OTP Group Mandatory Reserves Coverage
Project description
This summary describes equity investments (including retained earnings) by OTP Bank Nyrt (OTP) in its subsidiary in Serbia, OTP banka Srbija akcionarsko drustvo Novi Sad (OTP Serbia, or the Bank). The MIGA guarantee is expected to provide regulatory capital relief to OTP on a consolidated level by reducing the amount of Risk Weighted Assets (RWAs). The tenor of the guarantee is expected to be up to 3 years (the Project).
OTP is one of the largest banking and financial services group in Hungary and the Central and Eastern European region. Its subsidiary banks outside of Hungary are required to maintain reserves at the central banks in their respective jurisdictions, based on the volume of customer deposits that these subsidiaries have. Mandatory reserves contribute to OTP’s overall RWA at the consolidated level, resulting in less headroom for other assets at a given level of capital.
Environmental Categorization
OTP Serbia provides retail, small and medium enterprise (SME), and corporate finance services to clients in Serbia. The MIGA project will support lending to SMEs. SME transactions are typically considered medium-risk transactions, with environmental and social (E&S) risks and impacts that can be addressed through mitigation measures; transactions with significant E&S risks and impacts are expected to be limited in number. This project has thus been categorized as FI-2 in accordance with MIGA’s Policy on Environmental and Social Sustainability (2013).
The main E&S aspects of this project relate to OTP Serbia’s ability to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters. MIGA analyzed OTP Serbia’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. MIGA also analyzed OTP Serbia’s E&S risk management procedures for lending activities in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1), and the OTP Serbia’s labor practices in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2).
As of June 2023, OTP Serbia’s portfolio included the following business segments – corporate loans, retail loans (mortgages and consumer loans), SME loans, and leasing. The main sectors supported include wholesale and retail trade; manufacturing; electricity/utilities; construction; agriculture; information and communication; real estate; transportation and storage; and mining and quarrying. OTP Serbia currently has limited exposure to activities on the MIGA Exclusion List. The bank also has exposure to coal-related projects and oil and gas activities.
In relation to E&S risk management, OTP Serbia implements the OTP Group E&S risk management framework for credit origination and monitoring. The framework covers screening against the OTP Group exclusion list; categorization of E&S risks based on sector and tenor of facility; assessment of E&S risks and impacts via an E&S due diligence questionnaire; compliance with local E&S laws; identification of E&S conditions of lending as required and monitoring assessments. The E&S framework, however, needs to be expanded to include activities on the MIGA Exclusion List
For the purposes of the MIGA guarantee, OTP Serbia will be required to assess SME transactions against: (i) MIGA Exclusion List and (ii) applicable E&S laws and regulations in Serbia. OTP Serbia will also be required to develop and implement an external communication mechanism for receiving and addressing E&S concerns raised by third parties regarding projects financed by OTP Serbia. In addition, OTP Serbia will be required to appoint an E&S officer.
OTP Serbia has emergency response procedures which are in line with the requirements of PS1. OTP Serbia has labor policies and procedures that addresses terms of employment, recruitment, renumeration, benefits, grievance management and non-discrimination. In addition to these policies and procedures, the bank will be required to develop a policy on retrenchment.
For the proposed guarantee, OTP Serbia will be required to report annually to MIGA regarding its SME portfolio, detailing the implementation of the E&S procedures as well as labor practices.
Development Impact
The aim of MIGA’s guarantee is to help OTP Serbia reduce the risk-weighting of some of its assets, which would lead to a reduction in OTP Serbia's RWA on a consolidated basis. The RWA capacity that is freed up is expected to support OTP Serbia's lending activities to SMEs.
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 SME 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 SMEs.
SMEs 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, SMEs continue to face access to finance constraints in the country. Therefore, the Project is expected to support increased access to finance for SMEs, and possibly improve their contribution to the economy.