National Bank of Serbia adopts new rules on international credit facility operations

In early January 2021, the National Bank of Serbia (NBS) adopted two decisions elaborating on provisions of the Foreign Currency Transactions Law (FCTL) that govern international credit facility operations. The central bank’s decisions prescribe how and for what purpose foreign loans may be used, as regulated in Article 21[2] of the FCTL, and the requirements and procedure for Serbian residents to approve financial loans and obtain collateral for cross-border lending and credit operations between non-residents. These decisions continue the alignment of Serbian rules with European Union (EU) regulations, which began in 2018 with amendments to the FCTL.

Article 21[1] of the FCTL stipulates that foreign financial loans may be taken out by residents as part of their regular business activity and used to finance the importation of goods and services and construction works abroad, as well as to repay (refinance) outstanding foreign loans. Since Article 21[2] also permits Serbian residents to use foreign financial loans for other purposes, one of the NBS’s latest decisions regulates in detail what these purposes can be. No major changes have been made to the previous iteration of these rules and the FCTL continues to apply largely as it did before. The minimum repayment period for a foreign loan remains one year, and if the loan is to be repaid in multiple instalments, repayment can begin no earlier than six months after each tranche of the loan is disbursed. Shorter time limits are prescribed for loans received from non-residents that are based or have their registered office in an EU Member State, as well as where a bank is the beneficiary of the loan and where the resident borrower uses the loan for a specific purpose. The key change is that the decision is applicable not only to credit transactions involving non-residents based in the EU, but also to operations that involve non-resident international organisations of which Serbia is a member or with which Serbia has entered into agreements to regulate their operations in Serbia and whose articles of incorporation or relevant agreements have been ratified.

The second NBS decision regulates how residents may extend financial loans to non-residents and obtain guarantees and other collateral for international credit transactions and credit transactions between non-residents. Amendments to the FCTL have facilitated financial transactions between Serbia and EU Member States, and the new decision continues this trend. According to these rules, Serbian residents can extend financial loans to both non-residents based in EU Member States and those not based in the EU provided these are majority owned by entities registered in the European Union. In both cases, resident lenders are required to contract for and obtain collateral as security for loans from non-resident borrowers. The decision also applies to operations involving non-resident international organisations Serbia is a member of or has agreements with.

The FCTL allows the NBS to oversee credit operations for reasons of public policy and/or to preserve financial stability. This means the central bank can restrict a resident from undertaking these operations for a particular period of time if it deems the restriction is justified in each particular case whilst ensuring the statutory objectives are met and the constraints are proportional. The decision provides more detail for the amended article of the FCTL by setting out the instructive criteria the NBS ought to have in mind when making decisions.

Although the central bank’s decisions do clarify some outstanding issues left open after the FCTL was amended, they stop short of liberalising these transactions to the extent that had been expected. As such, they cannot be said to have achieved the objectives of the latest iteration of the FCTL. Both decisions entered into effect on 23 January 2021.