At the end of Q3 2021, the main characteristics of the financial sector are stability and moderate level of systemic risk. Temporary measures of the Central Bank, which enabled moratorium and restructuring of loans to the clients of banks, acted as stabilising factors both on the finances of the real sector and citizens, as well as on operation of banks.
Financial sector reached the value of assets of more than 5.5 billion euro at the end of September 2021, which made 119.5 percent relative to the GDP, due to the sizeable increase in assets of banks as well as due to still insufficient recovery of GDP to the pre-pandemic levels. The banking sector makes 93.1 percent of assets of the financial sector, followed by the insurance sector with 4.6 percent, and other financial institutions (micro-credit financial institutions, leasing companies and factoring companies) with 2.3 percent. During ten months of 2021, turnover at the Montenegroberza (Montenegro stock exchange) was 39.9 million euro, which is 11.2 million or 38.8 percent more than in the same period of 2020.
The Central Bank carries out continuous supervision of the banking sector; and the banking sector is liquid, solvent, and with non-performing loans at the acceptable level, with constant downward trend of interest rates. The liquidity of banks is at the high level. Liquid assets of banks were 1,481.7 million euro and made 27.92 percent of the total assets at the end of November 2021, which points to the fact that banks successfully absorbed significant pressure on liquidity from implementation of the moratorium measure. The banking sector stability is supported with adequate capitalisation, so that both the aggregate (18.53 percent) and individual solvency ratios for all banks in the system (ranging from 13.04 to 27.51 percent) as of 30 September 2021, are well above statutory minimum of 10 percent. These trends are reflected positively on the banking sector profitability. Positive financial result at the system level was 44.6 million euro, while it was 25.6 million euro in the same period of 2020.
In order to preserve the financial stability, the Central Bank continued to monitor actively further developments and impact of the COVID-19 pandemic on the financial system, the economy and citizens, to analyse macroeconomic and financial system trends, in order to support recovery and further growth and development of the Montenegrin economy in circumstances of constantly present uncertainties, through adequate macro-prudential and monetary policy measures. Focus of the Central Bank was protection of financial position of clients of banks – natural and legal person, in the narrow sense, while in the broad sense to preserve solvency and liquidity of the banking sector by applying ten packages of temporary measures. Furthermore, acting in precaution the Central Bank has secured 350 million euro from the European Central Bank and the Bank for International Settlements in case of urgent support for liquidity of banks in case of emergencies.
The temporary measures of the Central Bank covered four types of moratoria, of which first two were general moratoria in nature, while the last two were targeted or carefully tailored and directed towards specific sectors of the economy and individual categories of the population, for which it was established that were the most affected by the pandemic-caused crises. The measures also included those aimed at maintaining the banking sector stability, such as for example: prohibition from paying out dividends to shareholders of banks; permission to increase exposures to one person or a group of related parties beyond the statutory exposure limits; reducing the mandatory reserve requirement rates for banks; as well as measures providing incentives for extending and restructuring loans. Adopted measures made an important contribution to maintaining the banking system stability, which is recording rise in all important balance sheet items; while total deposits and liquid assets of banks reached the highest ever levels.
In compliance with the policy guidance of the European Commission, the Central Bank has continuously conducted activities from within its powers, in order to make a maximum contribution in their implementation and for preserving the financial system stability. In order to implement the policy guidance No 3 of the European Commission, in the segment “Maintain a strong financial sector regulatory framework in line with international and EU best practices;” the Central Bank will direct its activities from 1 January 2022 to apply the new regulatory framework and towards its further alignment with the EU regulations. During 2022, the Central Bank will also work on drafting the laws amending and supplementing the Law on Credit Institutions and the Law on Resolution of Credit Institutions. To that end, secondary regulations for implementation of these laws will continue to be further improved during 2023, and activities will take place towards further alignment of the legislation with EU regulations. Activities concerning preparation and adoption of the Proposal of the Law on Supplementary Supervision of Financial Conglomerates will take place during 2022 as well, which will implement the Directive 2002/87/EC on supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate.
With the aim of implementing the policy guidance No 3 of the European Commission, in the segment “Further reduce institutional and legal obstacles to swift and effective NPL resolution mainly outside the responsibility of the central bank, including by facilitating out-of-court settlement and modernising the insolvency regime”, the Central Bank has carried out a survey amongst banks about the duration of disputes for collection of receivables based on the case files in their records. The analysis showed that duration of the average litigation for collection of credit in Montenegro is 29.5 months or approximately 2 years and 6 months. Data show that in the period 2014-2020 the banks initiated a total of 7,712 proceedings for collection of receivables against natural and legal persons, with value of 242.2 million euro, of which 51 percent or 3,927 court proceedings were closed and approximately 140 million euro or 57.7 percent were collected. The banks are presently claiming 102.3 million euro, or 42.3 percent of the total amount of receivables. After that, in May 2021 the Central Bank has coordinated establishment of the Working Group made of representatives of the Association of Banks of Montenegro, the Central Bank of Montenegro, the Ministry of Finance and Social Welfare, and the Ministry of Justice, Human and Minority rights to improve and align relevant regulations and practices concerning the process of collection of receivables. The Working Group addressed two initiatives. The first initiative has treated an insufficiently consistent legal framework – the Labour Law, the Law on Proprietary and Ownership Relations in Montenegro, the Law on Enforcement and Securing of Claims, and inconsistencies of the Law on Consumer Credits, and the Law on Consumer Protection in Financial Services. The objective is to define clearly a content of the contract on banking arrangements, make a correct calculation of the effective interest rate, remove conflict of various provisions of the Law on Consumer Protection, and adopt legislation that would improve efficiency of the enforced collection process and ensure sufficient protection of fundamental rights of parties to the proceedings in line with the Acquis Communautaire of development countries. The second initiative is a project for introducing a more rigorous training of economic and financial experts, in light of recommendations from the Report of the Netherlands initiative for the rule of law and the World Bank from 2019, which could contribute to integration of the Western Balkans countries in the European Union. The Report analysed the role of court-appointed experts in judicial systems in the Western Balkans (including Montenegro), and followed the Guidelines of the European Commission on Efficiency of Justice (CEPEJ) on the role of court- appointed experts in judicial proceedings of the Council of Europe’s Member States and the Guide to Good Practice in Civil Judicial Expertise in the European Union (EGLE Guide). The Central Bank of Montenegro and the Association of Banks of Montenegro requested the EU support for standardisation and creation of a credible curriculum and course program for economic and financial experts.
As for the policy guidance No 3 of the European Commission, in the segment “ensure sound credit risk management, a transparent display of asset quality and adequate provisioning … Complete the ongoing Asset Quality Review, transparently publish its general findings and timely take remedial action where needed”, the results of recently completed Asset Quality Review (AQR) process of the entire banking sector best speak to the implementation of this policy guidance. Namely, in line with recommendations of the 2016 FSAP mission, the Central Bank, in cooperation with independent external auditing firms, has carried out the Asset Quality Review in all 13 banks, operating at that time in the Montenegrin market, using financial data of banks available as of 31 December 2019. The AQR in Montenegro was implemented in the period from March 2020 to September 2021, the period marked by challenges caused by the COVID-19 pandemic and measures taken to suppress negative consequences on the population and real sector of Montenegro, as well as by merger of the CKB Bank and Podgorička Bank, which was withal the largest integration of banks in the Montenegrin market.