NLB Group Mandatory Reserves Coverage
Project Description
On June 30, 2020, MIGA issued guarantees for up to EUR 50.7 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 d.d., Sarajevo (NLB Sarajevo) in Bosnia and Herzegovina against the risk of expropriation of NLB Sarajevo’s mandatory reserves held by the central bank in Bosnia and Herzegovina.
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 Sarajevo is a universal bank providing retail and corporate banking and has a network of 38 branches throughout the Federation of Bosnia and Herzegovina.
MIGA analyzed the portfolio of NLB Sarajevo for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. NLB Sarajevo has limited exposure to sectors on MIGA’s Exclusion List. The corporate finance transactions include among others some exposure to sectors which may have Environmental and Social (E&S) risks. The main E&S risks of this project are associated with the subsidiary’s lending activities in these high and medium E&S risk sectors and its capacity to manage these risks. The applicable E&S requirements for the NLB Sarajevo 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 Sarajevo has a strict prohibition on the financing of certain sectors/activities including: any illegal activities, registered Arms Manufacturing and Trade, Political Parties and Political Forums, and Religious Communities. 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 Sarajevo submitted to the NLB d.d., Ljubljana Credit Committee.
NLB Sarajevo has a corporate social responsibility policy but has not yet developed an Environmental and Social Management System (ESMS) to cover lending. As such, NLB Sarajevo 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 Sarajevo 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 Sarajevo will develop a retrenchment policy and procedure in line with Performance Standard 2.
NLB Sarajevo 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 Sarajevo 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 Sarajevo to appoint an Officer responsible for the ESMS.
2. NLB Sarajevo will develop and implement an ESMS.
3. NLB Sarajevo will implement a training program for staff on the ESMS policy and procedures.
NLB Sarajevo 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.