5 – The market in MSME receivables

DEMAND FOR MSMES’ NON-PERFORMING RECEIVABLES

The Serbian non-performing receivables market is not specifically regulated, so all businesses are able to access it. That being said, some aspects of the market are subject to regulation: for instance, debts owed by private individuals to banks may be assigned only to other banks, in accordance with Article 39 of the 2011 Financial Consumer Protection Law.^[1] Amendments to this piece of legislation enacted in 2014 (Art. 2[2]) extended this restriction to debts owed to banks by sole traders and farmers.^[2]

Debt buyers (assignees) purchase accounts receivable from the original creditors (assignors) in the market, with wide variation present in the types of receivables traded. These can be (1) corporate or consumer receivables; (2) performing or non-performing receivables; (3) receivables with or without third-party guarantees; and (4) receivables secured or unsecured by collateral.^[3] Market participants debt collection in exchange for a commission, and outright debt purchase. In Serbia, non-performing accounts receivable are primarily purchased by entities registered as collection agencies and credit bureaus. There are exceptions to this rule since there are no specific conditions as to how a debt buyer has to be registered.^[4]

Debt buyers offer two basic types of services: (1) debt collection, and (2) debt purchase. With debt collection, the outstanding amount is collected on behalf of the creditor in exchange for a commission, whilst debt purchase means the debt collection agency becomes the new creditor. Debts can be purchased as either (1) entire portfolios or (2) single receivables. Most information in Serbia is available for the non-performing loan (NPL) market. Currently, five large NPL servicers and buyers are active in the country: (1) APS holding; (2) B2 Holding; (3) Credit Express; (4) Coface; and (5) EOS Group.^[5] These agencies’ established practice in the Serbian market is to buy up large portfolios of non-performing receivables, mainly from the financial sector.^[6] For example, according to available information, in July 2019 EOS Matrix purchased a Serbian Deposit Insurance Agency portfolio worth €242 million.^[7] Currently, 28 businesses are registered as debt collection agencies in Serbia, as shown in Table 10.

Table 10.  Registered debt collection agencies operating in Serbia

Accessing information is an issue, since MSMEs (sellers of single receivables) find it difficult to identify businesses that provide debt buying services. Few of these agencies list debt buying as a service they offer. No more than five collection agencies that had web sites explicitly stated they provided this service. Only one agency offered to purchase single receivables, but even in this case the service was described rather vaguely. Factoring companies also offer to purchase non-performing receivables as a service related to factoring, and information listed on their web sites suggests they will purchase single receivables. Even though factoring firms are generally registered for other activities, one collection agency from the sample above also had a factoring licence. Since factoring is based on the purchase of single receivables, factoring firms enjoy an advantage over collection agencies, which usually deal with portfolios, as factoring companies have well-established risk assessment procedures they can rely on when purchasing individual accounts receivable.

A survey of the market and information obtained in semi-structured interviews with the relevant players (see Appendix, Semi-Structured Interviews) suggest that there is no significant market demand for MSME debt from collection agencies or other institutional debt buyers; in other words, market players do not see the purchase of these receivables as a lucrative endeavour. These accounts receivable are at best bought only sporadically. According to semi-structured interviews with debt collection agencies, the market in non-performing MSMEs’ receivables is constrained by a number of factors: 1) MSMEs often react late in seeking to dispose of their debt; 2) MSMEs frequently have unrealistic perceptions of the market value of their receivables (i.e. the discount at which they can sell them); and 3) MSMEs lack awareness.

PORTFOLIO PURCHASES

It takes some three months to complete an NPL portfolio purchase transaction.^[8] The usual steps taken in such a purchase are: (1) tender for sale of the portfolio is advertised; (2) non-binding bids are submitted; 3) portfolio information is accessed; 4) potential purchasers perform due diligence; 5) negotiations take place about the transaction; 6) a purchaser is selected; and 7) agreement on assignment of receivables is signed. Although the process need not comprise all the steps outlined above and may be structured differently, access to information about the portfolio and due diligence are always required, due to the pronounced information asymmetry between the assignor and the assignee.^[9] Due diligence allows buyers to assess the financial and legal risks inherent to a portfolio and set the price based on an overall review of it.

Receivables that are part of a portfolio may be assessed according to different criteria. Here, it is important to consider: (1) length of delinquency; (2) date and amount of the debtor’s latest payment; (3) number of contested receivables; (4) receivables subject to enforcement; (5) receivables filed as claims in bankruptcy and their status in the bankruptcy proceeding; (6) type and value of collateral posted to secure the receivable; and (7) financial position of the debtor. Each of these criteria contains a number of categories that are taken into account during the assessment. Portfolio size also allows buyers to better estimate collection risk. Since the seller usually defines the portfolio based on a number of pre-defined criteria, receivables with a low probability of recovery are grouped together with those relatively likely to be collected (such as, for instance, receivables included in reorganisation plans in progress, or those secured by valuable collateral).

Apart from institutional buyers, the market constantly sees ad hoc assignment of accounts receivable between various businesses in support of these firms’ core activities (‘casual’ assignments). These transactions are motivated by various reasons: (1) collecting an account receivable from the assignor; (2) settlement; and (3) closing of multiple open positions between companies doing business with one another.

Example:          Company A assigns a non-performing debt owed by Company C to Company B. Company B is at the same time a large customer of Company C, unlike Company A, which does business with Company C only occasionally. As such, Company B is better able to recover or offset the account receivable it has bought. This transaction can have the purpose of allowing Company A to repay its debts to Company B, where the assignment is made instead of payment, or of allowing Company B to earn a profit from the assigned receivable whilst Company A recovers at least some of the debt in a short period of time. In this case, the assignment arrangement is conditioned by the situation in which these three companies find themselves, or by the state of the market.

FACTORING MARKET

The Serbian factoring market is underdeveloped. In practice, companies generally allow discounts instead of factoring to ensure timely payment. The factoring market was valued at 1.9 percent of GDP in 2019, which was a relatively low percentage in comparison with EU Member States (where the figure is some 7 percent). In 2017, the market was in recovery, but future trends are difficult to estimate given the ongoing pandemic. There is significant potential for the factoring market to grow, especially given how widespread payment delinquency is and the liquidity issues it causes, particularly for MSMEs.

Serbia has the least well-developed factoring market in the region. Figure 7 shows trends in regional factoring markets from 2013 to 2019. According to these data, 2019 saw an increase in factoring revenues in Bulgaria (10 percent), Slovenia (42 percent), and Serbia (35 percent). Factoring revenues dropped sharply in Serbia in 2014, but thereafter increased consistently to peak at €883 million in 2019.^[10] Even at this value, the Serbian factoring market is the smallest relative to neighbouring countries, and this finding is corroborated by other sources. No respondents in the Annual Survey of 1000 Serbian Businesses conducted by the USAID Cooperation for Growth Project reported using factoring as a source of finance.^[11]

Figure 7.  Regional factoring market, 2013 – 2019, EUR mn

Source: Factoring and Financing of Open Account Domestic and International Trade Receivables, Industry Statistics, available at fci.nl/en/industry-statistics?language_content_entity=enI.

Banks account for a major part of the factoring market, in terms of both the number of players and the total revenue. According to statistics and findings of semi-structured interviews with the relevant players (see the Semi-Structured Interviews section), commercial banks dominate the market and shape its key aspects. No leading global companies are currently active in Serbia. There are 45 entities licensed to engage in factoring (as shown in Table 11). Of these:

– 18 are factoring companies (of which 16 are actively trading);
– 26 are banks (of which 19 were found to be advertising factoring services on their web sites); and
– one is a specialised public agency, the Serbian Export Credit and Insurance Agency.

Of the 45 licensed businesses, 36 actively offer factoring. These are 16 factoring firms, 19 banks, and one public entity. Although factoring companies generally offer only factoring services (for accounts receivable that have not matured), some firms also purchase delinquent or non-performing receivables.

Table 11.  Companies licensed to provide factoring services

Banks mostly offer reverse factoring. The findings of semi-structured interviews show banks provide reverse factoring for large clients, which allows them to finance the supply chains which include MSMEs. Even though this model ultimately serves to finance MSMEs, it is neither initiated nor dependent on this sector, which is a primary reason for the under-development of the Serbian factoring market.

Factoring firms prefer to work with larger companies, whilst MSMEs remain poorly acquainted with the benefits of factoring. As a consequence, MSMEs are very late in approaching factoring companies, often just days before maturity. The development of online reverse factoring could greatly facilitate access and increase the volume of factoring services. One commercial bank has introduced its proprietary platform for this, but a comprehensive (nationwide) online marketplace could significantly promote access and ensure the most favourable conditions for MSME financing.

MSMEs can access information about the supply of factoring services fairly easily. In addition, factoring companies could play a greater role in purchasing single non-performing receivables from MSMEs, and some already offer this service. Online invoice trading platforms, which will be discussed in detail below, offer much potential for development of the Serbian factoring market and the market in non-performing MSME accounts receivable. Lastly, some issues have been identified in practice, for instance with invoice registration, since factoring companies have no way of ascertaining whether an invoice has previously been factored.

[1] Zakon o zaštiti korisnika finansijskih usluga (Official Gazette of the Republic of Serbia, Nos. 36/2011 and 139/2014).

[2] Zakon o izmenama i dopunama zakona o zaštiti korisnika finansijskih usluga (Official Gazette of the Republic of Serbia, No. 139/2014).

[3] Receivables Management Association International. 2015. Receivables Management Association International – White Paper, 3.

[4] Some businesses are large players in the NPL management and purchase market, even though not registered specifically for this activity.

[5] NPL Monitor for the CESEE region H2 2019, 17.

[6] See, for instance, Eos Matrix, Services, available at rs.eos-solutions.com/en/services.html.

[7] NPL Monitor for the CESEE region H2 2019, 14.

[8] Draft of Analysis of the existing impediments to the sale of NPLs in Serbia, 29.

[9] Tešić, 2012, 124.

[10] Factoring and Financing of Open Account Domestic and International Trade Receivables, Industry Statistics. Available at fci.nl/en/industry-statistics?language_content_entity=enI.

[11] USAID-ov Projekat saradnje za ekonomski razvoj, Anketa „1.000 preduzeća”, novembar 2020. godine. Available at saradnja.rs/wp-content/uploads/2020/11/Anketa-1000-preduze%C4%87a-2020.pdf.