COMMERCIAL BANKS

In 90-ties, during most of the time , the commercial banks in Serbia were unable to finance business activities of firms in standard (“normal”) ways, usual for market economies (if there were exceptions - they did not concern the SMEs financing).

This situation was the result partly of the sanctions that were imposed upon Serbian economy within that period, but partly it was a result of the policy that was carried out intentionally by the former regime. The very limited financial funds were under complete control of the Government and the other (we could call them) hidden centers of the power. The approach to these funds was allowed only to a very narrow circle of selected “friendly”

firms.

One of the striking examples was the policy of exports support to these firms. They were allowed to buy foreign currency at the official exchange rate, fixed at 6 dinars for 1 DEM , that was in force during t 2000 . At the same time, the market rate was several times higher – at the end of 2000 it reached level of 30 dinars for 1 DEM. This was extremely efficient way of

“supporting” operations of the chosen firms, particularly having in mind that all other firms were left to compete at the open market and (in the case mentioned) they had been forced to buy foreign currency at the market price (i.e. 4 to 5 times more expensive).

The similar “methods” were used within the limited market of the other financial sources: the dinars-credits were released for the first group of firms at a fixed interest rate. Since a very high inflation was constantly present throughout the whole period, the amounts to be paid back by the selected

“friendly firms” sometime got depreciated so much that appeared to be quite symbolic. The only option for the rest of the companies (which presented a large majority of the national economy) - was to get credits at an enormous interest rate (around 10% monthly) that was calculated taking into account the re-evaluated principal amount.

However, at this moment there are still no commercial banks’ funds available for financing SME business activities (actually the situation is the same for all the other firms). The banking system is generally in a very bad shape and its total reconstruction needs yet to be performed in the months ahead, as an indispensable precondition for reconstruction of the whole national economy (according some, yet non-official, announcements only 4 out of 74 existing banks in Serbia have passed the Central Bank test of minimum viability).

The only types of SME business financing at this moment are the short- term loans, some drafts for overcoming of the current liquidity problems and alike. Herein are some briefly presented practices of this kind of business financing (just for the sake of illustration). The example is taken from the practice of the bank that is considered to be among the best and the conditions under which the Bank finances its clients are among the most favorable at the moment:

The conditions and procedure for approving short term loans in the commercial banks. The approval decision for the loan request is made and

the conditions are set on the basis of the credit capacity of the applicant, then upon the estimation of the loan risks, purpose of the loan asked for, as well as the repayment period asked, and finally, upon the previous history of relation with banks (punctuality in paying back previous loans, the present liquidity, and alike).

The credit capacity of the applicant-firm. Credit capacity of the firm is evaluated on the basis of the following “check list”:

• the firm should have no principal or interest payments towards the Bank, which are past-due more than 60 days;

• the firm’s total liabilities should not be larger than its capital;

• the losses recorded in the balance sheet should not exceed 50% of the capital;

• the firms should profit in the current time period, and the documentation asked for should be presented in accordance with the internal regulations of the Bank (those are, among the others: the firm’s registration list with all annexes; papers with signatures of persons in charge deposited in the Central Bank; the balance sheet and income statement for the last year as well as for the last semiannual period, statistical sheets, etc.).

The evaluated level of the loan risks is the base for determining of the interest rate, which could be set at the following level:

• risk A: basic interest rate (currently it is set at 5.0% monthly);

• risk B: higher interest rate (currently 5.5% monthly);

• risk C: the highest interest rate (currently 6.0% monthly).

The interest rate A is set under the condition that the applicant-firm is servicing on time all current debts towards the Bank, fulfills all criteria on current liquidity, providing the highest quality collateral, has a certain number of the Bank’s shares, has a dinars account in the Bank, carries out all foreign currency transactions via the Bank, the purpose of the credit guarantees itself timely repayment of the credit, the current debts towards the Bank do not exceed 10% of its assets, does not have any contract on rescheduling or delayed payment of its obligations, has positive net cash flow out of currency inflow and outflow, etc.

The interest rate B is set under the condition that the firm-applicant has certain non-paid obligations towards the Bank but the delay does not exceed 15 days; does not fulfill all criteria of liquidity asked for the risk level A; within the last 30 days if it happens that the firm was non-solvent, the period should not exceed 3 days in case of solvency problems; the firm is not able to provide the collateral of the highest quality; the program that is supposed to be financing does not itself guarantee that the loan will be paid back timely;

and it does not fulfill all other criteria for the risk level A.

The interest rate C is set when the applicant-firm has non-paid obligations towards the Bank with a delay exceeding 15 days but not more than 60 days; has liquidity level that is not fulfilling the criterion for risk level B; has

a negative cash-flow out of current inflow and outflow; within the last 30 days if the firm was non-solvent more the 3 days and generally it has solvency problems; the current debt towards the Bank exceeds 10% of its assets; the firm could provide only one good quality collateral and does not fulfill other criteria from the risk level A and B.

Before the loan is put at the disposal of the firm-applicant, the Bank is providing one or more instruments for loan assurance, depending on credibility of the debtor and the estimated risk level. Those instruments could be the following:

• bank guarantees,

• letters of credit,

• guarantees of the third persons,

• movable or immovable collaterals,

• dinars or foreign currency deposits,

• others.

Generally speaking, the commercial banks in Serbia at the moment are providing three following basic types of loans for SME (and other firms):

• loans for financing the specific transactions,

• loans for financing of the working capital,

• medium-term investment credits with up to no more than 1 year repayment period.

The interest rates are within the range of 4% to 8% monthly, in spite of the fact that since the beginning of the current year Government and Central Bank run very strictly the policy of stable, i.e. fixed exchange rate of the national currency.