Erste Bank Serbia Mandatory Reserves Coverage
Project description
This summary describes equity investments (including retained earnings) by Erste Group Bank AG (Erste Group) in its subsidiary in Serbia, Erste Bank Akcionarsko Društvo Novi Sad (Erste Bank Serbia). The MIGA guarantee is expected to provide regulatory capital relief to Erste Group on a consolidated level by reducing the amount of Risk Weighted Assets (RWAs). The tenor of the guarantee is expected to be up to 5 years (the Project).
Erste Group is one of the largest banking and financial services group in Austria and the Central and Eastern European region. Its subsidiary banks outside of Austria are required to maintain reserves at the central banks in their respective jurisdictions. Mandatory reserves in Erste Bank Serbia contribute to Erste Group’s overall RWA at the consolidated level, resulting in less headroom for other assets at a given level of capital.
Environmental Categorization
The capital relief made available through the MIGA guarantee will be used to support loans to micro, small and medium-sized enterprises (MSMEs) and small corporates in Serbia. These transactions are mostly considered to have potentially limited adverse environmental and social (E&S) risks or impacts that are site-specific, reversible and can be addressed through mitigation measures. The Project portfolio is thus considered medium risk, and the Project is categorized as FI-2 under MIGA’s Policy on Environmental and Social Sustainability (2013).
MIGA analyzed Erste Bank Serbia’s portfolio and the Project portfolio by types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. As of December 2023, Erste Bank Serbia portfolio was composed of project finance, SME loans, corporate loans, micro loans and working capital loans and other short-term loans. The main sectors financed are real estate, natural resources (including mainly agriculture, wholesale of chemical products, fertilizer manufacturing, and livestock), energy, non-cyclical consumer products, telecommunications, cyclical consumer products, construction materials, and health and services.
The main E&S risks of this Project are associated with Erste Bank Serbia’s ability to identify, assess and manage the E&S risks of its financing activities and the bank’s labor practices. The applicable E&S requirements for the MIGA Project portfolio will be: (i) MIGA’s Exclusion List; (ii) applicable national environmental and social laws and regulations in Serbia; and (iii) the MIGA Performance Standards (for eligible corporate loans).
MIGA assessed Erste Bank Serbia’s E&S policies and procedures in line with the requirements of MIGA Performance Standard 1: Assessment and Management of E&S Risks and Impacts (PS1) and also assessed the bank’s labor practices in line with MIGA Performance Standard 2: Labor and Working Conditions (PS2).
In relation to E&S risk management, Erste Bank Serbia has an Environmental and Social Management System (ESMS) for identifying, assessing, and managing E&S risks and impacts associated with its lending activities. The ESMS covers screening of transactions against the Exclusion List, identification of key E&S risks and impacts and compliance with E&S laws. The ESMS also includes the application of the Performance Standards for some transactions and an external communication mechanism for receiving and addressing E&S concerns about projects financed by Erste Bank Serbia from third parties. In addition, Erste Bank Serbia has an E&S team responsible for the implementation of the ESMS. For the MIGA Project, Erste Bank Serbia will be required to include MIGA’s criteria for applying the Performance Standards in the ESMS. MIGA reviewed Erste Bank Serbia’s emergency response procedures and found them to be in line with the requirements of MIGA PS1.
In relation to PS2, MIGA’s assessment revealed that Erste Bank Serbia’s labor policies and procedures are in line with the requirements of PS2 and national labor laws in Serbia. Erste Bank Serbia’s policies and procedures cover amongst other aspects, terms of employment, performance management, benefits and renumeration, employees’ rights and responsibilities, learning and development and diversity and inclusion.
For the proposed guarantee, Erste Bank Serbia will report annually to MIGA regarding the implementation of the E&S procedures for the Project portfolio, as well as its labor practices.
Development Impact
MIGA’s guarantee allows to attract lower risk weights for mandatory reserves, held at Erste Bank Serbia, which enables Erste Group to achieve RWA relief at the group consolidated level. The RWA capacity that is freed up is expected to support Erste Bank Serbia's lending activities to MSMEs.
The proposed Project is aligned with the World Bank Group’s Country Partnership Framework (CPF) FY22-26, by way of (i) improving stronger macro-fiscal framework and structural reforms for greener growth, and (ii) improved business environment and regional integration, including activities to spur MSME development. The Project is also aligned with MIGA’s FY23-26 Strategy and Business Outlook under its strategic directions of supporting all clients and development areas such as MSMEs.
MSMEs are the backbone of the Serbian economy, as they contribute to value add, and account for two thirds of formal business sector employment (including microenterprises). However, MSMEs continue to face access to finance constraints in the country. Therefore, the Project is expected to support increased access to finance for MSMEs, and possibly improve their contribution to the economy.