expenses at RSD 4.9 bn. In 2018, net interest income equalled RSD 7.2 bn, rising by RSD 3.3 bn relative to 2017. The NBS also recorded fee and commission income in the total amount of RSD 5.3 bn, mostly from payment of fees and commissions laid down in the Decision on Uniform Fees Charged for Services Provided by the NBS. Based on the assessment of expected credit losses, the NBS generated income from reversal of allowances for impairment to financial assets amounting to RSD 2.3 bn, and from the calculation of gains/losses from exchange rate and effects of the agreed currency clause – in the amount of RSD 17.4 bn. Of total other operating income of the NBS in the amount of RSD 6.6 bn, income from business operations of the Institute for Manufacturing Banknotes and Coins – Topčider accounted for RSD 5.9 bn. In 2018, the NBS recorded net loss from derecognition of financial assets measured at fair value through other comprehensive income in the amount of RSD 0.8 bn. Other operating expenses recorded by the NBS in its operations include: salaries, compensations and other employee-related expenses (RSD 4.2 bn), depreciation expenses (RSD 1.7 bn) and other operating expenses (RSD 5.3 bn), largely comprising production expenses of the Institute for Manufacturing Banknotes and Coins – Topčider.
147 National Bank of Serbia Annual Report on Activities and Results in 2018
Table V.1.2 Income Statement (RSD thousand, 1 January – 31 December)
2018 2017
Interest income 12,047,314 8,701,151
Interest expenses (4853928) (4,760,001)
Net interest income 7,193,386 3,941,150
Fee and commission income 5,346,190 4,508,232
Fee and commission expenses (561,999) (1,016,269)
Net fee and commission income 4,784,191 3,491,963
Net gains/(losses) from financial instruments measured at fair value 10,049 (6,738,050) through profit and loss
Net loss from derecognition of financial assets measured at fair value (870,199) - through other comprehensive income
Net exchange rate gains/(losses) and gains/(losses) from currency 17,398,639 (84,769,775) clause effects
Net gains from reversal of impairment/(losses) from impairment of 2,290,574 (13,035) financial assets
Other operating income 6,579,407 7,621,475
Salaries, compensations and other expenses related to employees (4,248,873) (4,383,083)
Depreciation expenses (1,728,201) (1,672,490)
Other income 4,973,278 4,964,982
Other expenses (5,316,602) (5,134,294)
PROFIT/(LOSS) BEFORE TAX 31,065,649 (82,691,157)
Profit tax (426,343) (454,479)
PROFIT/(LOSS) AFTER TAX 30,639,306 (83,145,636) Source: NBS.
V.2 Accounting principles and standards
The accounting principles and standards applied by the NBS in preparing, presenting and disclosing financial statements are defined by the accounting policies of the NBS, in line with the International Accounting Standards and International Financial Reporting Standards. The goal of accounting policies of the NBS is to ensure that the property status, success of operations and change in the financial position of the NBS are disclosed fairly and objectively in its financial statements. Accounting policies refer to the estimation of assets, liabilities and capital, calculation of operating results and disclosure of these items in financial statements. The NBS applied the IFRS 9 – Financial Instruments as at 1 January 2018. In line with the approach allowed under IFRS 9 – Financial Instruments, the NBS did
148 Financial Statements not recalculate the comparable data for the previous period (31 December 2017) related to classification and valuation changes (including the change in calculation of the impairment amount). All differences in carrying amounts of financial assets and liabilities arising from the application of the IFRS 9 are recognised in the undistributed result as at 1 January 2018. Accordingly, information concerning the year 2017 does not reflect the IFRS 9 requirements and is not comparable with the information concerning the year 2018 presented in accordance with the IFRS 9. Below is the summary of accounting policies applied at the time of recognising, valuing and disclosing the most important items of the balance sheet and income statement for 2018.
Interest income and expenses
Interest income and expenses, including default interest and other operating income and expenses arising from interest-bearing assets and/or interest-bearing liabilities are calculated according to the accrual principle. In calculating interest income or expenses under a financial asset or financial liability, the effective interest rate is applied to the gross carrying amount of the asset or the amortised cost of the liability. Interest income from credit-impaired financial asset (impairment stage 3) is calculated by applying the effective interest rate on the amortised cost of the financial asset, i.e. the carrying amount adjusted for the impairment allowance.
Fee and commission income and expenses
Fee and commission income and expenses are recognised in the period when realised.
Conversion of FX-denominated assets and liabilities
Transactions performed in foreign currencies whose exchange rates are officially published by the NBS are converted into dinars using the official middle exchange rates effective as at the transaction date, whereas for currencies whose exchange rates are not officially published by the NBS, conversion is performed using corresponding cross-exchange rates of the NBS effective as at the transaction date. Monetary assets and liabilities denominated in foreign currency are converted into dinars using the official middle exchange rate valid on the balance sheet date (if the currency rate is published by the NBS in the official exchange rate list) or the corresponding exchange rate of the NBS (for currency rates not published in the official exchange rate list). Foreign exchange gains or losses arising from the conversion of transactions in a foreign currency and the recalculation of monetary balance sheet items denominated in foreign currency are credited or charged to the income statement as gains/losses from exchange rate and currency clause effects.
149 National Bank of Serbia Annual Report on Activities and Results in 2018
Financial instruments
Classification of financial assets and liabilities
The NBS classifies its financial assets into the following categories: financial assets at amortised cost, financial assets at fair value through other comprehensive income, financial assets at fair value through profit and loss. The classification depends on a business model within which the assets are held and the characteristics of cash flows arising from the financial assets. The management determines the classification of assets and liabilities at initial recognition and potential subsequent reclassifications are carried out only if the business model within which they are held is changed, in which case the reclassification is mandatory. Financial liabilities are classified as financial liabilities at amortised cost and financial liabilities at fair value through profit and loss.
Measurement of financial assets and liabilities
At initial recognition, financial assets are recognised at fair value, in accordance with the IFRS 9. Fair value of financial assets is the price that would be received to sell them in an orderly transaction. Depending on the classification category, after initial recognition, financial assets are measured: at amortised cost, at fair value through other comprehensive income, at fair value through profit or loss. At initial recognition, financial liabilities are carried at fair value, in accordance with the IFRS 9, and at subsequent measurement they are measured at amortised cost, except for financial liabilities held for trading and financial liabilities carried at fair value through profit and loss based on the decision issued by the governor or the person authorised by him.
Modification of financial assets
Modification of a financial asset is the change in the established (contracted, prescribed or otherwise determined in accordance with regulations) cash flows on the financial asset, through renegotiation or otherwise. If the modified financial asset results in contractual cash flows that are not significantly different from the benchmark cash flow, recognition of that financial asset is continued at a modified value, and the difference between the carrying amount and the modified value is recognised in the income statement. If the modified financial asset results in contractual cash flows that are significantly different from the benchmark cash flow, the modification results in the derecognition of that financial asset and the recognition of a new financial asset.
150 Financial Statements
Impairment of financial assets
Loss allowance is recognised (recognition of impairment, that is, loss allowances) for expected credit losses on a financial asset measured at amortised cost, on a financial asset measured at fair value through other comprehensive income and on other receivables in accordance with IFRS 9 requirements. Expected credit losses on a financial asset are estimated for an individual financial asset or a group of financial assets with the same characteristics, taking into account all the relevant and available quantitative and qualitative information, pertaining to the past, current and future events. Financial assets are classified under impairment stage 1 if it is estimated that they have low credit risk or if the credit risk did not increase significantly since the date of initial recognition of those financial assets. For these financial assets 12- month expected credit losses are estimated. Financial assets are classified under impairment stage 2 if it is estimated that the credit risk increased significantly since the initial recognition and lifetime expected credit losses on these financial assets are determined. Financial assets are classified under impairment stage 3 if it is estimated that the credit risk increased significantly so that the value of these financial assets may be considered credit impaired, and lifetime expected credit losses on these financial assets are determined. Financial assets that are credit-impaired at acquisition are obligatorily classified under impairment stage 3 and remain there for their lifetime.
Derecognition
A financial asset or a part thereof is derecognised when the right to all or some cash flows from the financial asset expires, or when a financial asset or a part thereof is transferred. A financial liability or a part thereof should be derecognised when it is fully or partially discharged or expires. The difference between the carrying amount of the derecognised financial asset and liability or a part thereof measured at the date of derecognition and the consideration received (if any) is recognised in the income statement.
V.3 Risk exposure and management
The key financial risks to which the NBS is exposed in its daily operations are the following: credit risk, liquidity risk, interest rate risk, and currency risk.
151 National Bank of Serbia Annual Report on Activities and Results in 2018
Given that the primary objective of the NBS is to preserve price and financial stability, its financial risk management framework differs from that of commercial financial institutions. The majority of financial risks in the NBS’s operations arise from FX reserve management and financial market operations. FX reserve management is based on the Strategic Guidelines for the Management of FX Reserves of the National Bank of Serbia, determined by the Executive Board. The Guidelines define the criteria for investment of FX reserves, purposes for which the reserves are used, global investment framework and other. On the basis of these Guidelines, the NBS’s Investment Committee prepares the Tactical Guidelines for FX Reserve Management and submits them to the Executive Board for adoption.
Credit risk
Credit risk is the risk of default on obligations, i.e. the possibility of funds not being timely and/or fully repaid or not collected according to the planned/agreed timeframe. The NBS’s exposure to credit risk is primarily in the domain of FX reserve management. When investing FX reserves, the NBS is guided by the principles of liquidity and safety. The analysis and measurement of credit risk inherent in the NBS portfolio is performed in accordance with generally accepted methods, including minimum credit rating requirements.
Table V.3.1 Concentration of credit risk of financial assets by region (RSD thousand as at 31 December 2018)
USA and Serbia Europe Other Total Canada
Cash and current accounts 14,531,310 144,012,809 106,900 52,759 158,703,778 held with banks
Deposits 18,029 134,370,194 10,483,675 - 144,871,898
Securities 4,287,363 495,763,369 195,320,585 78,217,274 773,588,591
Loans and investment 1,011,133 - - - 1,011,133
IMF membership quota and - - 8,074,435 - 8,074,435 SDR holdings
Other assets 477,425 347 5270 - 483042
Total 31 Dec. 2018 20,325,260 774,146,719 213,990,865 78,270,033 1,086,732,877
Total 31 Dec. 2017 13,215,023 697,080,033 245,079,810 29,740,767 985,115,633
Source: NBS. According to Standard & Poor’s, Moody’s and Fitch rating agencies, the securities in which investment is made must have a composite credit rating of at least A- for government bonds, A+ for public sector bonds and AA for bonds secured by collateral. Banks maintaining non-collateralised deposits of the NBS must have a minimum composite credit rating of AA-. A credit limit for each bank is determined based on the bank’s credit rating, prior experience in operations with that bank and an analysis of its business performance. A credit limit for each bank is set in the List
152 Financial Statements
of Authorised Issuers of Securities and Banks in which it is permissible to place FX reserve funds, which is approved by the Executive Board. There are no limitations to investments with central banks and international financial institutions. An exception to the above are funds held in regular current accounts of the NBS with banks not having the required credit rating and used for the performance of foreign payment transactions.
Liquidity risk
Liquidity risk refers to the (in)ability to ensure regular payment of obligations and regular collection of receivables within agreed timelines.
Table V.3.2 Exposure to liquidity risk (RSD thousand as at 31 December 2018) From Without Up to 1 From 1 to 3 From Over 3 months specified Total month months 1 to 5 years 5 years to 1 year maturity Cash and current accounts held with 336,376,900 - - - - - 336,376,900 banks
Deposits 85,319,825 24,598,425 34,671,175 - 18,029 264,444 144,871,898
Derivative receivables - - - - - 43,481 43,481
Securities 5,361,378 85,343,608 266,345,804 416,537,800 - 10,319,458 783,908,048
Loans and investment 6,527 - 4 1,548 472,589 530,465 1,011,133
IMF membership quota and SDR holdings 8,074,435 - - - - 94,155,525 102,229,960
Other assets 416,316 - - 425 - 66,301 483,042 435,555,381 109,942,033 301,016,983 416,539,773 490,618 105,379,674 1,368,924,462 Derivative liabilities - - - - - 39,851 39,851 Deposits and other liabilities to banks and 363,216,106 - - 2,439,937 - 217,467,350 583,123,393 other financial organisations Deposits and other liabilities to the 204,122,182 - 1,576,687 - - 78,530,938 284,229,807 government and other depositors
Liabilities to the IMF - - - - - 102,305,491 102,305,491 Cash in circulation - - - - - 182,611,179 182,611,179 Other liabilities 1,570,998 - - - - 273,890 1,844,888 568,909,286 - 1,576,687 2,439,937 - 581,228,699 1,154,154,609
Maturity mismatch as at 31 Dec. 2018 -133,353,905 109,942,033 299,440,296 414,099,836 490,618 -475,849,025 214,769,853 Cumulative mismatch as at 31 Dec. 2018 -133,353,905 -23,411,872 276,028,424 690,128,260 690,618,878 214,769,853 - Maturity mismatch as at 31 Dec. 2017 -183,053,970 88,972,910 237,285,539 454,289,173 650,342 -403,416,499 194,727,495 Cumulative mismatch as at 31 Dec. 2017 -183,053,970 -94,081,060 143,204,479 597,493,652 598,143,994 194,727,495 - Source: NBS.
153 National Bank of Serbia Annual Report on Activities and Results in 2018
As part of its strategy of liquidity risk management, the NBS holds a portfolio of liquid assets, including funds held in accounts with foreign banks and bonds of the most developed countries, international financial institutions, federal units of the most developed countries and financial institutions supported by these countries, as well as prime covered bonds, in line with the guidelines for managing FX reserves.
Interest rate risk
The NBS sets the key policy rate and interest rates at which, in the conduct of monetary policy, it charges interest on loans and other investment and pays interest on bank assets held with the NBS in order to meet its legally defined objectives – price and financial stability, and to support, without prejudice to its legally defined
Table V.3.3 Exposure to interest rate risk (RSD thousand as at 31 December 2018)
Non-interest- Interest-bearing bearing Total items items
Financial assets
Cash and current accounts held with banks 144,002,436 192,374,464 336,376,900
Deposits 144,871,887 11 144871898
Derivative receivables - 43,481 43,481
Securities 783,882,289 25,759 783,908,048
Loans and investment 474,141 536,992 1,011,133
IMF membership quota and SDR holdings 8,074,434 94,155,526 102,229,960
Other assets - 483,042 483,042
1,081,305,187 287,619,275 1,368,924,462
Financial liabilities
Derivative liabilities - 39,851 39,851
Deposits and other liabilities to banks and other 243,372,395 339,750,998 583,123,393 financial organisations
Deposits and other liabilities to the government and 213,846,546 70,383,261 284,229,807 other depositors
Liabilities to the IMF 7,972,323 94,333,168 102,305,491
Cash in circulation - 182,611,179 182,611,179
Other liabilities - 1,844,888 1,844,888
465,191,264 688,963,345 1,154,154,609
Net exposure as at:
31 December 2018 616,113,923 -401,344,070 214,769,853
31 December 2017 527,513,493 -332,785,998 194,727,495
Source: NBS.
154 Financial Statements
objectives, the economic policy of the Government of the Republic of Serbia. In addition, the Government and government institutions hold their dinar and FX deposits with the NBS. However, interest-bearing assets, mostly kept abroad, are exposed to substantial risk of changes in market interest rates. As all this can induce a change in the financial position, the NBS’s rules for investment, primarily of FX reserves, aim to limit potential losses arising from market risks.
Currency risk
Table V.3.4 Currency risk exposure of financial assets and liabilities (RSD thousand as at 31 December 2018) Total Other EUR USD SDR foreign RSD Total currencies currencies Financial assets
Cash and current accounts held with 308,593,293 5,174,862 - 8,077,363 321,845,518 14,531,382 336,376,900 banks
Deposits 63,234,111 76,256,404 - 5,363,354 144,853,869 18,030 144,871,899
Derivative receivables - - - - - 43,481 43,481
Securities 418,900,420 317,681,890 10,318,847 37,006,891 783,908,048 - 783,908,048
Loans and investment - - - - - 1,011,133 1,011,133
IMF membership quota - - 102,229,960 - 102,229,960 - 102,229,960 and SDR holdings
Other assets 25,597 3,188 - 824 29,609 453,433 483,042
790,753,421 399,116,344 112,548,807 50,448,432 1,352,867,004 16,057,459 1,368,924,463
Financial liabilities
Derivative liabilities - - - - - 39,851 39,851
Deposits and other liabilities to banks and other financial 279,579,254 3,350,554 - 277 282,930,085 300,193,308 583,123,393 organisations
Deposits and other liabilities to the government and other 98,032,509 3,480,605 1,207 651,725 102,166,046 182,063,761 284,229,807 depositors
Liabilities to the IMF - - 102,305,491 - 102,305,491 - 102,305,491
Cash in circulation - - - - - 182,611,179 182,611,179
Other liabilities 748,976 160,066 - 179,047 1,088,089 756,799 1,844,888
378,360,739 6,991,225 102,306,698 831,049 488,489,711 665,664,898 1,154,154,609
Net exposure as at:
31 December 2018 412,392,682 392,125,119 10,242,109 49,617,383 864,377,293 -649,607,439 214,769,854
31 December 2017 370,107,400 372,462,975 9,880,001 45,274,195 797,724,571 -602,997,076 194,727,495
Source: NBS.
155 National Bank of Serbia Annual Report on Activities and Results in 2018
The NBS is exposed to currency risk because of changes in exchange rates. Most of the assets and liabilities in the NBS balance sheet are denominated in a foreign currency, which enables the NBS to respond, as needed, to requirements regarding the maintenance of external liquidity of the country and to moderate short-term volatility of the dinar exchange rate. To minimise currency risks over the medium run, the NBS makes efforts to match the currency structure of its assets with expected foreign currency- denominated liabilities. Over the short run, this may result in exchange rate gains or losses, which are recorded in the income statement.
156 Financial Statements
V.4 Independent auditor’s report
157 National Bank of Serbia Annual Report on Activities and Results in 2018
158 Financial Statements
V.5 Annual financial statements88
Balance sheet
88 The Annual financial statements for 2018, together with Notes, which are integral thereto, are submitted to the National Assembly by 30 June 2019, and published on the NBS website.
159 National Bank of Serbia Annual Report on Activities and Results in 2018
Income statement
160 Financial Statements
Statement of other comprehensive income
161 National Bank of Serbia Annual Report on Activities and Results in 2018
Statement of changes in equity
162 Financial Statements
Statement of cash flows
163 National Bank of Serbia Annual Report on Activities and Results in 2018
V.6 Institute for Manufacturing Banknotes and Coins – Topčider
Business result in 2018
Total income of the Institute for Manufacturing Banknotes and Coins –Topčider (ZIN) in 2018 amounted to RSD 7,126.4 mn, declining by 1.9% from 2017, and total expenses came at 4,889.0 mn, or 3% less than in the year before. The business result in 2018 equalled RSD 2,237.4 mn, increasing by 0.7% compared to 2017.
Table V.6.1 Total income and expenses of ZIN (RSD mn)
Index
2017 2018 2018/2017
Total income of ZIN 7,261.3 7,126.4 98.1
Operating income 6572.4 6838.1 104.0
Products for the NBS 145.4 953.0 655.4
Products for the domestic market 5813.9 5259.2 90.5
Export products 613.0 625.9 102.1
Other (financial) income: 689.0 288.3 41.8
Total expenses of ZIN 5040.2 4889.0 97.0
Income-to-expense ratio 144.1 145.8 - Source: NBS. The positive financial result of ZIN in 2018, as a manufacturing organisational unit within the NBS, reflects its market orientation and commitment to compliance with ever-rising standards. ZIN posted a positive result even without including income from products manufactured for the NBS (which are included in the internal reporting segment for the purposes of a comprehensive overview of ZIN’s operations), while including the costs of their production (manufacturing of banknotes and coins for circulation, reports, catalogues, posters, business cards, internal payment cards etc.). Proper management, overview and assessment of justifiability of costs resulted in their optimisation, so the percentage of total expenses in generated income was stable. Thanks to the continuous monitoring of the stocks and standards of intermediate goods consumption, savings in procurements were achieved, as well as their short- term conversion into more liquid forms of current assets (receivables or cash). Therefore, indicators of business efficiency (average inventory turnover, gross profit margin and return on assets) stood high above the average for Serbian companies, rising year after year.
164 Financial Statements
Structure of income
The largest share of ZIN’s income (RSD 5,259.2 mn or 73.8% of total income) was generated in the domestic market. Income earned from exports came at RSD 625.9 mn or 8.8% of total income, which is 2.1% higher than in 2017. ZIN’s proactive approach and timely response to circumstances in foreign markets ensured strong growth and continuity of exports. The breakdown of operational income generated in the domestic and foreign markets shows the predominance of income from the manufacturing and personalisation of payment cards and from products with security features. Internal income, i.e. income from products manufactured for the NBS in 2018 came at RSD 953 mn or 13.4% of total income, rising significantly from the year before, as a result of implementation of the NBS’s plan and programme of manufacturing and issuing banknotes and coins. The percentage of collection of receivables was extraordinarily high, given that receivables past due comprised less than 0.3% of the total invoiced value in 2018.
Table V.6.2 Structure of total income (RSD mn)
Index 2017 2018 2018/2017
Total income of ZIN 7261.3 7126.4 98.1
Operating income 6572.4 6838.1 104.0
Products for the NBS 145.4 953.0 655.4
Banknotes 88.6 660.4 745.4
Circulating coins 39.4 273.1 693.1
Commemorative coins
Other products and services for the NBS 17.5 19.5 111.4
Domestic market and exports 6426.9 5885.1 91.6
Preparation services 9.0 1.7 18.9
Banknotes and other products 447.9 608.4 135.8
Circulating and commemorative coins 71.0 5.6 7.9
Other coined products and services 416.1 668.1 160.6
Valuables 829.9 1003.0 120.9
Secured products 1184.1 1437.1 121.4
Books, publications and promotional material 10.6 9.0 84.9
Other products 827.0 791.9 95.8
Personalisation 2631.2 1360.3 51.7
Other (financial) income 689.0 288.3 41.8 Source: NBS.
165 National Bank of Serbia Annual Report on Activities and Results in 2018
Structure of expenses
On the side of expenses, operating expenses were dominant, most notably basic material and energy (47.8%), gross wages and other employee-related expenses (20.6%) and depreciation (20.4%). In 2018, the share of these expenses in total income remained stable, decreasing from 2017.
Table V.6.3 Structure of total expenses (RSD mn)
Index 2017 2018 2018/2017
Total expenses 5040.2 4889.0 97.0
Financial expenses 0.6 0.6 100.0
Gross wages and other employee-related expenses 1033.4 1005.6 97.3
Material and energy costs 2421.2 2334.5 96.4
Production services 125.8 122.8 97.6
Intangible costs 90.9 95.6 105.2
Depreciation 994.3 998.9 100.5
Other expenses 374.0 331.0 88.5 Source: NBS.
166
VI PLANS FOR THE FUTURE PERIOD
In planning future activities, the NBS was guided by its commitment to achieving the legally mandated objectives. For longer than half a decade the NBS managed to maintain low and stable inflation and this will remain its most significant activity in the future as well. The Serbian central bank will continue to pursue consistent and predictable monetary policy by implementing the inflation targeting strategy, the key principles of which are laid down in the 2019 Monetary Policy Programme.89 Looking ahead, monetary policy decisions will depend on the assessment of impact of inflation factors from the domestic and international environment. Key challenges will continue to come from the international environment, given that the global economy has experienced growth slowdown and inflation rates lower than initially projected. For these reasons, the process of normalisation of monetary policies of the leading central banks, the Fed and the ECB, could be slower than expected, which might help maintain favourable financial conditions and impact global capital flows, primarily toward emerging markets. Developments in the international commodity and financial markets are uncertain due to the persisting protectionism in international trade and geopolitical tensions. Uncertainties also relate to movements in global prices of primary commodities, particularly oil. In view of all the above, the NBS will continue to closely monitor and analyse the movements in the international environment and to assess their impact on economic developments in Serbia. The NBS’s monetary policy decisions will be based on the analysis of current economic movements and projections of the most important economic indicators in the period ahead. To this aim, the emphasis will be placed on further improvement of the quality of analyses and models used in monetary policy decision-making, in particular models for short-term projections of inflation and GDP, which will be developed in cooperation with the leading central banks of the euro area and the region.
89 RS Official Gazette, No 96/2018.
167 National Bank of Serbia Annual Report on Activities and Results in 2018
The NBS contributed to higher resilience of the domestic economy to potential negative impacts from the international environment, which is also warranted by the adequate level of FX reserves. To preserve the high level of safety and liquidity of FX reserves, the central bank will remain committed to maintaining very low risk in its investment portfolio. In 2019, the NBS plans to strengthen its analytical and reporting capacities with a view to ensuring more efficient management of the FX reserves portfolio. In addition, it will continuously monitor the implementation of regulations in the area of FX and exchange operations, in order to make further regulatory improvements and create a more favourable business environment. The stability of the domestic financial system has been preserved and strengthened. Thanks to timely and adequate measures of the NBS, the NPL share was brought down to a historical low and much more favourable financial conditions were created, laying the sound foundation for further growth in corporate and household lending. The following activities are planned for 2019 with a view to further strengthening the financial stability function: upgrading the tools for timely and adequate introduction and relaxation of the countercyclical capital buffer rate, setting the threshold values of optional indicators for assessment of financial cycle stages, continuous improvement of macroprudential stress testing in accordance with the Basel III regulatory package etc. In 2018, the NBS became the operator of the NBS IPS payment system, implementing the world’s most advanced payment method. This is yet another confirmation of NBS’s continuous efforts toward payment systems modernisation and efficiency improvement, coupled with the prevention of systemic disturbances and ensuring the stability of the overall financial infrastructure. As so far, the NBS, in its capacity of the financial sector supervisor, will continuously and timely monitor the operation of financial institutions, carrying out off-site and on-site supervision. In the area of supervision of banks, insurance undertakings, financial lessors and voluntary pension fund management companies, the NBS will take activities toward further improvement of the supervisory process and the existing regulations, ensuring their alignment with the acquis communautaire. Also, in line with its competences, the NBS will continue its regulatory efforts aimed at NPL resolution, with a view to preserving and strengthening the stability of the financial system. In 2019, the NBS also plans to monitor in which way financial institutions assess risks in their information systems and manage those risks. On the international plane, the NBS plans to continue successful cooperation with the IMF under the agreed economic programme, supported by the Policy Coordination Instrument, including regular Article IV consultations between the IMF and the Republic of Serbia. Talks will be held with the World Bank representatives about the new cooperation framework for the Republic of Serbia based on different grounds, given that the domestic economy is more stable than in the previous period. Meetings are expected within the Intergovernmental Conference on Serbia’s EU accession and the opening of chapters in which the
168 Plans for the Future Period
NBS is the leading or the second-leading institution. The EU Council’s Working Party on Enlargement and Countries Negotiating Accession to the Union (COELA) currently considers three negotiating positions under the NBS’s competence, under negotiation chapters Financial Services, Free Movement of Capital and Freedom of Movement for Workers. Within the ERP programme, the NBS will regularly report to the European Commission on the reform progress in the Republic of Serbia and its representatives will continue to participate in the economic policy dialogue between ministers of finance and governors of central banks of member states and countries of the Western Balkans and Turkey. To preserve high public trust in central bank’s activities, responsible and timely communication will remain NBS’s priority. Open communication about central bank’s decisions increases predictability and understanding of its role and the results achieved. The NBS therefore strives toward clear and active communication not only with the professional community, but with the wider public as well. It will continue to regularly inform the public about monetary policy decisions via press releases issued after Executive Board sessions that are held monthly, and organise quarterly press conferences to present to the professional community and the wider public its Inflation Report with the projections of key macroeconomic variables for the period ahead. Also, once a year it will present the Financial Stability Report, in order to timely inform the public about the current state and risks in the financial system. In 2019, the NBS will further improve communication via social networks, continue to develop its internet domain and subdomains, more intensively promote its exhibition and educational activities to the public and expand its network of associates for implementation of financial education programmes for children and youth. In 2019, the NBS plans to carry out supervision in the area of protection of financial services consumers and to continue to harmonise its regulations with those of the EU. It will continue to establish contacts with the competent registry authorities (ministries, courts, tax administrations, chambers etc.) and to improve regulations in the area of enforced collection and comprehensive electronic networking and data exchange with these institutions. It also plans to adopt regulations which will, based on the Law on the Prevention of Money Laundering and Terrorism Financing, enable customer identification using means of electronic communication and to further improve regulations in the area of payment services and reporting of financial institutions and economic agents. The NBS and its manufacturing unit, the Institute for Manufacturing of Banknotes and Coins, demonstrate social responsibility by taking part in a range of activities promoting the well-being of the wider social community. The Institute will continue to monitor the indicators of the environmental impact of its activities and to gauge the efficiency of measures undertaken toward preventing or reducing pollution. In parallel with environmental care, great attention is paid to safe and healthy working environment, and to this aim the NBS plans to implement the ISO 45001:2018 – Occupational health and safety management systems.
169 National Bank of Serbia Annual Report on Activities and Results in 2018
The NBS’s most important capital are its employees. In order to improve the business processes and strengthen professional capacities in new areas of operation, the NBS will continue to invest in staff training and development. It will also make the best efforts to use its other business resources most effectively.
170
ADDITIONAL INFORMATION
Publications of the National Bank of Serbia
Annual Report on Activities and Results of the National Bank of Serbia Monetary Policy Report Annual Financial Stability Report Inflation Report Statistical Bulletin
Analyses and reports
Trends in Lending Report on the Results of the Bank Lending Survey Report on the Results of the Inflation Expectations Survey Report on Dinarisation of the Serbian Financial System Analysis of the Republic of Serbia’s Debt Analysis of Profitability of Dinar and FX Savings
Supervision reports
Banking Sector in Serbia Financial Leasing Supervision in Serbia Insurance Sector in Serbia Voluntary Pension Funds Sector in Serbia Report on Consumer Complaints
Other publications
Working papers Methodological materials Special publications – SEEMHN Conference Proceedings – Economic Governance in Europe and EU Accession Process: What is the Role of Central Banks?
171 National Bank of Serbia Annual Report on Activities and Results in 2018
Index of charts and tables
Charts
III.1.2.1 Repo sale and stock of sold securities 31 III.1.2.2 Key policy rate and interest rate corridor 32 III.1.2.3 Volume of sterilisation by monetary policy instruments 32 III.1.3.1 Contributions of CPI components to y-o-y inflation 35
III.2.2.1 Quarterly movements in total premium 52 III.2.2.2 Total premium by type of insurance 53 III.2.3.1 Structure of VPF assets 59 III.2.4.1 Composition of lessors’ assets 61 III.2.4.2 Composition of lessors’ liabilities 61
III.4.2.1 Key macroeconomic risks 76 Financial soundness of the Serbian banking sector III.4.2.2 compared to regional average 77 III.4.2.3 Financial stress index (FSIX) and GDP growth 78 III.4.2.4 Systemic stress indicator 79
IV.1.1. Sovereign bond indices in local currency 84 IV.1.2. Composition of total yield on US treasuries 84 IV.1.3 Composition of total yield on German government bonds 85 IV.1.4. Portfolio yield in original currency 85 Portfolio and benchmark yield in original currency in IV.1.5 86 2018 Total portfolio and benchmark yield recalculated in RSD, IV.1.6 86 by quarter IV.1.7 Composition of investment portfolio 87
Settled foreign credit liabilities of the Republic of Serbia in IV.4.3.1 respect of which the NBS is the agent, in 2018 – by creditor and quarter 127
172 Additional Information
Tables
III.2.1.1 Financial system structure 37 III.2.1.2 Ownership structure of the banking sector in 2018 37 III.2.1.3 Banks by balance sheet assets 38 Concentration – the shares of top banks in banking sector III.2.1.4 38 balance sheet assets, loans and deposits III.2.1.5. HHI concentration 39 III.2.1.6 Structure of banks’ assets as at 31 December 2018 39 III.2.1.7. Structure of banks’ liabilities as at 31 December 2018 40 III.2.1.8. Structure of bank capital 41 III.2.1.9. Banks by off-balance sheet total 41 III.2.1.10 Banks’ exposure to FX risk as at 31 December 2018 42 III.2.1.11 NPL composition 43 III.2.1.12 Classification of bank assets 44 III.2.1.13 Banks’ performance indicators 44 III.2.1.14 Banks’ financial result 45 III.2.1.15 Banking sector’s profitability indicators 45 III.2.1.16 Overview of on-site supervisions in 2018 49
IV.1.1. Value-at-Risk (VaR) as at 31 December 2018 87 IV.1.2. Stress test as at 31 December 2018 88
IV.2.1.1. Denominational structure of currency in circulation 89 Overview of detected banknote counterfeits (by number of IV.2.1.2. 90 banknotes) Overview of detected banknote counterfeits (in RSD IV.2.1.3. 90 thousand)
IV.2.2.1. Cash management and 92 foreign cash operations – Belgrade Branch Cash management and foreign cash operations – Novi Sad IV.2.2.2. 93 Branch Cash management and foreign cash operations – Niš IV.2.2.3. 94 Branch
173 National Bank of Serbia Annual Report on Activities and Results in 2018
Cash management and foreign cash operations – 95 IV.2.2.4. Kragujevac Branch Cash management and foreign cash operations – Užice IV.2.2.5. 96 Branch
IV.3.1.1. Value of turnover and number of payments in RTGS 98 Value of turnover and number of payments in clearing IV.3.1.2. 99 system IV.3.1.3. Value of turnover and number of payments in NBS IPS 100 Value of turnover and number of payments in international IV.3.1.4. 101 clearing
Number of complaints by type of financial service provider IV.4.8.1. 135 in 2018 IV.4.8.2. Number of mediation procedures in 2018 136
IV.5.1.1. Comparative overview of the number of staff 140 IV.5.1.2. Staff qualification structure 141 IV.5.1.3. Staff gender structure by organisational unit 141 IV.5.1.4. Staff age structure 142 IV.5.1.5. Staff education, professional development and training 143
V.1.1. Balance sheet 146 V.1.2. Income statement 148
V.3.1. Concentration of credit risk of financial assets by region 152 V.3.2. Exposure to liquidity risk 153 V.3.3. Exposure to interest rate risk 154 V.3.4. Currency risk exposure of financial assets and liabilities 155
V.6.1. Total income and expenses of ZIN 183 V.6.2. Structure of total income 184 V.6.3. Structure of total expenses 189
174 CIP - Каталогизација у публикацији Народна библиотека Србије, Београд
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