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Preferential loans part of government package to mitigate the impact of the COVID-19 pandemic

16 April 2020 – On 10 April 2020, as part of a wider package of economic measures aimed at mitigating the negative impact of the COVID-19 pandemic, the Serbian government adopted the “Decree on Determining the Program of Financial Support for Commercial Entities for the Purpose of Maintaining Liquidity and Current Assets in Difficult Economic Conditions Resulting from the Pandemic Due to COVID-19 caused by the Virus SARS-CоV-2,” (the “Decree”), which entered into force on 11 April 2020. Among other provisions, the Decree sets out the legal framework for a program of financial support for commercial entities through the provision of state loans (the “Program”).

The Program prescribes that the main purposes of loans are to help qualified commercial entities legally registered in Serbia to obtain current assets and maintain current liquidity for the purpose of the timely payment of their obligations toward business partners, employees and the state. The main funds allocated for this purpose—RSD 24 billion (approx. EUR 200 million)—will be earmarked in the Serbian budget, while up to an additional RSD 2 billion (approx. EUR 17 million) will be secured through the Serbian Development Fund.

Entities eligible to submit a request for loans under the Program are entrepreneurs, cooperatives, micro, small and medium enterprises that are under majority private ownership or the ownership of a cooperative and which carry out production, hospitality, trade or agricultural activities (“Eligible Entity” or “Eligible Entities”). The classification of Eligible Entities is made under Serbian accounting rules and is based on the Entity’s latest financial reports. Funds disbursed under the Program may not be used to organise games of chance, lotteries and similar activities; for trade in oil and oil derivatives; or for the production and trade of any product or activity that is deemed prohibited under the applicable domestic or international rules.

A loan may be approved to Eligible Entities even if their official financial reports for one of the previous two years records a net loss, provided that they had operating profit. Eligible Entities may not be in financial difficulties and may not be subject to insolvency proceedings, reorganisation, financial restructuring or liquidation.

Credit applications will be accepted as long as there are available funds determined by the Program, provided that applications are filed not later than on 10 December 2020. An Eligible Entity can submit only one loan application under the Program. The Development Fund will issue its loan granting decisions at the latest by 31 December 2020. The deadline for disbursement of the approved funds is 31 March 2021.

The main requirement to receive a loan is maintenance of the level of employees in accordance with the data on the number of employees (employed for both definite and indefinite periods of time) on 16 March 2020 as registered with the Central Register of Mandatory Social Insurance. However, a fluctuation of up to 10% of the aforementioned number of employees until the date of submission of the credit application—as well as during the term of the use of credit—are tolerated.

The main terms of the credit are as follows:

  • Term – up to 36 months, including a 12-month grace period;
  • Interest rate – 1% per annum;
  • Loan is to be disbursed and repaid in Serbian dinars (RSD);
  • The minimum amount of a loan for companies and related persons is RSD 1 million (approx. EUR 8,300); for entrepreneurs, cooperatives and commercial entities registered in the competent registry the minimum loan is RSD 200,000 (approx. EUR 1,700);
  • The maximum amount of a loan for one Eligible Entity and its related persons is as follows:

– RSD 10 million (approx. EUR 83,000) – for entrepreneurs and micro entities;
– RSD 40 million (approx. EUR 333,000) – for small entities; and
– RSD 120 million (approx. EUR 1 million) – for medium-sized entities.

  • Repayment – monthly instalments;
  • During the grace period, interest is calculated and capitalised;
  • Collateral (depending on the loan amount):

– bill of exchange of the shareholder; and/or
– bill of exchange of the surety of the borrower; and/or
– mortgage with a market value that covers the amount of principal; and/or
– pledge over equipment/movables of one loan user together with related persons; and/or
– bill of exchange of the borrower.

The Program will be implemented in cooperation with the Ministry of Economy and the Development Fund. Specifically, the Ministry of Economy will sign an agency agreement with the Development Fund under which the Development Fund will be in charge of collecting and processing loan applications, concluding loan agreements with Eligible Entities, and oversight of the application of funds. The Serbian Export Credit and Insurance Agency will provide the necessary technical support.

The Development Fund will adopt bylaws regulating further the conditions and criteria for loan approval in line with the Program. These bylaws will enter into force once they receive government approval. Exceptions to the conditions and criteria determined by the Program are possible only in justified cases in which there is a special interest of the Republic of Serbia as determined by government decision.

In summary, Eligible Entities now have access to substantial amounts of funds under beneficial conditions that may be used to close the gap in their obligations towards their suppliers,  and the state. However, although the loan may be obtained on beneficial conditions, Eligible Entities should take into consideration their ability to comply with the Program’s main condition, i.e., that they not reduce the number of their employees by 10% or more throughout the loan repayment period (i.e., up to 36 months). This might generally be a challenging task for micro and small enterprises, given the fact that, on average, they have a small total number of employees. According to an informal interpretation of the Minister of Finance, all cases of headcount reduction will be considered for this limitation, except for the expiration of fixed-term employment contracts concluded before 15 March 2020. For more information on this question, please see our newsletter “Razrešene nedoumice u vezi sa isplatom „minimalca“ iz budžeta Republike Srbije” (in the Serbian language only).

Please be aware that if an Eligible Entity chooses to combine use of a loan under the Program with other extraordinary measures that the Serbian government has adopted in addition to the current Decree, e.g., payroll and income tax deferrals, additional restrictions would apply, i.e., prohibition to pay dividends until the end of 2020 for any year for which dividends were not distributed.

For more information please contact Tijana Arsenijević, Senior Associate, at tijana.arsenijevic@zakmmlaw.rs.