NLB Group Mandatory Reserves Coverage

Project Description

On June 30, 2020, MIGA issued guarantees for up to EUR $64.1 million to Nova Ljubljanska banka d.d., Ljubljana (NLB) of Slovenia for a period of up to 7 years covering equity investments (including retained earnings) into its subsidiary NLB Banka a.d. Banja Luka (NLB Banja Luka) in Bosnia and Herzegovina against the risk of expropriation of NLB Banja Luka’s mandatory reserves held by the central bank in Bosnia and Herzegovina. ^[1]

NLB is the largest banking and financial services group in Slovenia with operations across southeastern Europe. Its banking subsidiaries outside of Slovenia are required to maintain mandatory reserves at the central banks in their respective jurisdictions, based on volume of customer deposits that the subsidiaries have. Mandatory reserves contribute to NLB’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.

Environmental Categorization

This Project is a Category FI-2 project according to MIGA’s Policy on Environmental and Social Sustainability (2013).  NLB Banja Luka is a universal bank providing retail and corporate banking and has a network of 53 branches throughout the Republika Srpska.

MIGA analyzed the portfolio of NLB Banja Luka for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. The Corporate finance transactions include among others some exposure to sectors which may potentially have medium to high environmental and social risks. NLB Banja Luka has limited exposure to sectors on MIGA’s Exclusion List. The main Environmental and Social (E&S) risks of this project are associated with the subsidiary’s lending activities in medium to high-E&S risk sectors and its capacity to manage these risks. The applicable E&S requirements for the NLB Banja Luka portfolio will be: MIGA’s Exclusion List, applicable national environmental and social laws and regulations, and applicable MIGA’s Performance Standards; all as to be agreed in the MIGA guarantee.

NLB Banja Luka has strict restrictions on the financing of certain sectors/activities including: Production and Trade in Arms; Political Parties and Political Forums; Religious Communities, and Activities that produce energy from plants and also does not finance the production or trade in any product or activity deemed illegal under the laws or regulations of Republika Srpska (production or trade in weapons and munitions, production or trade in radioactive materials, or production, or activities involving harmful or exploitative forms of forced labor/harmful child labor). Relationship managers ensure that transactions are screened against these requirements and conduct screening that includes checking with the borrower to ensure compliance with the host country laws and regulations. Groups of connected clients are treated as materially important for the NLB Group whenever exposure exceeds EUR 7 million. Materially important clients are after approval by NLB Banja Luka submitted to the NLB d.d., Ljubljana Credit Committee.

NLB Banja Luka has a corporate social responsibility policy but has not yet developed an Environmental and Social Management System (ESMS) to cover lending. As such, NLB Banja Luka will develop and implement an ESMS, appoint an E&S officer to oversee the ESMS, and offer training to its employees on the ESMS.

NLB Banja Luka has a set of Human Resources (HR) policies and procedures, in line with NLB Group corporate practice and requirements and national legislation, that cover conditions of employment and compensation, working time, leave (maternity, paternity, sick), compensation and benefits, workers code of conduct, workers grievances and redress mechanism, whistleblower policy, and the responsibilities of the employees and the employer. NLB Banja Luka will develop a retrenchment policy and procedure in line with Performance Standard 2.

NLB Banja Luka has a Business Continuity Plan (BCP) and the Emergency Response Plan (ERP) in place that cover emergency response procedure, crisis management and business recovery protocols for the critical business processes, internal/ external notification and decision tree, requirements for training and drills and the requirements for auditing of the business continuity plans. The BCP plan as per MIGA’s review meets the requirements as outlined in Performance Standard 1 and the ERP will be updated. The Bank has established an Information Security Management System (SUSI / ISMS) that has been prepared in accordance with the requirements of the international standard ISO / IEC 27001:2013.

Based on MIGA’s review and applicable performance requirements, an Environmental and Social Action Plan (ESAP) will be agreed with NLB Banja Luka prior to entering into a MIGA guarantee and will be implemented within an agreed timeframe to ensure compliance with MIGA’s applicable Performance Standards. Key measures identified to address the requirements of an Environmental and Social Management System (ESMS) include:

1. NLB Banja Luka to appoint an Officer responsible for the ESMS.

2. NLB Banja Luka will develop and implement an ESMS.

3. NLB Banja Luka will implement a training program for staff on the ESMS policy and procedures.

NLB Banja Luka will report periodically to MIGA on the development and implementation of the ESMS and application of the relevant Performance Standards.

Development Impact

MIGA’s guarantees will help NLB reduce the risk of some of its assets, which would lead to a reduction in NLB’s RWA on a consolidated basis. The additional headroom created by the reduced RWA is expected to be redeployed by NLB across its subsidiaries, including Bosnia and Herzegovina, to expand growth.

MIGA’s coverage to NLB is aligned with the World Bank Group Country Partnership Framework (CPF) for Bosnia and Herzegovina, as it will support access to finance as well as creation of conditions for accelerated private sector growth and a competitive business environment.