Rewort No. 7869-YU Yugoslavia FinancialSector Restructuring: Policies and Priorities (In TwoVolumes) Volume II: Annexes November 30, 1989 Country Operations Department IV Europe, Middle East and North AfricaRegion FOR OFF:CIAL USE ONLY Document of the WYorld Bank This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Itscontents maynot otherwise be disclosed withoutWorldBank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Rewort No. 7869-YU
YugoslaviaFinancial Sector Restructuring:Policies and Priorities(In Two Volumes) Volume II: AnnexesNovember 30, 1989
Country Operations Department IVEurope, Middle East and North Africa Region
FOR OFF:CIAL USE ONLY
Document of the WYorld Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.
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CURRENCY EOUIVALENTS
Currency Unit - Dinar (Din.)
Currency Unit Calendar Year 1988 ' September 30. 19S9
US$1 Dinar 2,522.6 Dinar 32,521.0Dinar 1 US$0.0003964 US$0.00003Dinar 1,000,000 US$396.42 US$30.75
WEIGHTS AND MEASURES
Metric System
GLOSSARY OF ABBREVIATIONS AND ACROrFMS
BOAL Basic Organization of Associated LaborDFEL Deferred Foreigr. Exchange LossesGAAP Generally Accepted Accounting PrinciplesGDP Gross Domestic ProductGSP Gross Social ProductIEF Inter-Enterprise FinancingIMF International Monetary FundIAS International Accounting StandardJLF Joint Liability FundJRF J^n"-'t Reserve FundLBL Ljubljanska Banka Ljubljana-Associated BankLT Long-TermMLT Medium- and Long-TermNBFI Non-Bank Financial InstitutionNBY National Bank of YugoslaviaOAL Organization of Associated LaborPEF Preperty and Equipment FundsRAP Republic and Autonomous ProvinceST Short-termSDK Social Accounting Service (Sluzba Drustvenog Kujigovodstva)SMA Self-Management AgreementYBA Yugoslav Bankers' Association
1/ Period Average.
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FOR OFFICIAL USE ONLY
Yugoslania
Financial Restructuring: Policies and Priorities
Table of Contents
ANNEXESPage No.
I: Modelling the Operations of the Central Bank 1-4
II: The Demand for Money .n Yugoslavia 5-17
III: The Dynamics of Public Sector Debt in Yugoslavia 18-23
IV: The Structure of the Banking System in Yugoslavia 24-28
V: Non-Bank Financial Institutions 29-31
VI: Yugoslav Money and Securities Market 32-33
VII: Structure of Income Statements of Yugoslav Enterprises 34-45in the Period 1986-88 and the Proposed Structure for 1989
VIII: 1987 Financial Results of the Nine Commercial Bank Groups: 46
A. Investiciona Banka Titograd (IBT) 46-52B. Jugobanka Udruzena Banka Beograd (JB) 53-59C. Ljubljanska Banka Udruzena Banka Ljubljana (LBL) 60-66D. Privredna Banka Sarajevo (PBS) 67-73E. Stopanska Banka Skopje (SBS) 74-80F. Udruzena Banka Hrvatske Zagreb (UBH) 81-87G. Udruzena Beogradska Banka Beograd (UBB) 88-94
H. Udruzena Kosovska Banka Pristina (UKBP) 95-101
I. Vojvodanska Banka Novi Sad (VBN) 102-108
IX. Analysis of the Intermediation Spread 109-lll
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
ANNEX I
MODELLING THE OPERATIOlIS OF THE CENTRAL BANK
Since the Central Banking System of Yugoslavia does not extend creditsto the public sector, the question arises as to what factors have ;.riven theexpansion of base money in the country. The acceleration of base money growthand inflation during the 1980s makes this question even more relevant. Therehave been sizable transfers of real resources through high and increasinginflation in Yugoslavia. The related question therefore is who have been themain beneficiaries of the inflation tax collected on holders of base money.
In order to provide an answer to these questions, this annex provides adecomposition of the National Banks' main asset and liability operations,including the variations in their net worth. The final result allows for theidentification of the main uses of the inflation tax in Yugoslavia--theconcession of direct and indirect credits to the private sector at verynegative real interest rates and the financing of foreign exchange losseslinked to the large stock of foreign exchange liabilities of the NationalBanks.
The balance sheet identity of the Central Banking System of Yugoslaviais written in first differences as:
(1) NFA - NFA4., + Ct - Ct, + S, - S,, + NOI, - NOI,., -
- Ht - 1 j + NW, - NWt.,
Where NFA- Net Foreign Assets (foreign assets minus foreign liabilitiesto the rest of the world and to domestic banks), C- Credits to the Economy, S-Specific Credits, NOI- Net Other Items, H- Base Money and NW- Net Worth. Thespecific credits are Dinar credits granted to banks in return for the depositof foreign exchange by banks with the National Banks (a foreign exchangeliability of the National Banks). The credits to the economy are low interestDinar credits, granted to both banks (rediscounts) and non-banks. Most ofthese credits are directed to agriculture and to exports.
The variations in net foreign assets in terms of Dinars can be furtherbroken down into:
(2) NFAt - NFA,.I - E,_1 (NFA4 - NFA.1) + (Et - E,1 )NFA11 +
+ (E, - Et.,)(NFA4 - NFA4.1)
The first term above captures the variations in net foreign assets interms of foreign currency (the star superscript denotes variables expressed in
2
foreign currency), the second term captures the exchange rate revaluation ofthe previous stock and the third term is the cross product.
The variations in the National Banks' net worth are equal to thedifference between interest revenues and interest costs, including theexchange rate depreciation:
(3) NWt - NWt.,, (i,< + (E, -E,.,)/E, + i,(E, -E,,.)/E.,,)NFA,,Et, +
+i, C,, + is s.,
The term inside the parenthesis is the depreciation-adjusted interestrate on the stock of net foreign assets of the National Banks. Since netforeign assets are negative (foreign liabilities are much larger than foreignassets), the first term above captures the net interest expenses on the stockof net foreign assets/. The second and third terms capture the NationalBanks' nominal interest revenues on the stocks of credits to the economy andspecific credits. This formulation of interest expenses and revenues isadmittedly simplified. Actual interest flows are likely to be affected byvar-iations in interest rates and stocks within each year. In addition,interest flows are also affected by the frequency of interest payments andcollection and the base on which interest rate changes apply (i.e. whetherinterest rate changes are applied to all outstanding stock or only toincreases in the stock). Nevertheless, this formulation provides a firstapproximation of actual interest flows in the absence of direct information onthese flows.
The nominal interest rates in (3) can be further broken down in terms ofreal interest rates and the inflation premium:
A it= r, + p, + r, pt
(4)
it, 1 r, + Pt + r, pt
Where r is the realized real interest rate in period t and p is theinflation rate in the same period. As above, the star superscript denotesvariables expressed in foreign currency. The changes in the National Banks'net woith can now be expressed as:
j~/ The simplifying assumption behind the equation is that the Ceatral Bank.arns on its foreign assets the same interest rate that it pays on itsforeign liabilities.
3
(5) NW, - NW,, rt NFA,, Et + Pt NFAt. E, + (E, - E,.,)NFA,, +
+ rt (l+p,)C, 1 + pt C,, + rs (l+pt)St.1 + ASI
Combining equations (1) and (5) and dropping out the changes in netother items (NOI) one obtains a final expression for the changes in basemoneyJ:
* A* *(6) H, - H, E(NFA,I. (l+Pt )NFAt.1) + (Ct -(l+pt )C.1 ) +
+ (S, -(l+pt )St, ) - rt NFAj E, - rt (l+p, )Ct -
r- (14 ) S,,
The first three terms on the right hand side of equation (6) representthe real variations in net foreign assets, credits to the economy and specificcredits, respectively. The final three terms represent the real interestpayments on ret foreign assets and the real interest revenues on credits tothe economy and specific credits. Equation (6) may also be expressed inpercentages of OSP, as shown in Table 4 (Chapter 2).
It should be noted that the capital loss term in equation (2) cancels outthe same term in equation (5). A devaluation of the exchange rate increasesthe Dinar value of the stock of net foreign assets of the National Banks inabsolute terms. If net foreign assets are negative, the exchange ratedevaluation generates a loss which reduces the net worth of the National Banksbut it does not have an immediate impact on base money creation. However,these capital losses may eventually be monetized by either of the followingtwo ways: First, to the extent that the National Banks suffers a withdrawal offoreign exchange deposits (net foreign assets increase) which cannot be offsetby an ecual decrease in the stock of specific credits, this withdrawal must befinanced with recourse to base money creation. Second. capital losses on thestock of foreign exchange liabilities may also trigger monetization throughlarger interest payments.
If the real rates of interest on the stock of credits to the economy arenegative, that introduces an interest subsidy which must be financed with basemoney creation, as shown in equation (6). The total impact of credits to theeconomy on base money creation comprises the interest subsidy and the realvariations in the stock. In the years when the real variation in the creditsto the economy is negative, the total impact on base money is less than theinterest subsidy.
2.! Equation (6) depicts the most important and systematic factors of basemoney expansion. However, changes in net other items may be importantin particular years.
4
The creation of specific credits per se does not involve monetarycreation, since increases in these credits are backed by increases in foreignliabilities. However, if the real rate of interest on these credits isnegative, while the real rate of interest on the depreciation-adjusted stockof foreign exchange liabilities is positive, the difference must eventually befinanced through monetization. In addition, if the Central Bank does not earnan adequate return on its assets, the stock of earning domestic assets willdiminish relative to the stock of (negative) net foreign assets. Thedifference between them will consist of foreign exchange losses (negative networth). When that is the case, withdrawals of foreign exchang3 liabilities(increases in net foreign assets) cannot be matched by decrea es in domesticcredits. Under these circumstances, the increase in net foreign assets willalso be monetized, as noted above.
V S *Finally, in the extreme case where i t i it i 0, that is, all
nominal interest rates on net foreign assets and on credits to the economy andspecific. credi-s are zero, the equation (6) is reduced to:
(6') H, -Ht1 Et (NFA, -NFAt,) + Ct -Ct + St -S,,
In this case, the changes in base money are identical to the nominalchanges in net foreign assets, credits to the economy and specific credits.Note, also, that when nominal interest rates are zero, the flow of realinterest revenues on credits to the economy is equal to -Pt C,.1. In this case,the interest subsidy granted to the recipients of these credits is fully equalto the inflation rate multiplied by the beginning-of-period stock.
5
THE DEMAND FOR MONEY IN YUGO0LAVIA
1. Spacification
The estimation of the demand for money in Yugoslavia followsstandard practice. The demand for each mo.aetary asset/ is formulated as afunction of real income, the nominal rate of return on alternative financialassets and the expected rate of inflation. The inclusion of the expected rateof inflation is justified because real assets may be relevant alternatives tofixed-income financial assets. In addition, the relationship between interestrates and inflation in Yugoslavia has never been a very close one. As aresult of the determination of the nominal interest rate on deposits bycartel-like agreements among banks, the real rate of interest was negativeduring the entire estimation period. That has increased the importance ofexpected inflation for the estimation of the demand for financial assets.
The dasired real stock of money at period t is, therefore, writtenas:
A(1) log m* bo + b1 log y, + b 2 iTDt + b3 pt + u,
Where m* - desired stock of money, y real income, iTD - nominalinterest rate on time deposits, p - expected inflation and u - random errorterm. The subscripts indicate the period of time. Actual stocks are assumedto adjust to desired levels according to a standard stock adjustment function:
(2) log ;4 - log;.1 - d ( log mn* - log m.1 )
Combining equations (1) and (2) gives:
(3) log m = a. 0 fi a, log y, + a2 iTD, + a3p, + a4 log M. + ut
Where e1 - b, d, i - l..4 and a4 - 1 - d. The a, 's are the short-run coefficients. The long-run coefficients are obtained by dividing theshort-run coefficients by one minus th.e coefficient of the lagged dependentvariable: b1 - a, /( 1 - a 4 ) ; i - 0..3. The semi-logarithmic form impliesvariable inflation and interest rate elasticities along the demand curve. Thedemand for/ currency, sight deposits and time deposits in Yugoslavia wereestimated according to equation (3). The next section discusses the data,while the last section discusses the estimation methods and the results.
1/ Currency, sight deposits and time deposits.
6
? Data
The demands for monetary assets were estimated using quarterlydata for the 1980-87 period. The data on monetary aggregates, interest ratesand prices were centered in the middle of the quarter (February, May, etc)while the income variable was represented by the accumulated flow within thequarter. The data on monetary aggregates are from the quarterly bulletins ofthe National Bank of Yugoslavia. The domestic interest rate used in theestimations is the interest rate on one year time deposits (households' orenterprises' deposits, according to the case). This was the only short-terminterest series available during the estimation period--Deposits with shortermaturities did not exist prior to 1983. The consumer price index was used todeflate the nominal variables and to measure the rate of inflation. Inflationwas measured by the quarterly variations of the CPI. The CPI series are fromthe International Financial Statistics database.
In the case of the households' demand for money, the incomevariable was proxied by the real personal income of households. The series onnominal personal income of the household sector are from the Index?. Thereal income of enterprises was proxied by two alternative variables: theindustrial production index (from the IFS database) and the real revenues ofthe enterprise sector (from the monthly statistical bulletin).
The series on the Central Bank's discount rate are from thequarterly bulletin of the National Bank of Yugoslavia. Data on exchange rates(Dr/US $ and DR/DM) and foreign prices (US and German CPIs) are from theInternational F'nancial Statistics database. Foreign interest rates (on oneyear euro-dollar and euro-mark deposits) a-e from Morgan Guaranty's WorldFinancial Markets.
3. Estimation and Results
3.1 The Demand for Money by Households
A. General Results
The OLS estimates of equation (3) with household data are shown inthe upper half of Table 1. The first and second rows show the estimates ofthe demand for currency and sight deposits, while the third row shows theestimates of the household's demand for Ml. This is a narrow definition of Ml,since it excludes the sight deposits of enterprises. Each demand equation wasestimated with two alternative proxies for domestic inflation. The equations(A) were estimated with current inflation as proxy for expected future
2/ This is actually a series on wage income. Therefore, it is just a proxyfor personal disposable income, since it does not include, for instance,transfers from abroad.
-7-
Table IOWJTIU EUTINM OF TN M lWS' DENIS FM NM 1 YUUUV14A 13 - t7
3
Estlaisi EguatU: Im t= + I TDt*ai P t £i I CIt) t t
OLSI I. Cirruc (A) -5.506 0.421 -0.183 -0.516 0.644 0." 0.026( -S.lJ ( 5.78) 1-3.071 1-3.355 l 10.14)
(3) -6.332 0.401 -0.245 -0.432 0.569 O." 0.029
(-I741 (5.59) (-3.99) (-2.21) (1.121
2. Sligt DuOuts (Ai -7.17 I .n2 -o.7n -0.47 0.714 O." o0.01(-11.04) (11.13) (-3.341 ['4.64) (27.54)
(l) -1.951 0.tA -0.20 -0.581 0.751 0." 0.019
(-11.16) (11.26) (-4.69) (-4.07) (24.431
3. (may (A) -6.05 0.415 0.l2 -0.40 0.735 O." 0.019(-8.786 (6.95) (-3.86) (-4.41) (11.64)
(3) -6.817 0.46 -0.232 -0.506 0.681 0.9 0.:22(-8.281 (8.43) (-4.66 (-3.09) (11.41
4. Tin .Dposts (Al 0.134 -0.005 0.406 -1.346 0.765 0." 0.014(0.05) (-0.02) (3.451 (-3.76) (5.51)
(l) -2.06 0, 12 0.467 -1.?10 0.713 0.6 0.07?
(-0.64) (0.66) (3.13i (-2.95) (4.76)
TILS: 1. Currunq (At -6.355 0.Si -0.199 -0.512 0.n22 o.9 0.026=sin (-4.42) (4.36 (-3.13) (-3.43) (9.291
(8) -6.42 0.492 -o.ou -0.631 0.7n5 0.9 0.034(-3.62) (3.36) (-0.371 (-2.411 (6.66)
2. Siqbt Dugo ts (A) -9.1 0.6" -0.137 -0.474 0.76 0.9 0.0.O(-7.69) (7.'1) (-3.70) (-4.37) (23.471
(3) -7.763 0.60 -0.10) -0.452 0.6U3 O." 0.025
(-6.121 (6.198 (-1.16) (-2.61) (16.44)
3. No"i (A) -7.238 0.576 -0.207 -0.474 0.711 0.9 0.021(-6.46) (6.561 1-3.95) (-4.09) (16.66)
(1) -7.070 0.559 -0.070 -0.572 0.802 0.9 0.027(-5.051 (5.07) (-0.67) (-2.66) (11.60)
4. Tis Deposits (6) 2.021 -0.151 0.39 -1.53 o.m 0.90 0.074(0.51) (-0.49) (2.32) (-3.67) (3.69
(9) -0.677 0.037 0.607 -1.308 0.4U 0.64 O.03
(-0.13) (0.091 (2.45) (-2.27) (1.73)
oteo: IIl The estleate at o esmal dustem csttficclmts are not rnoorteu.(2) tspucted ittlatlon .CLY prostue by currst inflatlio (i) and Arim rolct? (I).(3) tsctsd tiflatio In TILS proused by cwv.t Ilatim (A) ad latf u tlatU (3).
8
inflation. The equations (B) make use of ARIMA predictors as proxinc forexpected future inflation-'.
The estimated equatiolis fit very well the data for this period, asshown in Table 1. The estimates are particularly good in the case of currencyand sight deposits. All the coefficients have the expected sign and are verysignificant. Also, the results are not very sensitive to whichever measure ofexpected inflation is used. The long-run income elasticity of the households'demand for Ml is larger than unity, as is frequently the case in developingcountries. The estimated income elasticity for time deposits is notstatistically different from zero. However, low or even negative incomeelasticities for time deposits are not unexpected. Given the wealthconstraint, if the demand for some monetary assets, such as currency and sightdeposits, increase with the number of transactions (proxied by income), thenthe demand 'or at least one asset must fallV.
Tne coefficient of the interest rate on one year time deposits isnegative and significant in the case of currency and sight deposits, and it ispositive and significant in the case of time deposits. Finally, thecoefficient of expected inflation is always negative and significant. Itshould be noted that the coefficients of the inflation rate and the interestrate are the short-run semi-elasticities. Estimates of the average long-runelasticities may be obtained by: First, multiplying the estimated coefficientsby the average inflation and interest rates and, second, dividing the resultby one minus the coefficient of the lagged dependent variable. For instance,in the case of the households' demand for Ml, the long-run interest andinflation elasticities are -0.25 and -0.2, respectively. In the case of thehouseholds' demand for time deposits, the long-run interest and inflationelasticities are +0.6 and -0.8, respectively§. The fact that the inflationelasticity is higher in absolute terms indicates that increasing nominalinterest rates in line with inflation may not be sufficient to prevent areduction in the real demand for time deposits when inflation increases.
i~./ The quarterly variations of the consumer price index in Yugoslavia arebest approximated by a fourth-order auto-regressive stochastic process-AR(4). The inflation predictors used in the demand for money equationsare the one-step-ahead forecasts obtained from the estimation of anAR(4) for the period 1977-87. Although the one-step-ahead forecastswere not obtained from recursive estimation, that does not seem tocreate a serious problem, since the estimates of the auto-regressiveprocess parameters vary very little over different sample periods.
i/ See Friedman,B (1981) and Tobin (1982).
2/ The average interest rate t.nd quarterly inflation rate for the sampleperiod are 36.2 percent and 12.6 percent, respectively. The reportedlong-run elasticities are associated with the (A) equations. Similarresults are obtained with the (B) equations.
9
Risk-averse asset holders may require a risk premium in th- nominal interestrate in compensation for increased inflation uncertainty§.
The lower half of Table 1 presents TSLS estimates of thehouseloldn' demand for monetary assets. In the TSLS estimation, interestrates were considered exogenous for the following reasons: First, interestrates were determined by cartel-like agreements among banks durir.g the wholesample period. In addition, the banks were frequently reluctant to adjustinterest rates to the developments in inflation during this period. Second,the levels at which interest rates were set were sanctioned by accommodatingmonetary policy. Therefore, the main potential source of simultaneity bias inOLS estimates probably lies in the output variable.
Again, each demand equation was estimated with two alternativeproxies for expected inflation. The equations (A) were estimated with currentinflation as a proxy for expected future inflation. In this case, the set ofinstruments used in the TSLS estimation consisted of the Central Bank'sdiscount rate, and the real GNP and interest rates in both Germany and theUS?. Equations (B) were estimated with realized future inflation as a proxyfor expected future inflation. This is a rational expectations procedure--itassumes that the individuals' predictions of inflation are correct on theaverage, and that the individuals do not make systematic prediction errorsover time. In order to avoid the well-known errors-in-variables problem inrational expectations estimation, the realized future inflation wasendogenized in the TSLS estimation and current and past inflation rates wereadded to the instrument set. This procedure ensures the orthogonality betweeninflation and the error term and consistent estimation of the parameters.
The results obtained with TSLS estimation are not very sensitiveto whichever measure of expected inflation is used, as shown in Table 1. Inaddition, the TSLS estimates are quite similar to those obtained throughOLSI. Therefort, the observed decrease in real stocks of currency and sightdeposits held by households in the 1980s seems to be almost fully explained bythe increase in inflation and interest rates during this period. Theestimates of demand for time deposits seem to have less explanatory power, butstill look reasonably good. The fact that time depcosits declined in realterms shows that interest rates were inadequate to compensate for theincreased levels and variance of inflation during this period.
.i./ The alternative way to examine this problem is to test for thesignificance of the variance of inflation in the demand for financialassets. That was not pursued in this study.
1/ In addition to the exogenous independent variables.
.Q/ Except in the case of the demand for currency (and Ml), estimated withrational expectations of inflation. In this case, the interest ratecoefficient is lower and non-significant.
10
In order to examine the stability of the equations, the end of thesample period was constrained to the last quarter of 1985 and the equationswere reestimated by OLS. The expected inflation variable was proxied by thecurrent inflation rate. These results are shown in Table 2. The demand forcurrency, sight deposits and MI seem to be s over this period, as indicated byTables 1 and 2. The performance of F-tests for stability against increases insample size confirms the existence of stability of the parameters during thisperiod. The stability of the demand equations can also be confirmed throughout-of-sample dynamic forecasts. As shown in Figures 1 through 3, thepredicted values of currency, sight deposits and Ml track very well therealized values of these variables during 1986 and 19871Y.
The results are quite different in the case of time deposits. Asshsown in Tables 1 and 2, the estimated inflation coefficient increasessignificantly when the sample period is extended to 1987, while the interestrate coefficient declines. That may indicate why asset holders starteddemanding a risk premium in nominal interest rates to compensate for increasedinflation uncertainty. The shifts in the parameters of the time deposits
table 2
OLS ESTIMATE9 OF THE HOUSEHOLN' EIBIE FOR HUl, 1990 - 83A ^ 3
Estiutu Equatims t0LFal&nYt+&,iTDt3Pt+a 4 t-iE1 C .) t t
*0 'o a2 63 44 ft SER
1. Currency -5.927 0.453 -0.101 -0.55 0.702 0." 0.025(-3.76) (3.713 (-1.333 (-2.99) (8.14)
2. Sight lignte -6.603 0.521 -0.130 -0.552 0.824 o." 0.019(-5.20) 15.28) (-1.85) (-3.913 (15.12)
3. NI1 -6.50 0.523 -0.125 -0.550 0.160 o.9 0.013(-5.52) (5.57) (-1.97) (-4.05) (12.9)
4. Tin loignte -6.802 0.504 6.560 -0.374 0.439 0.89 0.06o(-1.611 (1.57) (4.29) (-0.67) (2.34)
Notna III The ectltn at s u of sus duan cuttficients ae bt rspated.
2/ The same results hold for the other specifications and methods ofestimation.
11
R"cseholcRo' Demae«d tn CumrenvyActnal and Predicte02.
O.1
-0 \
-0.s
1060 161 196 163 1. 1955 196 1967IM igli ~IM zIN 894 LP8 m
Ftgure a
ffouwhold u D emand ftor ht ObAtAcual and Prdid
I aX~~~~~~50 196 ...6 1...3 194 1..16 16
°M>
-1410 predicted .
_IzaS. .m Iasi. IM ,,9 ,9 , . , ... s I-,
floosel2vds Demanld for Mli-Actual and Predicted
2 D2S >~~~~~~~Z3 prodiotel
10o0 iau iaoz 1983 lU1 9SS l'O0 *m 1"
12
ki.nra 4
0 oassholds' Demand for Timc De;vitz-Actual and Predic ed
predicted
_357~f aotaiRl
-1.00 , .1P5D 13tl 19z 1983 *1984 1935 1950 1987
equation are also confirmed by an F-test against increased sample size and byout-of-sample dynamic forecasts, as shown in Figure 4. The estimated demandfor time deposits greatly overpredicts the actual behavior of this variableduring 1986 and 19872k, a period when inflation accelerated sharply.
B. Foreign Exchange Deposits and Currency Substitution
In several developing countries foreign exchange assets constitutea significant share of savers' portfolios. This substitution of domestic forforeign exchange assets, frequently referred to as currency substiLution, doesnot depend on the formal existence of foreign exchange deposits in thedomestic financial system. For instance, in sever&l Latin-American countriesresidents are not allowed to hold foreign exchange deposits in domestic banks,but do hold foreign exchange assets, either in the form of currency or in theform of deposits and other assets held abroad. In some of these countries,foreign assets are not only used as a store of value but also, to some extent,as a means of payments.
Large differences between the domestic and foreign rates ofinflation are the primary cause of currency substitution. When inflationdifferentials are large, the actual and expected rates of devaluation willalso be large, increasing the attractiveness of foreign currency assets vis-a-vis domestic assets. Under these circumstances, the shift into foreign assetsis likely to occur, whether foreign exchange deposits are formally permittedor not. However, the formal existence of these deposits is believed toincrease the attractiveness of foreign exchange assets further. First, theformal existence of these deposits decreases the transaction costs of making
JQ/ Again, the same result holds for the other specifications and estimationmethods.
13
payments in foreign currency. Second, these deposits frequently yieldinterest rates comparable or even more attractive than those abroad.
In order to examine the exte..t to which the portfolio decisions ofasset holders are affected by expectations of devaluation, the demand fordomestic and foreign exchange deposits by households were formulated asfunctions of income, the nominal interest rate on one year Dinar deposits anda proxy for expected devaluation--a combination of current and laggedquarterly variations of the Dinar/DM exchange rate with polinomiallydistributed weights. The expected inflation is excluded from the equationdue to the high collinearity between the inflation and devaluation rates. Theactual and desired stocks are related by a standard stock adjustment equation,as above. The results are shown in the upper part of Table 3.
The coefficient of the expected devaluation variable appears withthe expected sign (negative for the Dinar deposits and positive for theforeign exchange deposits) and is significant in all the equations!11. Theinterest rate coefficient also appears with the expected sign (negative forsight deposits and for the foreign exchange time deposi-s) in all theequations, although it is not significant in the c-se of the demand for timedeposits. These resuits do suggest that asset holders shift out of Dinardeposits as a result of expectations of higher exchange rate devaluations.The results also show that the real demand for foreign exchange deposits (bothsight and time deposits) are reduced when the i.uterest rate on time depositsincreasesl2.
These results are confirmed by the estimates of the desired ratioof foreign exchange to Dinar deposits as shown in the lower half of Table 31U.The desired ratio of foreign exchange sight deposits to Dinar sight depositsincreases as a result of higher expectations of exchange rate devaluations.The interest rate on Dinar time deposits does not affect the ratio, since itaffects negatively the demand for both Dinar and foreign exchange sightdeposits. The desired ratio of foreign exchange time deposits to Dinar timedeposits also increases as a result of higher expected devaluations anddecreases as a result of increases in the interest rate on Dinar timedeposits. Finally, the same results broadly hold for the ratio of totalforeign exchange deposits to total Dinar deposits. The coefficient of
fl/ The expected devaluation is significant at the 5 percent level in thecase of Dinar and foreign exchange sight deposits and in the case offoreign exchange time deposits. It is significant at the 10 percentlevel in the case of Dinar time deposits.
12J In the comparison of the expected devaluation and interest coefficients.it should be borne in mind that the interest rates are expressed inyearly rates, while the exchange rate devaluations are expressed inquarterly variations.
J,3/ This is the approach followed by Ortiz (1983) in his analysis of theprocess of dollarization in Mexico.
14
expected devaluation is positive and significant and the interest ratecoefficient is negative, although it is not significant. The lack ofsignificance of the interest rate coefficient is not surprising--higherinterest rates on Dinar time deposits reduce not only the demand for foreignexchange deposits but also the demand for Dinar sight deposits.
Table 3
Exlct:d Devaluation and the "Oousenolds 2aana for Dinar and Foreign Currency Deposits
Estisatud Equation: ntm a +a l ny t+a2 iTD t+a 3Et+a4 t-1 +E C D it+t
ao 1 az a3 a4 R SER
-. Sight Deposits:
Ia. Oanrs -6.909 0.544 -0.299 -0.317 0.732 0.99 0.020(-9.57) (9.57) (-5.99) (-2.7)X (20.42)
lb. Foreign Currency 0. 212 -0.017 -0.174 0.933 0.781 0.93 0.045(0.09) (-0.09) (-3.57) (2.88) (7.13)
2. Tice ueOu4ts:
2a. DOnars 2.992 0.220 0.193 -1.079 0.911 0.87 0.098(0.79) (-0.77) (1.49) (-1.86) t4.74)
D. Foreign Cuerency 2.149 -0.205 -0.132 0.856 0.902 8.97 0.050
(1.19) (-1.19) (-1.61) (2.42) (6.68)
3. Ratio of ForeignCurrency Depositsto Oinar Deaosits:
).. Siqht Cenosits e.665 -0.525 0.041 1.209 0.799 0.99 0.047(3.z4) (-3.371 (0.47) (4.12; (14.06)
lb. Tin Deposits 4.719 -0.365 -0.304 1.954 0.675 0.83 0.081(1.08) (-1.09) (-3.47) (4.22) 4.43)
Sc. Total Deposits 5.632 -0.445 -0.11 1.699 0.759 0.97 6.059(1.9 8) (-1.92) (-1.21) (4.85) (7.96)
15
As mentioned above, these results reflect just part of the overallshifts ir. the asset holders' portfoiios. Any observed increase in the stockof foreign exchange deposits is not necessarily accompanied by a reduction inthe demand for Dinar deposits, but may simply reflect the transfer of foreigncurrency previously held outside the banking system into foreign exchangedeposit accounts. By the same token, asset holders may decide to shift out ofDinar deposits and increase their holdings of foreign exchange assets if theyexpect higher future devaluations. However, that can be accomplished byincreasing the holdings of foreign currency or foreign exchange depositsabroad, as opposed to increasing the holdings of foreign exchange deposits inthe domestic financial system.
Nevertheless, these results do suggest that the demand for Dinardeposits decreases as a result of expected devaluations of the domesticcurrency. The shift out of Dinar deposits into foreign exchange deposits irthe asset holders' portfolios is partly offset by the maintenance of realisticinterest rates on Dinar time deposits. However, realistic interest rates onDinar time deposits are not sufficient to interrupt the overall shift intoforeign exchange assets which results from higher inflation and devaluationsof the exchange rate. In paruicular, foreign exchange sight deposits becomevery attractive in a scenario of high inflation and exchange ratedevaluations. The possibility of using these deposits to make payments (or toconvert foreign exchange into Dinars before making final payments in Dinars)allows individuals to economize on the use of Dinar sight deposits furtherwhen inflation increases.
The large differential between inflation rates in Yugoslavia andthe other OECD countries is the primary cause of the large expected exchangerate devaluations and the resulting decrease in the demand for Dinar depositsvis-a-vis the demand for foreign exchange deposits. Therefore, the estimatesof the demand for Dinar assets obtained with expected inflation or expecteddevaluation are fully consistent. These results suggest that substantialprogress irf the mobilization of Dinar resources and in the reduction ofcurrency substitution will depend on progress in reducing inflation. Inaddition, the interest policy has to be realistic in order to prevent furthershifts out of Dinar assets. That means that the interest rate on time deposit!has to compensate asset holders for their expectations of future inflation anlnominal and zeal devaluations. The interest rate on Dinar sight deposits mayalso have to be adjusted to inflation developments, in other to prevent anexcessively negative real return on these deposits. Finally, progress inreducing currency substitution may also be obtained by imposing restrictionson the use of foreign exchange deposits as means of payments. That can beachieved by introducing minimum size requirements for sight deposits inforeign exchange or introducing minimum maturities.
3.2 The Demand for Money by Enterprises
4 reports the estimates of the enterprises' demand for sight andtime deposits. In the case of enterprises, two alternative proxies for outputwere used in the estimations: the industrial production index (equations A)
16
and the real revenues of the enterprises (equations B). The expectedinflation variable was always proxied by the current inflation rate.
The estimation of the enterprises' demand for money produced mixedresults, as shown in Table 4. In the case of sight deposits, the interestrate and the inflation rate coefficients are negative and significant whenintroduced separately, but are never both significant in the sameregressionl4. Also, the output coefficient in the demand for sight depositsis either non-significant or appears significantly with a negative sign.These results may be reflecting shifts in the enterprises' demand for money.For instance, the need for enterprises to hold cash balances for transactionpurposes may have been reduced as a result of the increasing liquidity ofmoney substitutes such as promissory notes. These shifts are likely to becaptured by the output variable, resulting in low or even negativecoefficientsi!/ . Alternatively, the regression results may just reflect thelack of a good proxy for output in the case of enterprises.
In the case of time deposits, the inflation coefficient isnegative and significant, while the interest rate coefficient appears with theexpected positive sign in most regressions but is never significant. Inaddition, the speed of adjustment seems too low, as indicated by thecoefficient of the lagged dependent variable. Again, these results may alsobe affected by the increase in financial transactions among enterprises duringthis period. The interest rates on promissory notes and other inter-enterprise credit agreements probably followed inflation developments moreclosely than the interest rates on time deposits. If that was really thecase, then the increase in inflation must have increased the attractiveness ofpromissory notes and other related instruments at the expense of time depositsin banks, despite the increases in the nominal return on time deposits.Unfortunately, the insufficiency of quarterly series on both the stocks andinterest rates on inter-enterprises' agreements prevents the econometricanalysis of these factors.
14/ Although the relationship between interest rates and inflation was nevertoo close during this period, there remains some degree of collinearitybetween these two variables which could be affecting the t-statistics. IHowever, this problem does not seem to be affecting the estimates of thehouseholds' demand for money.
1i/ This problem has also been observed in other countries. See, forinstance, Garcia and Pak (1978) for the case of the US in the 1970s and WorldBank Report TU-7162 ( External Debt, Sustainable Growth and Fiscal Policy )for the case of Turkey in the 1980s.
17
Table 4: OWTSU ISTINATES OF THE ENTERtISI' DEPMI FOR NW IN YU VIA, 19t - 97a J
..
Out 1. Sight hsats (A) 0.059 0.011 -0.346 - 0.754 0." o.on(0.02) (0.02) (-2.72) - (1.41)
(A) -0.314 o.0n M -0.51 o.m 0.97 0.071-O.09) (0.14) - (-2.04) (9.13)
(Al -1.l71 0.24 -0.2 -0.469 0.M 0." 0.071(-0.37) (0.411 (-2.041 (-1.201 (1.73)
CU) 1.084 -0.53 -0.247 - O.13 0." 0.045(2.73) (-2.43) (-L."9) - (4.12)
(3) 1.33) -0.43 - 4..94 0.174 0." 0.01(3.31) (-3.31 - (-2.49) (6.71)
(II 1.136 -0.523 -0.177 -0.14 0.411 o.9 0.01(3.061 (-2.55) (-1.34) (-2.U1 (4.3)
4. Tin Qosats (A) -2.372 0.M -0.00 -1.37 0.90 O." 0.03(-1.74) (1.731 (-0.14) (-7.42) (11.58)
(3) 0.177 -0.1l3 0.07o -1.324 0.303 0.97 0.03(0.97) (-0.11 (1.11) (-4.15) (11.15)
TSUI 1. Sight Onisto (A) 2.119 -0.443 -0.321 - 0.706 0.9 0.072(0.40 (-0.38) (-2.21) - (4.61)
(A) 0.M -0.030 - -0.791 0.90 0.97 0.07O(0.04) (0. I) - (-1.5 (5.33)
(A) -L.O 0.37 -o.m -o.51 0.327 O.9 o.on(-0.49) (0.52) (-2.05) (-l.%2 (4.9)
(3) 1.203 -0.40 -0.223 - O.U2 0." 0.05(2.41) (-2.34) (-1.010 - (4.30)
(3) 1.4t7 -0.702 - -0.947 0.355 0." 0.042(3.70) (-3.25) - (-2.42) (7.74)
(3) 1.262 -0.593 -0.156 -0.329 0.59 O." 0.041(2.94) (-2.46 (-1.14) (-2.09) (.41U
2. Tin Deposits (A -1.024 0.45 -0.023 -1.33 0.924 0.91 0.033(1.04) (1.04) (-0.30) (-7.24) (3.47)
(6) 0.042 0.015 0.037 -1.341 0.100 0.97 0.033(0.11) (0.12) (0.47) (-6.131 (10.94)
18
Annex III
THE DYNAMICS OF PUBLIC SECTOR DEBT IN YUGOSLAVIA
I. Introduction
The replacement of NBY's foreign exchange losses by a stock of interestbearing bonds issued by the Gevernment constitutes a recognition of vheselosses as public sector debt. Likewise, the interest expense on the stock ofGovernment debt will be recognized as current budgetary expenditures. Thefiscal burden of NBY's restructuring depends on whether the bonds, issued toreplace the losses, are amortized or not. The evolution of the ratios of debtand interest expense to GNP, as well as the ratio of primary surplus (revenuesminus non-interest expenditures), to GNP will depend on the particularfinancing strategy adopted by the Government, as well as on the interest ratespaid an the debt stock and the growth rate of GNP.
This Annex provides an analysis of the evolution of these ratios underthree alternative solutions to the financing of interest and amortizationpayments on the debt stock. The first solution involves the amortization ofthe debt stock over a period of 40 years. In this case, the primary surplushas to be large enough to cover interest expenditures and the amortization ofthe stock of debt over the planned period of amortization. Unier the secondsolution, the stock of bonds is not amortized. In this case, the primarysurplus only has to cover interest expensesi'. In addition, one couldenvisage a third solution, involving a constant debt-output ratio.
2. Debt Dynamics: Primary Surpluses. Real Interest Rates and Output Growth
In the absence of Centrai Bank financing, the Government's budgetconstraint reduces to:
(1) D + (i + E)B E - (BE)
Where D is the nominal primary deficit/surplus, i is the international(Deutsche Mark) nominal interest rate paid on the (Deutsche-Mark denominated)debt stock, B*, and E is the nominal exchange rate (Dinar/Deutsche Mark). Thedots over the variables represent derivatives with respect to time and thepercentage changes (x - x/x). In equation (1) interest payments and the debtstock are stated in terms of Dinars. That is, the stock in Dinars, B, isequal to B*E, and the interest rate is adjusted for the exchange ratedepreciation. The sum of the two terms on the left side of the equationconstitute the nominal deficit. Equation (1) can be expressed in real terms
1/ As mentioned in Chapter VI, a constant real debt stock, as in the secondsolution, could also be achieved by financing the redemption of these(exchange-rate indexed bonds) through issues of inflation-indexed bonds.However, this swap of Dinar for foreign exchange-denominated debt is notconsidered to be adequate since it would generate a currency mismatch inthe banking system.
19
by dividing all the variables by the price level, P, multiplying and dividingthe Interest and the debt terms by the international (Germany) price level,P, and splitting e international nominal interest rate between the real rate,r, and the inflation premium, pal
(2) d + (r' + e)b^e (b-e)
Where d = D/P is the real primary deficit/surplus; b^ - B /P is thereal stock of debt, e - EP-/P is the real exchange rate and b^ the real changesin the stocky. Equation (2) is a linear differential equation in eb. Itshows that changes in the real Dinar value of the debt stock is driven by thereal primary surplus, d, the real interest payments in Deutsche Marks, rb'eand devaltiations of the real exchange rate, eb-e--a capital loss term.
Dividing all the variables in equation (2) by the real GNP, y, andnoting that (eb-)/y - (eb'/y) + y(eb'/y), where y is the rate of growth of realGNP, one obtains:
(3) (eb'/y) - d/y + r'(eb'/y) + e(eb-/y) - y(eb'/y)
Equation (3) shows that the changes in the real debt-output ratio aredetermined by the size of the real primary deficit relative to real GNP, thereal interest payments relative to real GNP, a capital loss term and an outputgrowth factor. Denoting the real debt stock in terms of Dinars as b - eb ,equation (3) can be rewritten as:
(4) (b/y) - d/y + ( r - y ) b/y + e b/y
Equation (4) indicates the three essential factors which drive the debt-output ratio: the primary deficit, the real interest rate-output growthdifferential and the real exchange rate devaluations. If the real exchangerate is kept constant, e G 0, equation (4) reduces to:
(4') (b/y) - d/y + (r' - y ) b/y
Which is a first-order linear differential equation whose generalsolution is:
(5) (b/y)(t) - e (r0dt ( K + (d/y)(t) e ("r.)dt dt )
It is useful to analyze the dynamic properties of the debt-output ratiounder an exchange rate policy which maintains a constant real exchange rate.Discrete adjustments in the real exchange rate produce jumps in the real debt-output ratio but do not affect the dynamic properties of the debt-output ratio(convergence/non-convergence). Of course, a continuous and sustained real
~./ i - r + p' . This formulation assumes perfect foresight, i.e. equalitybetween expected and realized inflation rates.
1/ b G B /P - pb'
20
exchange rats devaluation would affect the dynamic properties of the debt-output ratio, but this possibility is ruled out. Therefore, the sectionsbelow analyze the behavior of the debt-output and the primary surplus-outputratios under the hypothesis of a constant real exchange rate. The lastsection comments on the effects of real devaluations.
2.1. Solution 1: Primary surplus covers interest expenses and theamortization of the stock over a period of 40 years,
The solution to equation (5) is greatly simplified in the particularcases mentioned above. The first solution envisaged by the Yugoslavauthorities involves the generation of a primary surplus (through highertaxes) large enough to cover interest expenses and the amortization of thedebt stock over a period of 40 vears. In this case, the changes in the realstock of debt are determined by the constant yearly real amortizations:
(6) b - - a(t)
Where a(t)--the real amortization at period t--is equal to: b(0)/40,where b(0) is the initial real stock of debt. The solution to thedifferential equation (6) is simply:
(7) b(t) - b(0) - a. t b(0)( 1 - t/40 ) ; t < 40.
Assuming that real output gxows at a constant rate, y, the level of realoutput at period t, y(t), will be equal to y(0)eY'. Therefore, the real debt-output ratio at period t will be equal to:
(8) (b/y)(t) - (b/y)(0) e-Yt ( 1 - t/40 )
The real primary surplus at period t, d(t), is equal to:
(9) d(t, - - rb(t) - a(t)
Substituting the values of a(t) and b(t) and dividing by the real outputat period t one obtains the ratio of primary surplus to output at period t:
(10) (d/y)(t) (b/y)(0) eY' ( -r' + 1/40 ( r t - 1 ))
Figure 1 shows the time paths of the ratios of debt to output andprimary surplus to output for an initial real debt-output ratio of 25 percent,a constant real interest rate of 6 percent and a real output growth rate of 4percent. Under this solution, the real debt-output ratio would declinerapidly--approxiamtely 12 percent in just 10 years. The required real primarysurplus would also decline rapidly--from more than 2.1 percent of real GNP inthe first three years to 1.1 percent of real GNP in the same period.
2.2 Solution 2: Primary surplus covers interest expenses
Under the second solution the bonds issued to replace the stock oflosses are not redeemed. This solution consists in a zero real deficit and aconstant overall real debt stock. This is accomplished by setting the primary
A -
deficit at a level equal to the interest expenditures and keeping the stock ofbonds in NBY's balance sheet. The required primary surplus relative to GNPwould be d/y - - r b/y. In this case equation (4') reduces to:
(11) (b/y) - - y (b/y)
Equation (11) is a homogeneous, first-order linear differential equationwith constant coefficient, whose solution is:
(12) (b/y)(t) - (b/y)(0) e-Yt
In this case, the required primary surplus relative to GNP is alsoeasily obtained:
(13) (d/y)(t) - r' (b/y)(0) e-Yt
Figure 1 shows the time paths of the teal debt-output and primarysurplus-output ratios under the same conditions used to illustrate the firstsolution. In the second solution, the real debt-output ratio declines lessrapidly. This is obvious, since in the first solution the real debt stock isbeing amortized, while in the second solution the overall debt stoe~k is keptconstant in real terms and the decline in the real debt-output ratio is onlydlue to the growth of real output. Nevertheless, the compounding of outputgrowth rates over time also produces a significant decline in the debt-outputratio in the second solution--after 40 years the debt-output ratio would bereduced to approximately 5 percent. The prima-y surpluses immediatelyrequired in the second solution would be smaller--between 1.5 and 1.2 percentof GNP in the first five years, compared with 2.1--l.7 percent of GNP in thefirst solution. After the seventeenth year the required primary surplus inthe second solution would become larger than the one required in the firstsolution. However, at this stage the required primary surpluses under eithersolution would be extremely small--less than 0.8 percent of GNP and declining.
It should be noted that the level of real interest rates does notproduce any impact on the time path of the real debt-output ratio under eithersolution. This is because in both cases the primary surplus is adjusted so asto cover the interest expenses on the stock of debt (in the first solution italso covers the amortization of the stock). Therefore, in either case thereal interest rate may be above the output growth rate without causingproblems of divergence!/. However, the level of real interest rates doesaffect the required primary surplus relative to GNP.
i/ As shown in equation (5), if the real interest rate is higher than theoutput ,rowth rate, the debt-output ratio does not converge to anyfinite value.
22
FIGURE 1
CeOtt-OUtWt Rat(O s rrlnry surpus-outout RatLos
C41.~~~~~~~~~~~S
B. - 0.03
161
ILM.
B. _ . . , ,
2.3. Solution 3: Constant Real Debt-Output Ratio
A third solution which could be envisaged consists in generating a primarysurplus/deficit so as to maintain a constant debt-output ratio. In this case,equation (4) would reduce to:
(14) (d/y) - - ( r - y )(b/y)(0)
If the real interest rate paid on the stock of debt remained above theoutput growth rate, the Goveinment would have ta maintdin a constant primarysurplus. For instance, if the real interest rate-output growth ratedifferential remains constant at 2 percent (6 percent minus 4 percent, asassumed above) and the initial debt-output ratio is 25 percent, the Governmentwould have to maintain a primary surplus of 0.5 percent relative to GNP. Inthis case, the primary surplus is less than the interest expenses because thegrowth of real GNP allows the Government to finance part of the interestexpenses through additional debt issues, while also maintaining a constantdebt-output ratio.
2.4 Real Exchange Rate Devaluations
Real exchange rate devaluations would increase the real Dinar value ofthe debt stock, therefore also increasing the real value of interest andamortization payments. A discrete real devaluation would produce an upwardshift in the schedules but would not change the dynamics. After the realdevaluation, the debt-output and primary surplus-output ratios would resumetheir declining trajectories. Of course, that does not imply that the
23
additional fiscal effort that would be required by a real devaluation may beoverlooked. For instance, under the adopted assumptions, the implementationof the second solution would drive the debt-output ratio down to 20 percent inthe fifth year. A real devaluation of 20 percent in that year would drive thedebt-output ratio close to its original value, thus requiring an additionalfiscal effort. In any case, the fiscal adjustment required by the secondsolution is smaller in the early years. That makes it quite atractive,especially one takes into account the need to provide fiscal support to therestructuring of enterprises and banks in the same period.
24
Annex IV
The Bak_ing System In Yu_oslavia
I. The Central Banking System
1. The Institutional Set-up. The central banking system of Yugoslavia(National Banks, for short) comprises the National Bank of Yugoslavia (NBY)and the National Banks of the eight Republics and Autonomous Provinces(NBRAPs). The assets of the National Banks account for approximately30 percent of the total assets of the financial system.!1 The design andconduct of monetary policy in Yugoslavia are carried out by the National Banksthrough a Board of Governors consisting of the Governors of the NBRAPs and theGovernor of the NBY. Decisions of the Board are binding on all the NationalBanks. Until recently, most operational decisions required a unanimous vote;now, however, all decisions are based on a majority vote. In case the Boardfails to reach a decision, the Federal Executive Council makes the finaldecision. The NBY is responsible to the Federal Assembly, whereas the NBRAPsare responsible to the respective assemblies of the Republics and Provinces.
2. Functions. In general, the functional responsibilities of the NationalBanks in Yugoslavia are similar to those of the central banks in othercountries. They are responsible for the design and the implementation ofmonetary and credit policies of the Government. They perform this function inthe context of the annual economic plan o the Government, called the AnnualResolution. Upon approval of the Annual solution by the General Assembly,the Board of the Governors of the NBY decides on the policies and measures toachieve the monetary objectives and targets of the Resolution. Thesedecisions and the Board's recommendations are then submitted to the FederalExecutive Council for approval. When the Board's recommendations areapproved, they are sent back to the NBY for implementation. The NBY theninstructs the NBRAPs as to the manner in which these policies should becarried out.
3. Unlike the central banks in many countries, the National Banks do notengage in direct short-term lending to the Federal Government.V However, theNational Banks have been implicitly extending credit to the Government byassuming the foreign exchange risk on foreign currency deposits collected bythe commercial banks. The latter has created enormous losses for the NationalBanks and has been the major source of base money expansion in Yugoslavia.
4. Noteworthy, with respect to the National Banks' operation, is theirpreoccupation with para-fiscal activities and extending credit on preferential
1/ Including non-bank intermediaries, but excluding the inter-enterprisemarket.
2/ The exception is credit to the army.
25
terms to priority sectors. At the heart of this issue stands the policy ofregional allocation of the benefits of base money creation. In practice,these para-fiscal tasks seem to take priority over the National Banks' task ofconducting a national monetary policy aimed at price stability.
II. The Commercial Banking System
A. Financial Arrangements in the Post-War Period
1. The post-war period has seen a number of profound changes in theYugoslav political and eccnomic system which have been reflected in themechanisms for resource mobilization and allocation and in the structure ofthe financial system. Between 1945-1952, the pre-war market economy wasgradually replaced by a centrally-planned economy in which planning 'DoAiesmade practically all savings and investment decisions, and the Natioial Bankof Yugoslavia (NBY) performed all central and commercial banking operations.Si..ce that time, there have been three stages of increasing decentralization.The first elements of self-management were introduced between 1953-1964,during which time the NBY gradually transferred part of its functions tonewly-established banks, and the Social Accounting Service (SDK) became anindependent institution. A second decentralization was launched throughreforms in 1965, aimed at enlarging the scope of self-management. Banks weretransformed into three types of so-called "business" banks (investment, mixedand commercial) and began to exercise significant influence on the investmentdecisions of enterprises, partly because of the easing of previously imposedcentral planning requirements. Considerable powez was also enjoyed byGovernment bodies, especially at the local and regional level.
2. The period from 1971 to the present began with a major reform program inwhich self-management was extended to all levels of decision-making inassociation with an important transfer of power from the Federal to theRepublican, Provincial and local Governments. In 1971, the productionstructure of the economy was fragmented by splitting existing enterprises intoBasic Organizations of Associated Labor (BOALS). The Law on the Foundationsof the Credit and Banking System was adopted in 1977 and reflected theintention that the "pooling of labor and resources" would become the mkjstimportant instrument for mobilization and allocation of savings in theeconomy. The law replaced existing banks by basic and associated banks, whichwere to be organized and managed as "financiel associations of associatedlabor". It also led to the creation of internial banks as financiai serviceorganizations for BOALS bound together by self-management agreements withinlarger organizations of associated labor. Although significant revisions tothe banking legislation were made in 1985, the Law on the Premises of theBanking and Credit System, which was introduced at the end of that year,helped to maintain the three-tier structure of internal, basic and associatedbanks until recently.
3. Yugoslavia is now in the midst of a policy and legislative reform effortwhich is aimed at achieving a more fundamental restructuring of its economicsystem. The constitution was amended in late 1988. An extensive package ofnew legislation has been introduced, including new laws on enterprises and on
- 26 -
foreign investment (in December 1988), on accounting and on financialoperations (in February 1989) and the new "Law on Banks and other FinancialOrganizations" which was issued on February 17, 1989.
4. Section B of this Annex reviews the main features of the commercialbanking system from 1977 to present day. Section C focusses on the newbanking law and further elements of the legislative framework needed toachieve reform objectives.
B. Institutional Structure of the Financial System from 1977-1989
1. The Commercial Banking System
5. By the beginning of 1988, the commercial banking system consisted ofabout 150 basic, 9 associated, and more than 200 internal banks. The maintask of internal banks was to place in circulation the pooled resources oftheir member enterprises and to channel resources to priorities agreed bythem. The internal bank conducted the BOALs' payments operations and lendingand credit transactions. They were allowed to accepc deposits only from memberBOALS and from the workers within the group. They were not subject tomonetary regulation and some internal banks have therefore been able tosubstantially expand their financing activities and become major participantsin enterprise financing.
6. Basic barks formed the core of the commercial banking system: theyaccepted individual and enterprise deposits and extended short- and long-termfinancing to public and private customers. They were founded, owned andalmost exclusively directed by enterprises and, to a lesser extent, by SocialCommunities of Interest. The larger enterprises were the dominant foundersand also the principal borrowers of the banks.V Ownership of a basic bank bygovernmental bodies was explicitly excluded. Whereas the basic banks weremeant to mobilize resources for the purpose of financing "social production",in a narrower but more critical sense, they aimed at satisfying their foundersdemand for credit at the lowest possible cost. The basic banks were, hence,not truly profit oriented and have been undercapitalized&.
i/ In fact the actual borrowers were not production nor financiallyintegrated entities, but rather the individual basic organizations ofassociated labor (BOALS) which comprised an enterprise.
§/ The equivalent of the banks' equity capital were their reserves: theJoint Liability Fund (JLF), the Fixed Assets Fund, and the Reserve Fund(RF). These funds were made up of the initial contribution of thebanks' founders and contributions from the surpluses of the banks. TheFixed Assets Fund covered expenditures incurred in providing fixedassets needed for the operation of the bank. The JLF was used forwriting off losses. The RF was used to maintain the liquidity of thebank.
- 27 -
7. The law provided that the primary management body of a basic bank wouldbe the assembly. Representatives of the founders made up the banks'assemblies, executive committees, credit committees and supervisingcommittees. Operational managers did not serve on these committees.Furthermore, although the basic banks were legally designed to operatenationwide, their activities were mostly confined to their original regions,partly as a result of their ownership structure. Their numbers did not varysubstantially until 1987 (when seventeen banks in Macedonia, two in Croatia,and one in Vojvodina were merged with other banks in the same RAP).
8. Associated banks were founded and managed by two or more basic banks.Their main function was to pool the resources of basic banks, to undertakeborrowings for large operations, and to handle foreign exchange and creditactivities on behalf of their member basic banks. Unlike basic banks, theywere not permitted to issue checking accounts or accept savings deposits. Theassociated banks were also originally envisaged as nationwide institutions.However, the associated banks have served the interests of the basic bankswhich form their group and primarily of the RAP in which they are located. Atpresent, there is one associated bank in each RAP except for Serbia, which hastwo. With one exception (Jugobanka, one of the banks headquartered inSerbia), the extent of these banks' operating sphere beyond regionalboundaries has been extremely limited. The actual relationship between basicbanks and their associated bank varied among the nine associated bankinggroups and there was a marked difference in the strength of the associatedbanking groups in different RAPs. However, in all cases the associated banksexercised a leadership role, which in part reflected the generally greatermanagerial strength and technological sophistication of the associated banks,and in part the importance of their specialized functions (foreign credit andexchange transactions, larger scale borrowings, guarantees, etc.).
2. Bank Associations and Regulatory Institutions
9. Ail banking organizations were legally required to be members of theAssociation of Yugoslav Banks (YBA), which was in turn represented in theChamber of the Economy. YBA promoted inter-bank co-operation and bankingactivities; provided legal and professional staff assistance to banks; andcooperated with the federal authorities in the formulation of laws on monetaryand banking issues. The cooperation among banks within the YBA was formalizedthrough self-management agreements, and a notable example of these were theagreements on the uniform interest rates on deposits.Y In addition to theYBA, there are three regional bank associations.
10. Basic and associated banks have been supervised by the MBY. They havebeen audited by the Social Accounting Service (SDK). SDK is an autonomousorganization responsible to the Federal, Republican and Provincial assemblies.It operates nationally through a network of branches and performs three types
5/ Based on the agreement of its member banks, the YBA has also managed thedevelopment of the recently approved Common Methodology for investmentselection which is to be applied throughout Yugoslavia.
- 28 -
of operations: it has been the financial auditor of banks and enterprises andsocio-legal entities; it acts as a clearing center for all payments ofenterprises and socio-legal entities (with the exception of socio-politicalcommunities whose payments are undertaken by the central banking system);Vand It collects and publishes statistical information based on the quarterlyreports and annual accounts which all socio-legal entities are obliged toprovide.
WX SDK performs payment services as a bank agent, its balances being aliability to the bank in which the deposits are originally held.
29
Annex V
NON-BANK FINANCIAL INSTITUTIONS
1. In Yugoslavia, a number of non-bank financial intermediaries (NBFIs)have been established, including savings banks and insurance companies. Thusfar, however, their role in the financial system has been limited.
2. Post Office Savings Banks (POSBs). POSBs, like banks, are founded bybasic organizations of associated labor (BOALs) and managed by a boardcomprising representatives of the founders. They are authorised to acceptdeposits from individuals and to make foreign payments on behalf of theirfounders. However, unlike banks, POSBs are not authorised to grant credits,except to their founders and are obliged to deposit th2ir surplus funds inbasic banks within their region. At present, POSBs play a very minor role inthe financial system; their total assets are equivalent to only about 1% ofthe total assets of the associated and basic banks.
3. Savings Banks. In contrast to POSBs, savings banks play an even smallerrole in the financial sector; their number is small and their assets amount toa minute fraction of the assets of POSBs. However, unlike POSBs, they areauthorised to grant credits to households. According to the law, savingsbanks can be established by BOALs and other social/legal entities.
4. Insurance Companies. Insurance companies provide both life insuranceand general and casualty insurance. Like POSBs, the use of their funds isrestricted to deposits in banks only. The funds of the insurance companiescannot be used to purchase money market instruments or to make investments.Total assets of the insurance companies is again a negligible percentage oftotal financial system assets.
5. Self-managed Funds of Associated Labor (SFAL). SFALs are joint or"pooled" funds of enterprises. These are formed, when two or more enterprisescombine their financial resources to finance a "joint venture"; these jointventures are of a contractual rather than equity nature. Typically, one ofthe enterprises in the "pool" would be the lead investor and the otherenterprises in the "pool" would provide financing with both loan and equityfeatures.
6. Thus, for instance, a risk sharing agreement (the contract) might benegotiated whereby the non-lead investor enterprises may have a first claim ora disproportinately large claim (in relation to their financial contribution)on the profits of the joint venture for the duration of the contractualagreement (although the non-lead investor enterprises may be liable for lossesas well). At expiration of the agreement, the lead enterprise typicallybecomes the sole owner of the project (with or without having to pay atransfer price to the other enterprises). Alternatively, the partners maynegotiate to continue the contractual agreement. To a large extent, however,the arrangements are such that the non-lead enterprises will generally have toseek a return on their initial contributions from their share of project
30
profits (during the contract period), rather than from any capital gains atthe termination of the contract.
7. A number of companies interviewed have expressed their unhappyexperience, as non-lead investors, with this form of arrangement. They claimto have limited management control over the new projects (which are normallymanaged by the lead enterprises) and have often received low or negativereturns to their contributions, since many projects are of a developmentalrather than commercial nature (see following section) and also because leadenterprises are not particularly motivated to maximize profits during theperiod of the joint venture agreement, knowing as they do that ownership ofthe joint venture eventually reverts fully to them.
8. Investment Loan Funds (ILFs). Various investment funds have beenestablished by law for the specific purpose of financing projects in theless-developed regions of the country. The most important of these is theFederal Fund for Financing Economic Development of Less-Developed Republicsand Autonomous Regions. Similar funds have also been established at therepublic and local levels. Generally speaking, contributions to thefe fundsare made by enterprises, are obligatory and are channelled through basicbanks. Since 1980, enterprises have been permitted to use up to 50% of theircontributions to the Federal Fund to finance SFAL projects which they havenegotiated with enterprises in less-developed regions. In the 1980s,investment funds have averaged about 2% of GSP per annum.
9. The Yugoslav Bank for International Economic CooReration (YUBIEC).YUBIEC is an export credit and insurance institution, whose main function isto promote Yugoslav exports and to develop economic relations with foreigncountries. Up until 1968, Yugoslavia's export of capital goods was financedby Jugobanka, at that time, a specialized bank for foreign trade. Jugobankaobtained its resources from the NBY and the state. In 1968, Jugobanka'sfunctions were taken over by the Export Credit and Insurance Fund (ECIF),which was established to refinance credits granted by commercial banks for theexport of capital goods and to provide insurance against non-commercial risks.To support these activities, the ECIF obtained its funds from the state andfrom borrowings.
10. In 1979, the functions of ECIF were in turn taken over by the newlyestablished YUBIEC. In addition to the ECIF functions, YUBIEC was assignedadditional export promotion tasks, such as financial cooperation with foreignparties, promotion of joint ventures, financing of preinvestment activities,legal and financial consultancy and the supply of information to founders ofthe bank. The founders of YUBIEC consisted of exporting enterprises, namelyshipbuilders, capital goods manufacturers and capital project contractorsoperating abroad. As of the end of 1988, YUBIEC had a total of 182 members.YUBIEC financed itself by drawing on funds from its members, basic andassociated banks and the NBY. Other sources of funds included foreignborrowings and security issues.
11. In the first half of 1989, the new Law on the Yugoslav Bank forInternational Economic Cooperation was promulgated. Under this Law, YUBIEC isto be transformed into a Joint-stock company and its ownership expanded to
31
include the state and banking institutions, as well as exporter enterprises.The restructured Bank will provide preshipment credits for capital equipmentand ships and grant credits to foreign buyers (buyer's credits) in its ownname and for its own account. It is envisaged that YUBIEC will continue tofund itself through the domestic and international capital markets.
32
Annex VI
Yugoslav Money and Securities Market
The history of the money market in Yugoslavia dates back to 1967, whencertain banks found a necessity for inter-bank transactions and accordinglyorganized a market. Tne money market is utilized by both enterprises (toraise short-term credit) and banks (to meet reserve requirements and to keepwithin credit ceilings).
Reflecting the regional structure of the banking system in Yugoslavia,the money market has developed into a two-tier market. Banks within the sameassociation deal directly with each other, while inter-associationtransactions are conducted primarily at the level of associated banks. Ineffect, banks attempt to satisfy their needs through intra-associationtransactions in the first instance, and inter-association transactions takeplace only as a means of clearing the surpluses and deficits of bankingassociations as a whole.
In 1987, more formal recognition was given to the money market, with theestablishment of the Yugoslav Money and Securities Market (YMSM). The YMSM isphysically located in Belgarde and is organized under the auspices of theYugoslav Bankers Association, on the basis of a self-management agreement (asprovided for by Article 165 of the Law on the Bases of the Credit and BankingSystem). Participants in this market include members (basic and associatedbanks) and non-members (other financial institutions). POSBs, for example,are non-members, but are permitted to deposit funds in and to borrow from themarket, although they are not allowed to engage in the trading of securities.As of November 1987, the number of participants in the market totalled 176.
The YMSM is organized with an Assembly (consisting of representatives ofmembers), a Board of Control (7 members) and an Executive Committee (23members). Members of the Board and the Committee are elected by the Assemblyfor two year terms. The function of the Executive Committee is to implementpolicies adopted by the Assembly, while the function of the Board is tomonitor and supervise the work of the Executive Committee. The Board meetsonce a year, while the Committee meets once or twice a month. Assemblymeetings are held once or twice a year.
The law provides for the YMSM to engage in the following activities:
1. The attraction and lending of idle money resources of banks andother financial organizations.
2. The trading of negotiable short-term securities.
3. The buying and selling of long-term securities.
4. Other transactions related to the speeding up of the circulationof idle money resources and the maintenance of the liquidity ofbanks.
33
The YMSM distinguishes itself from direct inter-bank operations in thatit is more like a bank (a "bank of banks") than a market. The YMSM acceptsdeposits (up to two years in term) from, and makes short-term loans to, banksand POSBs (up to one year in term). With its surplus funds, it also purchasesbills and notes from banks, subject to specific decisions adopted by itsAssembly. It does not, however, issue securities. During periods of tightcredit ceilings, the YMSM provides the banks with a mechanism for off-loadingthe promissory notes in their portfolios and thus lowering their creditexposure.
The law requires that the issue of all promissory notes be backed bygoods and services: i.e. that notes and bills be issued on the basis of "realcommodity-money relationships". In practice, however, the recording,monitorin; and regulatory system has been weak and inadequate (as confirmed byan audit of the Serbian SDK in Belgrade (see Report Incorporating ArrangementsProposed for Regulating the Status and Operation of the Yugoslav Money andSecurities Market, Federal Secretariat of Finance, Belgrade, 20 November,1987). This was one of the major factors leading to the "Agrokomerc" affair,in which a large number of promissory notes were improperly issued and nodetermination was made as to the liquidity and creditworthiness of the issuinginstitution.
Following the "Agrokomerc" affair, attempts have been made to strengthenthe regulation and security of the market. To this end, the YMSM's Assemblyadopted a resolution to regulate the discounting of bills and notes in themarket. This resolution sets out the conditions under which bills and notescan be discounted in the YMSM. Specifically, the market may only accept billsand notes for discounting if such bills and notes have been:
1. purchased by basic banks from their trading partners;
2. issued in accordance with the Law on Securing Payments BetweenUsers of Social Assets;
3. issued with a face amount of not be less than one million dinars;
4. issued with a maturity of not be less than 10 days and no longerthan 60 days;
5. endorsed by the issuing bank and have changed hands at least once(not including the issuing bank) before presentation to themarket.
34
ANNEX VII
Structure of the Income Statements of Yugoslav Enterprises in the
Petiod 1986. 1987-88 and the ProDosed Structure for 1989'
In this Scheme we shall present the structure of the income statementsof Yugoslav firms in three different periods. This is not how thesestatements actually look like; they have been transformed in order to presenttheir logic in a simple manner. This scheme can also be used forunderstanding how revaluation effects are treated on the income statements.
Items to be deducted are in brackets.
Structure up to 1986
1. Revenues, including financial revenues
2. (Cost of goods sold)
3. (Depreciation)
4. Income (1-2-3)
S. (Financial costs)
6. (Taxes and contribution)
---- _--------------
7. Net income (4-5-6)
8. (Personal income, i.e. wages and salaries)
9. (Collective consumption)
_____________a_____
10. Profit or loss (7-8-9)
* Prepared--by Professor N. Mates
35
Structure in 1987 and 1988
1. Revenues, including real financial revenues
2. (Cost of goods sold)
3. (Revaluation of c.o.g.s)
4. (Net revaluation costs)
S. (Revaluation of the business fund, if not covered by the revaluation
surplus)
6. (Depreciat&on)
7. (Revaluation of depreciation)
___________________
8. Income (1-2-3-4-5-6-7)
9. (Real financial costs)
10. (Taxes and contribution)
___________________
11. Net income (8-9-10)
12. (Personal income, i.e. wages and salaries)
13. (Collective consumption)
14. Profit or loss (11-12-13)
36
Illustration of the effects of inflation on the stated income in differentaccounting systems applied in Yugoslavia'/
In this Appendix, we shall present on a number of simplified examples ofthe effects of inflation on stated income and the balance sheet, as per theold accounting system in force until the end of 1986, and the accountingsystem in force in 1987 and 1988. In the first part, we shall analyze theseeffects with respect to fixed assets, and in the second with respect toworking capital. These simplified examples have been devised soas to show the key characteristics of these accounting systems.
1.1 Fixed Assets under the Accounting System in Force until 1986
For simplicity's sake let us assume that in all the three cases anenterprise operates without inventories and that its revenue equals itsdepreciation. In the first case, we shall assume that the enterprise fullyfinances its fixed assets from its business fund. In the second case, weshall assume that fixed assets are 50 percent financed from its business fundand 50 percent from interest-free credits. In the third case, 50 percent ofthe fixed assets are financed from its business fund and 50 percent fromexpensive credits. Stated in a table, the assumptions are as follows
Case 1 Case 2 Case 3Value of fixed assets 1000 1000 1000Business fund 1000 500 500Interest-free credits - 500 -Expensive credits
(50% interest rate) - - 500Inflation 50% 50% 50%Depreciation rate 20% 20% 20%Revenues 200 200 200
The opening and closing balance and income statement for the three casesare as follows
Case 1
Opening balance sheetFixed assets Business fund 1,000-Current value 1,000-Depreciation 0-Net value 1,000Closing balance sheetFixed assets Business fund 1,000-Current value 1,500 Reval.in favour of b.f. 400
g Prepared by Professor Neven Mates , Ekonomski Institute, Zagreb.
37
Depreciation (300)-Net value 1,200Cash 200Income statementRevenues 200Depreciation (200)Income 0
Case 2Opening balance sheetFixed assets Business fund 500
-Current value 1,000 Cheap credits 500
-Depreciation 0-Net value 1,000Closing balance sheetFixed assets Business fund 500
-Current value 1,500 Reval. in favour of b.f. 400
-Depreciation (300) Cheap credits 500
-Net value 1,200Cash 200Income statementRevenues 200Depreciation (200)Income 0
Case 3Opening balance sheetFixed assets Business fund 500
-Current value 1,000 Expensive credits 500
-Depreciation 0-Net value 1,000
Closing balance sheetFixed assets Business fund 500
-Current value 1,500 Reval. in favour of b.f. 400
-Depreciation (300) Expensive credits 500
-Net value 1,200 Interest due 250
Cash 200Loss 250Income statementRevenues 200Depreciation (200)Interest (250)Income -250
38
In the first case the income was zero,but the equity of this enterprisewas only partly preserved. This was because depreciation was computed on thenon-revaluated purchase value of fixed assets. If depreciation had beencomputed on the revaluated value of the fixed assets at the end of the year,the income statement would have correctly shown that total revenues were notsufficient for the full computation of depreciation. Total revenue shouldhave amounted to 300 dinars. If it had continuously flowed in, it could havebeen smaller. Because of its investment in interest-bearing assets,corresponding financial receipts should have been in an amount sufficient tofully cover depreciation. Consequently, owing to the insufficient computationof depreciation, under this system part of the real losses would have beenconcealed.
The second example shows that inflationary gains arising from creditsfor fixed assets were, to a large extent, excluded from the stated income, andresulted in a real increase of the business fund. In this way the businessfund was augmented much more than necessary to sustain its real value. Thereal increase in the business fund was in this case smaller than theinflationary gains stemming from cheap credits. Part of these gainscompensated for the insufficiently computed depreciation.
The third example shows that if the enterprise had financed its fixedassets from credits at a high nominal interest rate (at the level of the rateof inflation), it would have recorded a considerable real increase in thebusiness fund, on the one hand, and a loss in the income statement, on theother.
1.2. The Same Examples under the Accounting System of 1987 and 1988
Case 1Opening balance sheetFixed assets Business fund 1,000-Current value 1,000-Depreciation 0-Net value 1,000Closing balance sheetFixed assets Business fund 1,000-Current value 1,500 Reval. of the b.f. 500-Depreciation (300)-Net value 1,200Money 200Loss 100
Statement of revaluation revenues and costsRevaluation of fixed assets 400Revaluation of depreciation 61Revaluation of business fund (500)Balance -39Income statementRevenue 200Depreciation (200)Revaluation of depreciation (61)
39
Deficit of reval.revenue (39)Income -100
Case 2Opening balance sheetFixed assets Business fund 500-Current value 1,000 Cheap credits 500-Depreciation 0-Net value 1,000Closing balance sheetFixed assets Business fund 500-Current value 1,500 Reval. b.f. 250-Depreciation (300) Cheap credits 500Yet value 1,200 Reval.reserve 211Cash 200Loss 61
Statement of revaluation revenues and costsRevaluation of fixed assets 400Revaluation of depreciation 61Revaluation of business fund (250)Balance 211Income statementRevenues 200Depreciation (200)Revaluation of depreciation (61)Income -61
Case 3Closing balance sheetFixed assets Business fund 500-Current value 1,500 Reval.of the b.f 250-Depreciation (300) Expensive credits 500-Net value 1,200 Interest due 250Cash 200Loss 100
Statement of revaluation revenues and costsRevaluation of fixed assets 400Revaluation of depreciation 61Revaluation of business fund (250)Interest on credits (250)Balance -39Income statementRevenues 200Depreciation (200)Revaluation of depreciation (61)Deficit of reval.revenues (39)Income -100
40
The first example, according to the basic variant of the new accountingsystem, correctly shows a business loss of 100 dinars, because revenue was notsufficient to cover depreciation. It is, however, important to note that theloss is only partly stated through the revaluation of depreciation. Full lossis stated only because of the obligatory full revaluation of the businessfund. However, according to an amendment passed at the end of 1987,enterprises had the option of not stating the deficit in revaluation revenuesto preserve the real value of the business fund, which would encumber theincome statement (in this case 39 dinars), and were permitted to carry thiscost forward to the next year, when it could be covered by a non-revaluatedamount. By using this relief, the enterprise in question could state a loss ofonly 61 dinars.
The second example shows that even the accounting system of 1987 did notfully eliminate inflationary gains from the income statement. In this case,the loss was smaller than in the first case; the only difference between themis that in the second case the fixed assets were financed in part by cheapcredits. This was due to the fact that even in the accounting system of 1987,real depreciation was not fully computed. Whereas in the first case theresult was corrected by the obligatory revaluation of the business fund, thiswas not so in the second case where a portion of the fixed assets werefinanced under favorable terms.
The third example shows that the basic variant in the accountingsystem of 1987 correctly presents the loss to an amount of 100 dinars, sincethe income was not sufficient for the real amount of depreciation. It should,however, be noted that in this case, too, the enterprise was able to diminishthe loss stated by carrying forward to the next year the deficit for a morepositive revaluation affect.
1.3 Analysis of the Effects of Revaluation and Nominally High Interest Ratesin the Sphere of Working Capital
Common Assumptions:
The assets of the enterprise consist of inventories and cash only. Itsliabilities consist of varicas combinations of the business fund, cheap(interest-free) credits, and credits at an interest rate equalling the rate ofinflation. The enterprise has not processed the inventories procured, i.e.,it has not generated any value added.
The annual inflation rate is 50 percent, and the corresponding monthlyrate 3.4 percent. Multiplied by 12, this amounts to 41 percent per annum.
Case 4 - the old accounting system
At the beginning of the year, the enterprise had at the beginning of theyear inventories valued at 1,000 dinars, which are exclusively financed fromits business fund. At the end of the year, it sells all its: inventories atprices increased by an amount corresponding to the inflation rate.
41
Opening balance sheet
Inventories 1,000 Business fund 1,000
Closing balance sheetInventories 0 Business fund 1,000Cash 1,500 Income 500Income statementRevenues 1,500Costs 1,000Income 500
We can see that under the old accounting system an enterprises whichfinanced its inventories from its business fund could end the business yearwith a fictitious income. On this income it had to pay taxes; it could alsouse part of this income for wages anid salaries. However, if before sellingthem, this enterprise had purchased its inventories at a new price, it wouldhave been obliged to revaluate them. Its balance sheet and income statementwould be finally as follows:
Closing balance sheetInventories 0 Business fund 1,000Cash 1,500 Effect of reval. for b.f. 500Income stateme.tRevenues 1,500Expenses (1,500)Income 0
Consequently, avoidance of the ap. arance of fictitious income in theincome statement depends, in such a case, on whether or not purchases weremade at new prices, and on whether or not the enterprise had carried outrevaluation (which was not easy to control).
The above results will not change if we assume that inventories werepurchased and sold every month. Revenues and costs would be greater, but theresult (provided there were no individual revaluations of inventories) wouldnot change. It should, however, be noted that it is less likely that a fullrevaluation of inventories could be carried out before their each individualsale.
Case 4 - the new accounting system
Opening balance sheetInventories 1,000 Business fund 1,000Closing balance sheetInventories 0 Business fund 1,000Cash 1,500 Reval.of the b.f. 500Statement of revaluation revenues and cestsRevaluation of inventories spent 410Revaluation of business fund (500)
42
Balance -90Income statementRevenues 1,500Costs (1,000)Revaluation of costs (410)Deficit of reval.revenues (90)Income 0
As we can see, according to the basic variant of the new accountingsystem, the income statement would be correct and the income achieved wouldbe zero. However, in this case, the costs would partly be correctlyrevaluated owing to the erroneous computation of the rate of revaluation(monthly rate multiplied by 12). This is, however, compensated for by therevaluation of the business fund. It should also be noted that the enterprisealso had the possibility to leave 90 dinars of deficit of revaluation revenuesfor the next year and to present the income of 90 dinars.
Case 5
Let this case be fully identical with case 4 and let only inventories befinanced from cheap (interest-free) credits. It is not necessary to presentthis case through the balance sheet, since the previous tables can be easilymodified for this purpose.
Under the old accounting system, income up to an amount of 500 dinarswould be presented. This would not be fictitious income but only aninflationary gain recorded in the income statement.
Under the new accounting system an income of 90 dinars would be recordedand a surplus of positive revaluation effects in favour of the revaluationreserve amounting to 410 dinars (because, in this case, there has not been anyrevaluation of the business fund). In this case, too, the new accountingsystem has not fully succeeded in excluding from income the inflationary gainsarising from cheap credits.
Case 6
This case is fully identical with case 4; however, let us only assumethat inventories were not sold at the end of the year. Under the accountingsystem of 1987 and 1988 inventories would be automatically revaluatedaccording to the average price indices and the effect thereof credited to thebusiness fund. If these inventories were later sold under lower prices, theenterprise would record a loss.
Case 7
This case assumes that inventories were not sold at the end of the yearand that they were financed from nominally expensive credits (at an interestrate equalling the rate of inflation). Under the old accounting system theenterprise would have recorded a loss equalling the amount of interest paid.In principle,the new accounting system should not record a loss. In fact, it
43
would record a loss (90 dinars) owing to the incorrectly computed revaluationcoefficient. These two accounting systems are presented as extreme cases.Whereas the old system did not recognize a nominal increase in the value ofinventories unless they were procured at new prices, regardless of the elapsedtime since their procurement, the accounting system of 1987 and 1988automatically ir.creases their prices independent of market prices.
Case 8
Let us suppose that an enterprise was given a cheap (interest-free)long-term credit for fixed assets in an amount of 2,000 dinars. Let us, forthe sake of simplicity, disregard depreciation of fixed assets. Let usfurther assume that at the beginning of the year, it had inventories with avalue of 1,000 dinars and 500 dinars in cash for current liquidity during thecourse of the entire year. Let this working capital have been financed by ashort-term credit of 1,500 dinars at an interest rate equalling the rate ofinflation. The enterprises has, however, operated poorly and the finishedproducts sold for an amount equal to the purchase prices of the materials.
Under the old accounting system its balance sheet would beas follows:
Opening balance sheetFixed assets 2,000 Cheap credits 2,000Inventories 1,000 Expensive credits 1,500Cash 500Closing balance sheetFixed assets 3,000 Initial business fund 0Inventories 0 Effect of reval. inCash 1,500 favour of b.f. 1,000Loss 750 Cheap long-term
credits 2,000Expensive long-termcredits 1,500Interest due
Income statementRevenues 1,000Costs (1,000)Interest (750)Income -750
Under the accounting system of 1988 and with the application of thevariant a) method of the revaluation of costs and inventories, the balanceswould look as follows:
Closing balance sheetFixed assets 3,000 Cheap credits 2,000Inventories 0 Expensive credits 1,500Cash 1,500 Reval. reserve 660Loss 410 Interest 750Statement of revaluation revenues and costs
44
Revaluation of fixed assets 1,000Revaluation of inventories spent 410Interest (750)Balance 660Income statementRevenues 1,000Costs (1,000)Revaluation of costs (410)Income -410
As can be seen, under the old accounting system the loss incurred incurrent business operations would be correctly stated in the amount ofinterest on credits used for working capital, i.e., 750 dinars, where500 dinars relates to the financing of inventories (which a year later, and ata rate of inflation of 50 percent, could not be sold at a nominal price higherthan the purchase price), and 250 dinars of interest due on the part of creditused for financing current liquidity (loss due to keeping cash underconditions of inflation).
Under the accounting system of 1987 and 1988, less than a third of reallosses from current business operation was stated. This is due to tworeasons. First, the effects of the revaluation of fixed assets "cover" hereinterest paid on short-term credits used for financing current liquidity.This "liquidity cost" is therefore completely excluded from the incomestatement since it is not included in the revaluation of the costs ofinventories spent. Second, the effects of the revaluation of fixed assetsalso cover the cost of interest paid on short-term credits. The revaluationof costs only partly makes good interest excluded from the income statement,so that the loss becomes much smaller. It is not, however, difficult to seethat such an enterprise runs the risk of illiquidity since the money availableto it does not enable it to pay interest on expensive short-term credits, evenif the inventories have been sold.
If, however, instead of variant a) for the revaluation of inventoriesand costs, the enterprise had applied the "hifo" or "lifo" method, then withrespect to case 8 it would most likely record an even smaller loss. Morespecifically, with suc'L a revaluation of inventories and costs, revaluationcosts would have decreased on the income statement. Since, at the same time,interest up to the level of the rate of inflation was excluded from the incomestatement,and the enterprise could have fully "covered" this interest from therevaluation of its fixed assets, no loss at all would have been recorded.
Finally, for such effects it is not necessary at all for an enterpriseto have cheap sources of finance. If instead of cheap credits, it would haveutilized its own capital, it could have carried forward to the next year theobligation to cover the revaluation of the business fund and cover interest onexpensive credits from the effects of revaluated fixed assets. Thecorresponding balance sheet and income statement would be as follows:
Closing balance sheet-Fixed assets 3,000 Initial business fund 2,000
45
Inventories 0 Reval. of the b.f. 1,000Cash 1,500 Expensive credit 1,500Loss 410 Interest due 750Reval. loss 340Statement of revaluation revenues and costsRevaluation of fixed assets 1,000Revaluation of inventories spent 410Interest (750)Revaluation of business fund (1,000)Income statementRevenues 1,000Costs (1,000)Revaluation of costs (410)Income -410
By using incomplete HIFO or LIFO revaluation of costs methods, the losscould have been decreased even more (because interest is excluded from theincome statement). Of course, the revaluation loss would increase.
46
Annex VIII A.Page 1 of 7
1987 Financial Results of the Nine Commercial Bank Groups
INVESTICIONA SANKA tlTOGRAD (lIT)
Table I
Structure of deposits and borrowing
1987
(as X of total liabilities)
Local: 35S
Deposits 152
ST borrowing 4X
LT borrowing 15X
Foreign: 61X
Deposits 72ST borrowing 12
LT borrowing 532
Source: SOK report and Coomerciat banks.
Table (2)
1987 Changes in Oinar and Foreign Exchange liabilities
Real Terms (1986 Prices) /a
L FShort-term: --- -..
Oeposits -492 102
Borrowing -562 2452........................................
Long-term
Deposits -63X -3X
Borrowing *31X 172
a/ "Real f*igures were obtained by dividing the nominal figures
by the revaluatfon factor.
Source: SOK reports and commercial banks.*--muaaauaauuuuauaauuainumzaua-annauuu-uuuuuuuuauam-D--Wl-- ama
47
lIT
Table (3)Structure of Diner Liabilities
1987
Deposits 44.1SDei nd 30.1S
savings 5.52Time S.6
Banks 0.02may 55.92
Selective 55.92
Specific 0.0S
Others 14.8X
Total Diner liabilities 100.02
Source: SDK reports and ccmwrial banks...............................................................................
Table (4)Structure of Assets
Dinar 2 total assets
Cash and liquid assets 65.9 5.02
Deposits with MBY 96.0 7.2S
Loans 1087.9 82.02Other assets 77.2 5.8SDeferred FE losses 18.3 1.42
total assets 1345.3 101.42AdJusted total assets 1327.0 100.02
Source: SDK reports and comercial bwtks...............................................................................
48
IST
Table (5)
Change in LoamsOuring 1987 in Real Term (1986 prices)
L F
Short- term -51.71 134.21Long-tetu -39.4X 12.2S
Toal loans -44.91 14.5X
Source: SOK reports and camsrcial banks...............................................................................
Table (6)Lending Portftolio (1987)
Olnar S of Totat lown
1. Foreign currency 719.2 66.6S
2. Locat currency 360.6 33.41Selective 194.4 18.01Non-selective 93.4 S.6"Fixed Interest rate 70.6 6.51Ooubtful 2.2 0.2S
Source: SOK reports and coowercfla banks..................... . .. . . . . ....................... --...................----------~-''''''Table (7)
Contingent Liabilities - 1987(% of totat assets)
Foreign guarante 0.01Doaestic guarantees 0.0O
Total guarantees 0.0OLetter of credits 0.01Coamircial papers 0.01currency pool 0.0O
Total 0.01..............................................................................
49
ISTTable (8)
Income statement 1987 as per SOK Audit Report(in Oinar billion)
Interest collected 20.1Revaluation interest 123.0
Collected 7.5
capitalized 115.5
uncollected 0.0
Interest paid 92.7Other income 9.8Provision 47.2Operating expenses 15.9Foreign exchange losses 8.1
current losses 5.0deferred 3.1
Other revaluation 22.2Statutory obligation & taxes 1.2met income 10.0
Source: SuK reports and commercial banks...............................................................................
Table (9)Adjustment of net incoa for 1987Based on the Mission's Assuiptionon Collectibility of Revaluation Interest
Net income per SDK 10.0
Adjusted net income before provision (a) -9.1
Required provision for (b):
capitalized 11.5unccllected 0.0
Adjusted net income -20.7
Ratios:Unadjusted net income / average total assets 1.0X
Adjusted net income / average total assets -2.1X..........................................
(a) This has been calculated as follows: Net incom according to SDK lessUother revaluationa (since it does not represent real incom) plus deferredforeign exchange losses (since these have been written off aginst equityin these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimateduneollectable revaluation interest. The value of accumulated uncollectableloans at the end of 1987, has ben estimated through sensitivity analysis(plesse see table 11) stoinar Dinar (250) billions.This amount has ben directly dedicted from capital.If this adJustmnt were to be made through provision in the incom statementresulting net income woul have mwunted to Diner (259) billions...............................................................................
50
ISTTable (t0)
Capital Funds as per SOK Reports(in Dinar Sillions)
JLF1986 3.0
1987 23.1Increase 20.1
RF19856 2.11987 3.7
Increase 1.6PEF
1986 5.91987 10.7
Increase 4.8Total funds
1986 11.01987 37.5
Increase 26.5Total funds as X risk assets
1986 1.58X1987 1.78X
Increase 0.20X
Source: SDK Reports................................. ................................................................... .................. ............
Table (11)Capital according to different assumrtions
for Uncollectibility of Estimated Problem Loans a/1987
UncollectibiLe percentage Adjusted capitalof problem loans (in Oinar SiLLions)
10 (42)20X (92)30X (142)40Q (192)502 (242)
. .. . .. ........ ............. . .... .... ..................
a/ Capital exludes Property and Equipment Fund and is adjusted forforeign exchange losses.
51
IST
Table (12)Net equity of the banks under different assumptions
As to the ratio of provisions to '.ens1987
(in Dinar siLlions)102 (99)12X (121)141 (143)16X (164)182 (186)
202 (207)
Source: Mission estimates.
Table 13BALANCE SHEET
AS PER SUK AWlIT REPORT(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 21 45 66DEPOSITS WITH NBY 18 34 96ST LOANS 72 122 169LT LOANS AND INVESTMENTS 265 384 919
LESS: PROVISION 0 0 0NET LOANS 337 506 1088
FIXED ASSETS 2 5 8OTHER ASSETS 34 54 69DEFERRED FOREIGN EXCHNGE LOSSES 3 3 18
TOTAL ASSETS 416 647 1345
LIABILITIES
LOCAL DEPOSITS 92 164 199FOREIGN DEPOSItS 20 35 92ST BORRNINCS 30 49 64
LT SORROVINGS 241 339 889OTHER LIABILITIES 26 50 63
TOTAL LIABILITIES 408 636 1308FUNDS
PROPERTY AND EQUIPMENT FUND 3 6 11OTHER FUNDS 5 5 27
NET WORTH 7 11 38TOTAL LIAB. AND FUNDS 416 647 1345
, ..................................... ...........
52
IBT
Table 14
ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE LOSSES
AND 50X COLLECTIBILITY OF PROBLEM LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987.... ..... .... ........................ .<
CASH, DUE FRON BANKS AND SECURITIES 21 45 66
DEPOSITS WITH NOY 18 54 96
ST LOANS 72 122 169
LT LOANS AND INVESTMENTS 265 384 919
LESS: PROVISION 0 0 250
NET LOANS 337 506 838
FIXED ASSETS 2 5 8
OTHER ASSETS 34 54 69
TOTAL ASSETS 413 644 1077
LIABILITIES
LOCAL DEPOSITS 92 164 199
FOREIGN DEPOSITS 20 35 92
ST BORROWINGS 30 49 64
LT BORROWINGS 241 339 889
OTHER LIABILITIES 26 50 63
TOTAL LIABILITIES 408 636 1308
FUNDS
PROPERTY AND EQUIPMENT FUND 3 6 11
OTHER FUNDS 2 2 -242
NET WORTH 5 8 -231
TOTAL LIAO. AND FUNDS 413 644 1077.. ... .... ......... .................. .................. .................................... ........... ..........
Annex VIIIB,53 Page 1 of 7
1987 Financial Results of the Nine Commercial Bank Groups
jugobanka Udruzena Banka Seograd (is)
Table 1
Structure of deposits and borrowing
1987
(as % of total LiabiLities)
Local: 29%
Deposits 20%
ST borrowing 7X
LT borrowing 2%
Foreign: 70%
Oetooqits 48%
ST borrowing 2%
LT borrowing 21%
Source: SK report and CommerciaL banks.. .. .................................................................... ..................................
TabLe (2)1987 Changes in Dinar and Foreign Exchange liabilities
ReaL Terms (1986 Prices) /a
L FShort-term: --- ---
Deposits -32% 60%
Borrowing 40% 5454%
Long-term
Deposits -33% 20%
Borrowing -58% 24%...................... .........................................................................................
a/ "Real" figures were obtained by dividing the nominal figures
by the revaluation factor.
Source: SDK reports and cammerciaL banks..uuu 3s-sasaaun-uszzunn-z-ssmnazusuuu uuuz as3uuc-u-auu
54
Jugobanka Udruzena Banka Seograd (J9)
Tabte (3)Structure of Dinar Liabilities
1987Deposits 68.8X
Defnrd 26.2XSavings 26.0XTime 16.6X
Banks 11.6XNSY 19.62
Selective 12.92
Specific 6.72Others 2.92
Total Dinar liabilities 100.0X
Source: SDK reports and cenmercial banks.... ...........................................................................
Table (4)Structure of Assets
Dinar X total assets... -.. .........
Cash and ljquid assets 437.6 5.3XDeposits with NsY 3321.1 40.32Loans 4288.2 52.02Other assets 199.7 2.4XDeferred FE losses 61.6 0.72
total assets 8308.4 100.7XAdjusted total assets 8246.8 100.02
Source: SDK reports and commercial banks.................... ......................................... _........
55
Jugobanka Udruzena Banka Beograd (JB)
Table (5)
Change in loans
During 1987 in Real Terms (1986 prices)
L F
Short-term -14.2X 301.8X
Long-term -39.92 20.02
Total loans -25.0X 51.02
Source: SDK reports and comerc'.al banks......... ....... .............. .................... ........................................ ..... ...................
Table (6)
Lending Portfolio (1987)
Dinar X of Total loans
1. Foreign currency 2249.0 51.82
2. Local currency 2090.2 48.22
Selective 887.7 20.52
Non-selective 815.2 18.82
Fixed Interest rate 250.0 5.8X
Doubtful 137.3 3.22
Source: SDK reports and commercial banks......... .............. ..... ......... .......... ..................... ... .... .....
Table (7)
Contingent Liabilities - 1987
(2 of to:al assets)
Foreign guarantees 26.92
Domestic guarantees 3.9X
Total guarante's 30.92
Letter of credits 6.12
Commercial papers 5.3X
currency pool 0.02
Total 42.32... ... ....... .............. ..... ......... ........... ..................... ............................................ ......
56
Jugobanka Udruzena aka eograd (JB)Table (8)
Incre_ statmnt 1987 as per SOK Audit Report(in Diner billion)
Interest cottected 300.9Revaluation interest 894.4
Coltected 412.1capitalized 12.4uncollected 469.9
Interest paid 839.8Other incom 96.8Provision 130.0Operating expes 97.9Foreign exchange tosses 42.4
current tosses 22.7deferred 19.7
Other revaluatifn 61.0Statutory obligation & taxes 12.3Net inform 230.7
Source: SDK reports nd comercial banks.
Table (9)
Adjustment of not income for 1987Based on the Nission's Assumptionan Collectibility of Revaluation Interest
Net income par SK 230.7
Adjusted net incom before provision (a) 189.4
Required provision for (b):capitalized 1.2uncollected 235.0
Adjusted net income 46c8
Ratios$unadjusted net incrme / average total assets 4. 1
Adjusted not incmea / avrag total assets -0.8X............... ............................
(a) This has benn calculated as ftollos: Net income according to SOK ltess*other revatustion" (since it does not represent resl incoeu) plus deferredforeign exchange losses (since thes have been written off against equityin thes analysis, see table 11).
(b) The figure used for 1987's provisions includes only estimateduncoltectable revaluation interest. The value of accumlutatd uncol tctableloans at the end of 1987, has be estimated through senitivity anlysis(please se table 11) atOinHr (883) billions.This mmut has been directly deducted from capital.If this adjustunnt ware to be mnd through provisions in the ince_ statent,resulting not income would have Umunted to Diner (69) billions.
57
Jugobanka Udruzena Banka Beograd (JO)
Table (10)
Capital Funds as per SOIC Reports(in Oinar Billions)
JLF1986 24.61987 159.6
Increase 135.0RF
1986 12.21987 46.0
Increase 33.8PEF
1986 S1.31987 127.7
Increase 76.4Total funds
1986 88.11987 333.3
Increase 245.2Total funmds as X risk assets
1986 0.43X1987 6.42X
Increase 6.002
Source: SDK Reports~~~~~~_.. ....... . ................. ................................... ....................
Table (11)Capital according to different assumptions
for Uncollectibltity of Estimated Problem Loans a/
1987Uncollectibile percentage Adjusted canital
of probLem loans (in Dinar BiLlions)
10 (33)
20X ..a9)30X (386)40X (563)
50X (739)................. .................................... ........................................................... .
a/ Capital exludes Property and Equipment Fund and is adjusted forforeign exchange losses......... .............. ............... ............................... ... ................... .............................. ......
58
*Jugobnka Udruzena Banks 8eograd (J8)
Tabte (12)Het equity of the banks uwder different assumptions
As to the ratio of provisions to loans1987
(in Dinar Billions)102 (279)121 (363)14X (448)
16 (533)181 (617)20X (702)
Source: Mission estimates.
Table 13BALCE SHEET
AS PER SDtK AIT REPORTCIN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, UE MM FR BANKS AND SECURITIES 307 264 438
DEPOSITS WITH NBY 455 908 3321
ST LOANS 365 674 2096LT LOANS AND INVESTMENTS 608 962 2302
LESS: PROVISION 19 14 110NET LOANS 9S3 1622 4288
FIXED ASSETS 17 38 92OTHER ASSETS 118 165 108DEFERRED FOREIGN EXCHANIGE LOSSES 86 81 62
TOTAL ASSETS 1936 3078 8308
LIABILITIES
LOCAL DEPOSITS 621 905 1579FOREIGN DEPOSITS 605 1080 3806ST BORROWINGS 98 149 679LT ORRWINGS 450 680 1817OTHER LIABILITIES 117 176 93
TOTAL LIABILITIES 1891 2990 7975FUNDS
PROPERTY AND EQUIPMENT FUND 27 51 128OTHER FUNDS 18 37 206
NET WORTH 4S 88 333TOTAL LIAB. AND FUNDS 1936 3078 8308
59
Jugobnka Udrusen. Banka Beograd (JB)Table 14
ADJUSTED BALANCE SHEETFOR DEFEERRED FOREIGN EXCHANGE LOSSESAND 50X COLLECTIBILITY OF PROBLEM LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 307 264 438
DEPOSITS WITH NOY 455 908 3321ST LOANS 365 674 2096LT LOANS AND INVESTMENTS 608 962 2302
LESS: PROVISION 19 14 994
NET LOANS 953 1622 3405
FIXED ASSETS 17 38 92OTHER ASSETS 118 165 108
TOTAL ASSETS 1850 2997 7364
LIASILTIES
LOCAL DEPOSITS 621 905 1579
FOREIGN DEPOSITS 605 1080 3806ST SORROWINGS 98 149 679LT BORROWINGS 450 680 1817OTHER LIABILITIES 117 176 93
TOTAL LIABILITIES 1891 2990 7975
FUNDS
PROPERTY AND EQOIPNENT FUND 27 51 128
OTHER FUNDS -69 -45 -739NET WORTH -42 7 -612TOTAL LIAS. AND FUNDS 1850 2997 7364
.__...................................... . .... .... . . .... ...... _..............
Annex VIII C.60 Page 1_f 7
1987 Financial Results of the NVine Commercial Bank Groups
LJUBLJANSKA BANKA UDRUZENA BANKA LJUBLJANA (LBL)
Table I
Structure of deposits and borrowing
1987(as X of total liaoilities)
Local: 36X
Deposits 26X
ST borrowing 9X
LT borrowing 2X
Foreign: 62X
Deposits 432
ST borrowing 1X
LT borrowing 18X
Source: SDK report and Co=mercial banks.. ..... ......... .. .... .............. ...............
Table (2)198 Changes in Dinar and Foreign E"c:ange liabilit'es
Real Terms (1986 Prices) /a
L F
Short-term: -- -
Deposits -292 582
Borrowing 18X 4861X. ... .... . ..... .. . . . . . .. . . . . .. .
Long-term
Deposits -39X 192
Borrowing -42X 192~~~~....... ............ .. ..... .... .. ... .... .. ................
a/ IRealU figures were obtained by dividing the nominal figures
by the revaluation factor.
Source: SK reports and commercial banks.- _ = w sw t w X a
61
LJUBLJANSKA SANKA UDRUZENA 8ANKA LJUBLJANA (LBL)
Table (3)
Structure of Dinar Liabilities
1987
Deposits 71.3XOemand 21.6K
Savings 31.0XTime 12.6X
Banks 11.9X
NBY 16.8X
Selective 10.3X
Specific 6.5X
Others 2.1X
Total Dinar liabilities 100.0K
Source: SDK reports and comercial banks.................... .............. ..............
Table (4)
Structure of Assets
Dinar X total assets.. . ... ..
Cash and liquid assets 573.0 6.0X
Deposits with NBY 3588.8 37.5x
Loans 4896.0 51.1X
Other assets 514.4 5.42
Deferred FE losses 70.9 0.72
total assets 9643.1 100.7X
Adjusted total assets - 9572.2 100.02
Source: SDK reports and commercial banks.......................................................................
62
LJUBLJANSKA BANKA UDRUZENA BANKA LJUBLJANA (LBL)
Table (5)
Change in loans
During 1987 in Real Terms (1986 prices)
L F
Short-term -118X 46.82
Lowg-term -33.02 24.12
Totat toans -20.22 26.32
Source: SDK reports and conuercial banks... ......................... .................................................... .................
Table (6)
Lending Portfolio (1987)Dinar X of Total loans
1. Foreign currency 1839.5 37.62
c. Local currency 3054.0 62,42
Selective 1282.9 26.2X
Non-selective 1375.1 28.1X
Fixed Interest rate 278.5 5.7X
Doubtful 117.5 2.42
Source: SDK reports and connmrcial banks.
Table (7)
Contingent Liabilities - 1987
(2 of total assets)
Foreign guarantees 41.9X
Domestic guarantees 6.42
Totat guarantees 48.32
Letter of credits 10.72
Coamercial papers 12.32
currency pool 0.02
Totat 71.3X
63
LJUBLJANSKA BANKA UDRUZENA BANKA LJUBLJANA (LBL)Table (8)
Income statement 1987 as per SOK Audit Report(in Dinar bitlion)
Interest collected 312.6Revaluation interest 1261.2
Collected 620.4
capitalized 311.1
uncollected 329.7
Interest paid 790.1other income 125.2Provision 113.0operating expenses 186.0Foreign exchange losses 298.2
current losses 274.3deferred 23.9
Other revaluation 102.1Statutory ob,igation & taxes 22.0
Net income 391.8
Source: SOK reports and conmercial banks.
Table (9)Adjustment of net income for 1987Based on .he Mission's Assunptionon Collectibility of Revaluation Interest
Met income per SDK 391.8
Adjusted net income before provision (a) 313.6
Required provision for (b):capitalized 31.1
uncotlected 164.9
Adjusted net income 117.6
Ratios:Unadjusted net income / average total assets 6.0X
Adjusted net income / average total assets 1.8X
(a) This has been calculated as follows: Net income according to SOK less
"other revaluation" (since it does not represent real income) plus deferred
foreign exchange losses (since these have been written off against equityin these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimateduncollectable revaluation interest. The value of accumulated uncollectableLoans it the end of 1987. has been estimated through sensitivity analysis(please see table 11) at Dinar (852) billions.This amount has been directly deducted from capital.If this adjustment were to be made through provisions in the income statement,resulting net income would have amounted to Din (538) billions........ ........... ... .... .............. ............................ . .
64LJUBLJANSKA BANKA UDRUZENA SANKA LJUBLJANA (LBL)
TabLe (10)
Capital Funds as per SOK Reports
(in Oinar Billions)
JLF
1986 36.4
1987 271.6
Increase 235.2
RF
1986 34.4
1987 87.1
Increase 52.7
PEF
LJUBLJANSKA BANKA UDRUZENA SANKA LJUBLJANA (LOL)1986 98.6
1987 259.5
Increase 160.9
Total funds
1986 169.41987 618.2
Increase 448.8
Total funds as X risk assets
1986 3.74X
1987 11.40X
Increase 7.66S
Source: SDK Reports,................................................................................................. _............... ..
Table (11)
Capital according to different assumptions
for Uncotlectibility of Estimated Problem Loans a/
1987Uncollectibite percentage . Adjusted capital
of problem loans (in Dinar Billions)
1OX 117
20X (53)30X (223)
40X (394)
50X (564)......................................................
a/ Capital exiudes Property and Etilpment Fund and is adjusted for
foreign exchange losses.......................................................................
65
LJU8LJANSKA BANKA UORUZENA BANKA LJUBLJANA (LBL)
Table (12)
Net equity of the banks under different assumptionsAs to the ratio of provisios to Loans
1987
(in Dinar Billions)
102 (192)
12X M2R8)
14X (385)
16X (481)
18X (577)
20X (673)
Source: Mission estimates.
Table 13BALANCE SHEET
AS PER SDK AUDIT REPORT(IN DINAR BILLION)
ASSETS 1985 1986 1987-- ---- ....
CASH. DUE FROM BANKS AND SECURITIES 157 248 573
DEPOSITS WITH NOY 441 900 3589
ST LOANS 422 926 2285
LT LOANS AND INVESTMENTS 586 1142 2702
LESS: PROVISION 5 5 91
NET LOANS 1004 2063 4896
FIXED ASSETS 38 81 221
OTHER ASSETS 148 238 293
DEFERRED FOREIGN EXCHANGE LOSSES 115 95 71
TOTAL ASSETS 1903 3626 9643
LIABILITIES
LOCAL DEPOSITS 722 1304 2314
FOREIGN DEPOSITS 567 1091 3859
ST BORROWINGS 108 260 919
LT BORROWINGS 305 627 1784
OTHER LIABILITIES 113 174 149
TOTAL LIABILITIES 1815 3456 9025
FUNDS
PROPERTY AND EQUIPMENT FUND 46 99 260
OTHER FUNDS 43 71 359
NET WORTH a8 169 618
TOTAL LIAB. AND FUNDS 1903 3626 9643..............................................................................
66
LJUBLJANSKA BANKA UDRUZENA BANKA LJUBLJANA (LBL)
TabLe 14
ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE LOSSES
AND 50X COLLECTIBILITY OF PRC3LEN LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 157 248 573
DEPOSITS WITH NBY 441 900 3589
ST LOANS 422 926 2285
LT LOANS AND tNVESTMENTS 586 1142 2702
LESS: PROVISION 5 5 943NET LOANS 1004 2063 4044
FIXED ASSETS 38 81 221OTHER ASSETS 148 238 293
TOTAL ASSETS 1788 3531 8720
LIABILITIES
LOCAL DEPOSITS 722 1304 2314FOREIGN DEPOSITS 567 1091 3859
ST BORROWINGS 108 260 919
LT BORROWINGS 305 627 1784
OTHER LIABILITIES 113 174 149
TOTAL LIABILITIES 1815 3456 9025
FUNDS
PROPERTY AND EQUIPMENT FUND 46 99 260
OTHER FUNDS -73 -24 -564
NET WORTH -27 75 -305
TOTAL LIAB. AND FUNDS 1788 3531 8720
67 Annex VIII D.Page 1 of 7
1987 Financial Results of the Nine Commercial Bank Groups
Privredna Banka Sarajevo (PBS)
Table 1
Structure of deposits and borrowing1987
(as X of total liabilities)
Local: 331Deposits 21XST borrowing 61
LT borrowing 6X
Foreign: 66XDeposits 33%ST borrowing 2XLT borrowing 32X
Source: SDK report and Comnerciat banks.
Table (2)1987 Changes in Dinar and Foreign Exchange liabilities
Real Terms (1986 Prices) /a
L FShort-term: --- ---
Deposits -271 351
Borrowing -461 3129%..............................................
Long-termDeposits -47X 21%Borrowing -571 29%. . . ........................ .. . . . . . . .. . . . . . ;. .. . . . . . . .
a/ "Real" figures were obtained by dividing the nominal figuresby the revaluation factor.
Source: SOK reports and coimmercial banks.SUUfUmmUUUUUU83s UUUUUUUUnU==3ZZU3UUSaIU
.
68
Privrene Banka Sarajevo (PBS)
Table (3)Structure of Ofnar Liabilities
1987
Deposits 64.22
DemarvJ 34.62
Savings 18.92
Time 10.8X
Banks 0.02
NOY 35.8X
Selective 32.4X
Specific 3.3X
Others 3.8X
Total Diner liabilities 100.0O
Source: SOK reports and commercial banks... ........................ ..................................................... .....................................
Table (4)Structure of Assets
Dinar X total assets
... .....
Cash and liquid assets 329.5 5.92
Deposits with NBY 1647.7 29.62
Loans 3257.7 58.5X
other assets 336.4 6.02
deforred FE losses 6.9 0.12
total assets 5578.2 100.12
Adjusted total assets 5571.3 100.0O
Source: SDK reports and commercial banks.....................................................................
69
Pri,redn Banka Sarajevo (P8S)
Table t5)
Change in Loans
During 1987 in Resl Terms (1986 prices)
L F
Short-term -23.9X 225.2X
Long-term -51.2Z 19.5XTotal loans -39.7X 24.6X
Source: SDK reports and comsercial banks................................ .... _. .......... ............................................. .
Table (6)
Lending Portfolio (1987)
Dinar X of Total loans
1. Foreign currency 1747.4 53.4X
2. Local currency 1527.2 466X
Selective 1098.5 33.5X
Non-seLective 127.0 3.9X
Fixed Interest rate 175.0 5.3XOoubtful 126.7 3.9X
Source: SDK reports and comnercial banks......................... ...................................................... .................... .. ....
Table (7)
Contingent Liabilities - 19P?
(X of total assets)
Foreign guarantees 15.51
Domestic guarantees 14.21
Total guarantees 29.6X
Letter of credits 1.4X
Commercial papers 0.0O
currency pool 0.01
Total 31.01
l ~ ~ ~ ~ ~ ~ ~ ~ . ... . . .. . . . . .. . . . . . . . .. .. . . .. . . .. .
70
Privredna Banke Sardjevo (PBS)
Table (8)
Income statement 1987 as per SOK Audit Report
(in Oinar bitlion)
Interest coLlected 184.0
Revaluation interest 631.9
ColLected 384.7
capitalized 29.2
uncollected 218.0
Interest paid 480.3
Othe,r income 40.1Provision 101.6
operating expenses 58.3
Foreign exchange Losses 64.6
current Losses 51.0
deferred 13.6Other revaluation 40.1Statutory obligation & taxes 5.1Net inca.. 186.2
Source: 4lK reports and connerciaL banks.
Table (9)
Adjustment of net income for 1987
Based on the Mission's Assumptionon ColLectibility of Revaluation Interest
Net income per SO1. 186.2
Adjusted net income before provision (p) 159.7
Required provision for (b):
capitalized 5.8
uncollected 109.0
Adjusted net income 44.9
Ratios:
UnadJusted net income I average total assets 4.7X
AdJusted net income / average total assets 1.1X......... .................... .. ^.
(a) This has been calculated as follows: Net income according to SOK Less"other revaluatio"n (since it does not represent real income) plus deferredforeign exchange Losses (since these have been written off against equity
in these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimated
uncollectable revaluation interest. The value of accumulated uncollectableloans at the end of 1987, has been estimated through sensitivity analysis
(please see table 11) at Dlnar (787) billions.
This amount has been directly deducted from capital.
If this adjustment were to be made through provisions in the income statement,resulting net incom would have amounted to Dine (627) biLlions.. ....................................................................
71
Privredna Banka Sarajevo (PBS)
Table (10)
Capital Furds as per SOK Reports(in Dinar Billions)
JLF
1986 2.4
1987 115.4
Increase 113.0RF
1986 10.2
1987 49.1Increaso 38.9
PEF
1986 31.9
1987 91.5
Increase 59.6Total funds
1986 44.5
1987 256.0
Increase 211.5Total funds as X risk assets
1986 1.65X1987 7.74X
Increase 6.09X
Source: SDK 2eports
Table (11)
Capital according to different assumptions
for Uncollectibili:.y of Estimated Problem Loans a/
1987
Uncollectibile percentage Adjusted capital
of problem loans (in Dinar Billions)
lOX 1 -
20X (157)30X (314)
40X (472)50X (629)
.................................. ........................................................
a/ Capital exludes Property and Equipment Fund and is adjusted for
foreign exchange losses.......................................................................
72
Privredna Banka Sarajevo (PBS)
Table (12)Net equity of the banks under different assumptions
As to the ratio of provisions to loans1987
(in Dinar Billions)10X (164)
12X (229)14X (293)16X (357)18X (422)
20X (486)
Source: Mission estimates.
Table 13BALANCE SHEET
AS PER SOK AUDIT REPORT
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 119 171 330
DEPOSITS WITH NBY 243 485 1648ST LOANS 264 428 985
LT LOANS AND INVESTMENTS 614 1067 2329LESS: PROVISION 17 18 56
NET LOANS 861 1477 3258FIXED ASSETS 14 31 62OTHER ASSETS 96 141 274DEFERRED FOREIGN EXCHANGE LOSSES 31 20 7
TOTAL ASSETS 1363 2325 5578
LIABILITIES
LOCAL DEPOSITS 368 642 1135FOREIGN DEPOSITS 287 537 1732ST BORROLINGS 138 213 378LT BORROWINGS 466 808 2027OTHER LIABILITIES 83 81 50
TOTAL LIABILITIES 1341 2280 5322FUNDS
PROPERTY AND EQUIPMENT FUND 16 32 92OTHER FUNDS 7 13 165
NET WORTH 22 45 256TOTAL LIAO. AND FUNDS 1363 2325 5578
73
PrivredS Banka Sarajevo (PBS)
Table 14ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE LOSSES
AND 50X COLLECTIBILITY OF PROBLEM LOANS IN 1987
(IN OINAR BILLION)
ASSETS 1985 1986 1987.. .... .... .......
CASH, DUE FROR BANKS AND SECURITIES 119 171 330
DEPOSITS WITH NBr 243 485 1648
ST LOANS 264 428 985
LT LOANS AND INVESTMENTS 614 1067 2{29
LESS: PROVISION 17 18 843
NET LOANS 861 1477 2471
FIXED ASSETS 14 31 62
OTHER ASSETS 96 141 274
TOTAL ASSETS 1332 2305 4785
LIABILITIES
LOCAL DEPOSITS 368 642 1135
FOREIGN DEPOSITS 287 537 1732
ST BORROWINGS 138 213 378
LT BORROWINGS 466 808 2027
OTHER LIABILITIES 83 81 50
TOTAL LIABILITIES 1341 2280 S322
FUNDS
PROPERTY AND EOUIPMENT FUND 16 32 92
OTHER FUNDS -24 -8 -629
NET WORTH -9 24 -538
TOTAL LIAS. AND FUNDS 1332 2304 4785.......... .............................................
74 Annex VTlL E.Page 1 of 7
1987 Financial Results of the Nine Commercial Bank Groups
STOPANSKA BNKA SKOPJE (SBS)
Tablo I
Structure of deposits and borrowing
1987
(as X of total liabilities)
Local: 41X
Deposits 23X
ST borrowing 7X
LT borrowing -11X
Foreign: 57X
Deposits 29X
ST borrowing 1X
LT borrofing 27Z
Source: SOK report and Commercial banks.
Table (2)
1987 Changes in Dinar and Foreign Exchange Liabilities
Real Terms (1986 Prices) /a
L FShort-term: ... --
Oeposits -17X 26X
Borrowing -30% 14121............................ ..........................................
Long-termDeposits -251 21X
Borrowing -34X 91
a/ "Real" figures were obtained by dividing the nominal figures
by the revaluation factor.
Source: SDK reports and commercial banks.uuguuuuuauauuau :annn3lau33sinauma=uu Uuuu8uatWu
75
STOPANSltA BANKA SKOPJE (SBS)
Table (3)Structure of Dinar Liabilities
1987Deposits 56.3X
Demad 23.5%Savings 12.2X
Time 20.6X
Banks 17.61NBY 14.3X
Selective 10.71Specific 3.6X
Others 5.51
Total Dinar liabilities 100.01
Source: SDK reports and conmercial banks.
Table (4)Structu-e of Assets
Dinar 1 total assets... ....... ..........
Cash and liquid assets 182.6 6.01Deposits with N9Y 830.8 27.11
Loans 1970.8 64.31Other assets 82.4 2.7XDeferred FE losses 9.6 0.31
total assets 3076.2 100.31Adjusted total assets 3066.6 100.01
Source: SDK reports and conmercial banks.......................................................................
76
STOPANSKA BANKA SKOPJE tSBS)
Table (5)
Change in loans
During 1987 in Real Terns (1986 prices)
L F
Short-term 17.6X 202.3XLong-term 442.7X 0.2Z
Total loan -12.5X 1.2X
Source: SOK reports and co7mercial banks....................................... ................................
Table (6)
Lending Portfolio (1987)Dinar X of Total loans
1. Foreign currency 769.3 38.01
2. Local currency 1253.9 62.01Selective 433.2 21.41Non-selective 649.1 32.1XFixed Interest rate 171.6 8.51
Doubtful 0.0 0.01
Source: SDK reports and commercial banks.......... ...... ..........................................................
Table (7)
Contingent Liabilities - 1987
(X of total assets)
Foreign guarentees 16.11
Domestic guarantees 3.01
Total guarantees 19.2XLetter of credits 1.31
Commercial papers 7.5X
currency pool 0.0O
Total 27.91......................................................................
77
STOPANSKA NIKA SKOPJE (SOS)Table (8)
Income statement 1987 as per SOK Audit Report(in Dinar billion)
Interest collected 106.4Revaluation interest 491.0
Collected 18.6
capitalized 4.5uncollected 467.9
Interest paid 340.8Other income 16.1Proviajon 68.7Operating expenses 28.0Foreign exchange Losses 37.5
current losses 28.2
deferred 9.3Other revaluation -19.1Statutory obligation & taxes 3.2Net income 116.2
Source: SDK reports and comnercial banks.
Table (9)Adjustment of net income for 1987Based on the Mission's Assumptionon Collectibility of Revaluation Interest
Net income per SDK 116.2
Adjusted net incom before provision (a) 144.6
Required provision for (b):capitalized 0.4uncollected 234.0
Adjusted net income -89.8
Ratios:Unadjusted net income / average total assets 5.4S
Adjusted net income / average total assets 4.2%. ........... .... ...... ..... ......... .....
(a) This has been calculated as follows: Net income according to SDK lees"other revaluation" (since it does not represent real income) plus deferredforeign exchange losses (since these have bwn written off against equityin these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimateduncollectable revaluation interest. The value of accumulatAd uncollectableloans at the end of 1987, has been estimated through sensitivity analysis(please see table 11) at Dinar (717) billions.This amount has ben directly deducted from capital.If this adjustment were to be made through provisions in the ineam statement.resulting not income would have amounted to Dine (573) billions.
.... ..... . .................... ...................... ..............
.78
STOPANSKA BANKA SKOPJE (S8S)Table (10)
Capital Funds as per SDK Reports(in Dinar Billions)
JLF1986 4.1
1987 74.6Increase 70.5
RF
1986 4.0
1987 25.4Increase 21.4
PEF1986 15.41987 43.9
Increase 28.5
Total funds1986 23.51987 143.9
Increase 120.4
Total funds as X risk assets1986 -0.05X
1987 6.85X
Increase 6.9°0
Source: SDK Reports......................................................................
Table (11)
Capital according to different assumptionsfor Uncollectibility of Estimated Problem Loans a/
1987Uncollectibile percentage Adjusted capital
of problem loans (in Dinar Biltio )
10X (53)
20X (197)302 (340)
40X (483)502 (627)
.......................................................
a/ Capital exludes Property and Equipment Fund and is adjusted forforeign exchange losses.......................................................................
79
STOPANSKA BANKA SKOPJE (S8S)
Table (12)
Net equity of the banks under different assumptionsAs to the ratio of provisions to Loans
1987
(in Dinar Billions)10X (106)
12X (145)14X (184)
16X (223)
18X (262)
20X (3021
Source: Mission estimates......... .............. ._.. .. ____._. ... ...........................
Table 13
BALANCE SHEETAS PER SDK AUDIT REPORT
(IN DINAR BILLION)
ASSETS 1985 1986 1987* .... .... ---
CASH, DUE FROM BANKS AND SECURITIES 40 56 183DEPOSITS WITH N8Y 145 258 831ST LOANS 183 285 856
LT LOANS AND INVESTMENTS 388 578 1178LESS: PROVISION 14 18 63
NET LOANS 557 845 1971FIXED ASSETS 6 15 29OTHER ASSETS 25 55 53DEFERRED FOREIGN EXCHANGE LOSSES 14 24 10
TOTAL ASSETS 786 1254 3076
LIABILITIES
LOCAL DEPOSITS 197 331 683FOREIGN DEPOSITS 170 266 844ST BORROWINGS 81 116 250LT BORROWINGS 301 468 1108OTHER LIABILITIES 23 50 47
TOTAL LIABILITIES 772 1231 2932
FUNDS
PROPERTY AND EQUIPMENT FUND 8 15OTHER FUNDS 6 8 100
NET WORTH 14 24 144TOTAL LIAB. AND FUNDS 786 1254 3076
............................... ...... ........... .. . ........... ..................... _. ._
80
STOPANSKA SANKA SKOPJE (SBS)
Table 14
ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE LOSSES
AND 50 COLLECTIBILITY OF PROBLEN LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 40 56 183
DEPOSITS WITH NSY 145 258 831
ST LOANS 183 285 856
LT LOANS AND INVESTMENTS 388 578 1178
LESS: PROVISION 14 18 780NET LOANS 557 845 1253
FIXED ASSETS 6 15 29
OTHER ASSETS 25 55 53
TOTAL ASSETS m 1230 2349
LIABILITIES
LOCAL DEPOSITS 197 331 683
FOREIGN DEPOSITS 170 266 8a4
ST BORROWINGS 81 116 250
LT BORROWINGS 301 468 1108
OTHER LIABILITIES 23 so 47
TOTAL LIABILITIES 772 1231 2932FUNDS
PROPERTY AND EQUIPMENT FUND 8 15 44OTHER FUNDS .7 -16 -627
NET WORTH 0 0 . -583
TOTAL LIAB. AND FUNDS 773 1230 2349
81 Annex VII; FPag 1 of L 7
1987 Financial Results of the Nine Commercial Bank Groups
Udruzena Bank& Hrvatske Zagreb (USH)
Table 1
Structure of deposits and borrowirg1987
(as % of total liabilities)
Local: 38X
Deposits 26XST borrowing 7X
LT borrowing SX
Foreign: 602
Deposits 31X
ST borrowing 12
LT borrowing 28X
Source: SDK report and Commercial banks.
Table :2)
1987 Changes in Dfnar and Foreign Exchange liabiLities
Real Term (1986 Prices) /a
L F
Short-term:
Deposits -302 422
Borrowing -372 52602............ ........................ ................ ....................
Long-term
Deposits -30X 15X
Borrowing -412 38X......... ................. ................................. ............................................. ... ................
a/ UReaIU figures were obtained by dividing the nominal figures
by the revaluation factor.
Source: SDK reports and commercial banks._a 2 3U== s=X3X35531:3X5=Sa33
82
Udruzens Bankad Hrvatske Zagreb (U8H)
Tabte (3)Structure of Dinar Liabilities
1987Deposits 68.4X
Demand 33.2XSavings 21.6XTime 13.6X
Banks 19.22MBr 12.42
Selective 9.0XSpecit1c 3.4X
Others 1.82
Total Dinar liabilities 100.02
Source: SDK reports and comnercial banks.=F....... ............. .. ....................... ...................................... ............ ....
Table (4)Structure of Assets
Dinar X total assets.... ......... ...
Cash and liquid assets 509.7 4.9XDeposits with NBY 3204.8 31.02Loans 6171.3 59.8XOther assets 435.7 4.2XDeferred FE losses 197.5 1.9X
total assets 10519.0 101.92Adjussted total assets 10321.5 100.02
Source: SOK reports and coomercial banks............... ............................. ................. .............................. ......... ............... ..........
83
Udruzena Banka Nrvatske Zagreb (USH)
Table (5)
Change in loans
During 1987 in Real Terms (1986 prices)
L F
Short-term -2.4X 182.1X
ong-term -47.52 37.2X
Totat loans -25.62 45.5X
iource: SOK reports and commercial banks.
Table (6)
Lending PortfoLio (1987)
Dinar X of Total loans
1. Foreign currency 2780.5 44.5X
2. Local currency 3461.0 55.52
Selective 1537.1 24.62
Non-selective 1279.2 20.52
Fixed Interest rate 404.6 6.52
Doubtful 240.1 3.8X
Source: SDK reports and commercial banks.
Table (7)
Contingent Liabilities - 1987
(2 of total assets)
Foreign gtc:antees 34.92
Domestic guarantees 10.72
Total guarantees 45.62
Letter of credits 7.42
CommerciaL papers 8.62
currency pool 0.02
Total 61.62
84
Udruzena anka Nrvatske Zagreb (UBH)Table (8)
Income statement 1987 as per SDK Audit Report(in Dinar billion)
Interest collected 333.5Revaluation interest 1446.1
Collected 1031.9capitalized 62.9uwiollected 3S1.3
Interest paid 994.7Other income 230.6Provision 185.5
Operating expenses 167.5Foreign exchange losses 357.4
current losses 327.1deferred 30.3
other revaluation 45S.5
Statutory obligation & txes 20.0
Net incom 33l.6
Source: S0K reports and coamercial banks................. ................................ ... ..... . ... . .........
Table (9)Adjustment of net income for 1987Based on the Nission's Assumption
an Collectibility of Revaluation Interest
Net income per SDK 330.6
Adjusted net income before provision (a) 315.4
Required provision for (b):
capitalized 6.3
uncollected 175.7
Adjusted net income 133.5
Ratios:unadjusted net income / average total assets 4.6
Adjusted net income / average total assets 1 .9
(a) This han been calculated as follows: get income according to SDK less"other revaluation" (since it does not represent real income) plus deferredforeign exchange losses (since these have ben written off against equityin these analysis, see table 11).
(b) The figuve used for 1987's provisions, includes only estimateduwcolltectable revaluation interest. The value of accumulated uncolltctableloans at the end of 1987, has been estimated through sensitivity analysis(please see table 11) at Dinar (1.444) billions.
This onawt has been directly deducted from capital.
If this adJustnt were to be made through provisions In the Income statement,
resulting net income would have unomted to Diner (1,129) billions... ......................................................................... .. .........................
85
Udruzena Banka Nrvatske Zagreb (USH)Table (10)
Capital Funds as per S0K Reports(in Dinar Billions)
JLF1986 28.71987 203.2
Increase 174.5RF
1906 21.31987 108.3
Increase 87.0
PEf1986 64.7
1987 188.1
Increase 123.4Total funds
1986 114.71987 499.6
Increase 384.9
Total funds as X risk assets
1986 -4.69X1987 5.02X
Increase 9.71S
Source: SDK Reports.. ....................................................................................... ................... ....
Table (11)Capital according to different asswumtions
for Uncollectibility of Estimated Problem Loans a/1987
Uncollectiblte percentage Adjusted capital
of problem loans (in Dinar 8illions)
10X (175)
20X (464)
302 (753)40X (1,042)50X (1,330)
.........................................................
a/ Capital extudes Property and Equipment Fund and is adjusted forforeign exchange losses..................................... ....................................
C J.3J . e
86
Udruzena Banka Hrvatske Zagreb (USH)
Table (12)Net equity of the banks under different assumptions
As to the ratio of provisions to loans
1987
(in Dinar Billions)10 (488)
12Z . (609)146 (729)
16X (850)
18X (970)
20X (1.091)
Source: Mission estimates.... .. ..... _..... ......... ... . . . . . .. . . .. .. . . . . .. . .
Table 13
BALANCE SHEETAS PER SDK AUDIT REPORT
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 142 196 510DEPOSITS WITH NBY 521 955 3205ST LOANS 678 939 2600LT LOANS AND INVESTMENTS 835 1670 3790
LESS: PROVISICN 6 8 219NET LOANS 1507 2601 6171
FIXED ASSETS 24 53 126OTHER ASSETS 237 242 310DEFERRED FOREIGN EXCHANGE LOSSES 253 232 198
TOTAL ASSETS 2683 4278 10519
LIABILITIES
LOCAL DEPOSITS 863 1439 2601
FOREIGN DEPOSITS 541 935 3087
ST BORROWINGS 268 439 853
LT BOkROWINGS 700 1116 3319OTHER LIABILITIES 239 233 159
TOTAL LIABILITIES 2611 4163 10019fUNDS
PROPERTY AND EQUIPMENT FUND 34 65 188OTHER FUNDS 38 50 312
4ET WORTH 73 n 115 500TOTAL LIAB. AND FUNDS 2683 4278 10519
.... ..... _...... . .... .... ......... ................ ... . .... .... .... .... ..... ....... .
87
Udruzena Banka Hrvatske Zagreb (USH)
Tabte 14
ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE LOSSES
AND 50X COLLECTIBtLITY OF PROBLEM LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM RANKS AND SECURITIES 142 196 510
DEPOSITS WITH NBY 521 955 3205
ST LOANS 678 939 2600
LT LOANS AND INVESTMENTS 835 1670 3790
LESS: PROVISION 6 8 1663NET LOANS 1507 Z601 4727
FIXED ASSETS 24 53 126OTHER ASSETS 237 242 310
TOTAL ASSETS 2430 4046 8877
LIABILITIES
.
* LOCAL DEPOSITS 863 1439 2601
FOREIGN DEPOSITS 541 935 3087
ST BORROWINGS 268 439 853LT BORROWINGS 700 1116 3319
OTHER LIABILITIES 239 233 159
TOTAL LIABILITIES 2611 4163 10019
FUNDS
PROPERTY AND EQUIPNENT FUND 34 65 188
OTHER FUNDS -215 -182 -1330NET UORTH -181 -117 -1142
TOTAL LIAO. AND FUNDS 2430 4046 8877.
I
I
88 ex VIITPage 1of7
1987 Financial Results of the Nine Commercial Bank Groups
udruaena feogradska Banka Beograd (UBB)
Table 1
Structure of deposits and borrowing1987
(as X of total liabilities)
Local: 32ZDeposits 24XST borrowing 6XLT borrowing 2X
Foreign: 64XDeposits 35XST borrowing 1XLT borrowing 27X
Source: SOK report and CommerciaL banks.. _... .... ....... .............. ... .... . . ............. .
Table (2)1987 Changes in Oinar and Foreign Exchange liabilities
Real Terms (1986 Prices) /a
L F
Short-term: - - ...
Deposits -28X 142Borrowing -35X 23152,................... ........ ................ ................. .......
Long-termDeposits -37X 192Borrowing -542 82...................................
a/ uReals figurfe were obtained by dividing the nominal figuresby the revatluation factor.
Source: SOK reports and comaercial banks._ _ t=gusSIII-St8AtS13 tsa33I
89
Udruzena 8eogradska 8anka Beograd (UsS)
TabLe (3)
Structure of Dinar Liabilities
1987
Deposits 73.7%
Oemnd 38.31
Savings 17.3X
Time 18.1%
Banks 6.7X
NBY 13.3X
Selective 9.6X
Specific 3.7X
Others 2.5X
Total Dinar liabilities 100.01
Source: SDK reports and comercial banks.
Table (4)
Structure of Assets
Dinar X total assets.... .. ..
Cash and liquid assets 524.9 6.01
Deposits with NOY 2265.5 25.9X
Loans 5591.6 64.01
Other assets 356.1 4.11
Deferred FE losses 58.8 0.71
total assets 8796.9 100.71
Adjusted total assets 8738.1 100.01
Source: SOK reports anl conuercial banks.
90
Udruzena Beogradska Banka Beograd (USB)Table (5)
Change in loansDuring 1987 in Real Term (1986 prices)
L F
Short-term -10.1% 7.7XLong-term -51.0% 11.82
Total loans -27.6% 10.5%
Source: S0K reports and commercial banks....... ........ ................................... ........... ....................... .
Tabte (6)
Lending Portfolio (1987)
Dinar 7. of Total loans
1. Foreign currency 2734.7 48.62
2. Local currency 2887.8 51.42
Selective 1184.6 21.12
Non-selective 1368.2 24.32Fixed Interest rate 221.2 3.92
Doubtful 113.8 2.02
Source: SOK reports and commercial banks.
Tab-e (7)
Contingent Liabilities - 1987(2 of total assets)
Foreign guarantees 27.42
Domestic guarantees 15.22
Total guarantees 42.6X
Letter of credits 3.82Commercial papers 10.02
currency pool 3.42
Total 59.8X....... ............ . ....... ........... .... ...... . ... .... .... .....
91
Udruzene Seogradska Banka Beograd (USS)Table (8)
Income statement 1987 as per SOK Audit Report(in Dinar billion)
Interest collected 320.7
Revaluation interest 1216.3Collected 604.8capitalized 155.4uncollected 456.1
Interest paid 839.6Other income 154.1
provision 177.1
Operating expenses 126.3
Foreign exchbnge Losses 247.4current tosses 216.7deferred 30.7
Other revaluation 89.7Statutory obtigation & taxes 19.6
Net income 370.8
Source: SDK reports and commercial banks.
Table (9)Adjustment of net income for 1987Based on the Mission's Assuwptionon Collectibility of Revaluation Interest
Net income per SDK 370.8
Adjusted net Income before provision (a) 311.8
Required provision for (b):capitalized 15.5uncollected 228.1
Adjusted net income 68.2
Ratios:
Unadjusted net income / average total assets 6.0X
Adjusted ret ircome / average total assets 1.1X
(a) This h been calculated as foltows: Net income according to SK less
"other revaluation" (since it does not represent real incoma) plus deferred
foreign exchang tosses (since these have been written off against equity
in these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimated
uncollectable revaluation interest. The value of accumulated uncollectablloans at the end of 1987. has been estimated through sensitivity *nalysis
(please see table 11) at Dinar (1.28W) billions.
This amosmt has been directly deducted from capital.
If this adjustment were to be made through provisions in the Income statnt*
resulting net income would have amounted to Dina (968) billions.
92
Udruzensa eogradJka sanka Beograd (uBB)
Table (10)
Capital furds as per SDK Reports(in Oinar Billions)
JLf
1986 49.4
1987 237.5
Increase 188.1
RF1986 28.1
1987 78.2
Increase 50.1
PEf
1986 66.91987 197.1
Increase 130.2Total funds
1986 144.41987 512.8
Increase 368.4
Total funds as 2 risk assets
1986 2.23X
1987 8.23X
Increase 6.002
Source: SOK Reports.... ..... ___..................... ........................
Table (11)
Capital according to different assumptions
for Uncollectibility of Estimated Problem Loans a/
1987
Uncollectibile percentage Adjusted capital
of problem loans (in Dinar Billions)
lOX 1
202 (255)302 (511)
402 (767)
502 (1t023)........ ......................... ......................................
a/ Capital exludes Property and Equipment Fund and is adjusted for
foreign exchange losses.......... ........................ _..........._....
93
Udruzena Beogradska 8anka Beograd (ULS)
Table (12)
Net equity of the banks under different assumptfons
As to the ratio of provisions to toans
1987
(in Oinar Billions)
10X (295)
12X (405)14X (515)
16X (626)
18X (736)
201 (846)
Source: Mission estimates.
Table 13
BALANCE SHEET
AS PER SDK AUDIT REPORT
(IN 01NAR BILLION)
ASSETS 1985 1986 1987
CASH, OUE FROM BANKS AND SECRITIES 191 257 525
DEPOSITS WITH N8Y 387 709 2266
ST LOANS 781 1221 2949
LT LOANS AND INVESTMENTS 876 1313 2749
LESS: PROVISION 82 34 106
NET LOANS 1575 2501 5592
FIXED ASSETS 23 49 111
OTHER ASSETS 24 53 245
DEFERRED FOREIGN EXCHANGE LOSSES 100 89 59
TOTAL ASSETS 2300 3658 8797
LIABILITIES
LOCAL DEPOSITS 645 1101 1i76FOREIGN DEPOSITS 608 979 2936
ST BRROWINGS 216 356 593
LT BORROWINGS 703 959 2440
OTHER LIABILITIES 67 119 339
TOTAL LIABILITIES 2239 3513 8284
FUNDS
PROPERTY AND EQUIPMENT FUND 32 67 197
OTHER FUNDS 29 78 316
NET WORTH 61 144 513
TOTAL LIAO. AND FUNDS 2300 3658 8797
94
Udruzena Beogradska Banke Beograd (USB)
Table 14
ADJUSTED BALANCE SHEET
FOR DEFEERRED FOREIGN EXCHANGE .OSSES
AND 501 COLLECTIBILITY OF PROBLEM LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987. ..... .... ....... ..
CASH, DUE FROM BANKS AND SECURITIES 191 257 525
DEPOSITS WITH NSY 387 709 2266
ST LOANS 781 1221 2949
LT LOANS AND INVESTMENTS 876 1313 2749
LESS: PROVISION 82 34 1386
NET LOANS 1575 2501 4311
FIXED ASSETS 23 49 111
OTHER ASSETS 24 53 245
TOTAL ASSETS 2200 3568 7458
LIABILITIES
LOCAL DEPOSITS 645 1101 1976
FOREIGN DEPOSITS 608 979 2936
ST 8ORROWINGS 216 356 593
LT BORROWtNGS 703 959 2440
OTHER LIABILITIES 67 119 339
TOTAL LIABILITIES 2239 3513 8284
FUNDS
PROPERTY AND EQUIPMENT FUND 32 67 197
OTHER FUNDS -71 -12 -1023
NET WORTH -39 55 -826
TOTAL LIAS. AND FUNDS 2200 3568 7458.... ..... o........................... .... .... ..... ......... ...... ........... ... .. ....
95~~~~~~~~A;e VIII -HPaze I of 7
1987 F'nancial Resulcs of the Nine Commercial Bank Groups
UDRUZENA KOSOVSKA SANKA PRIStlNA (UKBP)
Table 1
Structure of deposits and borrowing1987
(as X of total liabilities)
Local: 41XDeposits a,ST borrowing 8XLT borrowing 25X
Foreign: 551
ueposits 17XST borrowing 01LT borrowing 38X
Source: SOK report ard Coemercial banks.......... ................. .. . .......................................... ....
Table (2)1987 Changes in Oinar and Foreign Exchange liabilities
ReaL Terem (1986 Prices) /a
L FShort-term: -- -
Deposits .-29 22XBorrowing -17X 129X. ............................................. . ... ...........
Long-termDeposits -511 24XBorrowing -37X 291.............. ..... ......... .... ....... . ...... ......... .............................
a/ "Real" figures were obtained by dividing the nominaL figuresby the revaluation factor.
Source: SOK reports and commercial banks.2S28mZui---= 3*- 8a a8u-23Z-a-Ds--- -- -- UU--# 3UCflDataWUW
96
UK3P
Table (3)Structure of Diner Liabilities
1987Deposits 20.0X
Duind 8.72Savings 4.8%Tim 6.4X
Banks C.0XN9Y 80.02
Selective 78.32Specific 1.72
Others 7.82
Total Diner liabilities 100.02
Source: $OK reports and comercial banks.... ....................................................................... ...............................
Table (4)Structure of Assets
Dinar 2 total assets
Cash and liquid assets 60.4 2.82Deposits with Nwa 343.1 16.02Loans 1705.4 79.5S'lther assets 37.4 1.7XDeferred FE losses 15.4 0.72
total assets 2161.4 100.72Adjusted total assets 2146.3 100.0X
Source: SOK reports and comaercial banks.
...................................................................... .......
97
UKOP
TabLe (5)
Change in loansOuring 1987 in Reat Terms (1986 prices)
L F
Short-term 58.8X -65.8XLong-term -27.3X 30.8X
Total Loans -31.92 22.52
Source: SOK reports and cowmerciaL banks................................................................. ...............
Table (6)
Lending Portfolio (1987)
Dinar X of Total Loans
1. Foreign currency 899.6 50.02
2. Local currency 900.8 50.02Selective 548.6 30.52%Jon-seLective 195 8 10.92
Fixed Interest rate 60.0 3.32Doubtful 96.4 5.4X
Source: SDK reports and comnercial banks.......................................................................
Table (7)Contingent LiabiLities - 1987
(2 of total assets)
Foreign guarantees 5.9XDomestic guarantees 4.4X
Total guarantees 10.32Letter of credits 0.22Cawmerciat papers 0.02currency pool 0.02
Total 10.52…
l
98
UKIPTable (8)
Income statement 1987 as per SDK Audit Report(in Dinar billion)
Interest cotlteted 66.7
Revatua:ion in"erest 250.7Collected 0.0
capitalfred 250.7uncotLeeted 0.0
Interest paid 167.5
Other income 10.7Provision 96.3Operating expenses 10.2Foreign exchange losses -3.0
current tosses -4.3deferred 1.3
Other revaluation 9.1Statutory obligation & taxes 0.6
Net income 65.6
Source: SDK repo -s and coimercial banks.
Table (9)Adjustment of net income for 1987
Based on the Mission's Assumptionon CotltctibiLity of Revaluatirn Interest
Net income per SDK 65.6
Adjusted net incoms befare provision (a) 57.8
Required provision ror (b):capitalized 25.1uncollected 0.0
Adjusted net income 32.7
Ratios:Unadjusted net income / everage total assets 4.2X
Adjusted net income / average total assets 2.1X.. .............. ................................................ .
(a) This has been calculated as follows: Net income according to SDK Less"other revaluation" (since it does not represent real income) plus deferredforeign exchange losses (since these have been written off against equityin these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only estimateduncollectable revaluation interest. The value of accumtlated uncollectableloans at the end of 1987, has been estimated through sensitivity analysis(please see table 11) at Dinar (502) biLlions.This amoumt has been directly deducted from capital.If this adjustment were to be made through provisions in the incora statement,resulting net income wouLd have amounted to Dinar (444) billions.
B ''''''''''''''''''''''''*ss-*-- *------*----.......................... ... . .. ... . . ... . .. . .. . .. . ..
99
UKeP
Table (10)
Capital Funds as per SDK Reports
(in Dinar Billions)
JLF1986 3.0
1987 32.1
Increase 29.1
RF
1986 2.6
1987 8.1
Increase 5.5
PEF
1986 8.8
1987 25.3
Increase 16.5
Total funds
1986 14.4
1987 65.5
Increase 51.1
Total funds as X risk assets1986 -0.26X
1987 2.96X
Increase 3.21%
Source: SDK Reports
Table (11)
Capital according to different assumptions
for Uncollectibility of Estimated Problem Loans a/
1987
Uncollectibile percentage Adjusted capital
of problem loans (in Dinar BilLions)
10 (75)
20% (176)
30X (276)
40X (377)
50% (477)........ .............................................................................................. ...
P a/ Capital exludes Property and Equipment Fund and is adjusted for
foreign exchange losses... .. ........ ...... ........... . .... .... ....... .............. .. .. ... .. ..... ...... ^. .. .
100
UDRUZENA KOSOVSKA BARKA PRiSTInA (UKBP)
Table (12)
Net equity of the banks under different assumptionsAs to the ratio of provisions to lowns
19S7(in Diner Bittions)
10 (145)12X (179)14X (213)161 (248)18X (282)20X (316)
Source: Mission estimates.. .................................. .............. ...................................... ......................................... .
Table 13IIALANCE SHEET
AS PER SDK AUDIT REPORT(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FRCN BANKS AND SECURITIES 36 21 60DEPOSITS WITH NIY 48 109 343ST LOANS 98 210 410LT LOANS AND INVESTNENTS 347 534 1391
LESS: PROVISION 0 0 96MET LOANS 445 744 1705
FIXED ASSETS 4 7 18OTHER ASSETS 65 65 20DEFERRED FOREIGN EXCHUAGE LOSSES 19 16 15
TOTAL ASSETS 617 963 2161
LIABILITIES
LOCAL DEPOSITS 99 107 172FOREIGN DEPOSITS 52 112 334ST BORROWINGS 36 81 174LT BORROWINGS 348 557 1309OTHER LIABILITIES 76 93 8s
TOTAL LIASILITIES 611 949 2096FUNDS
PROPERTY AND EOUIPINENT FUND 4 9 25OTHER FUNDS 2 6 40
NET WORTH 6 14 66TOTAL LIAO. AND FUNDS 617 963 2161
............................... ..................................................................................
101
UKBP
Table 14
ADJUSTED BALANCE SHEETFOR OEFEERRED FOREIGN EXCHANGE LOSSES
AND 50X COLLECTIBILITY OF PROBLEN LOANS IN 1987
(IN DINAR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FROM BANKS AND SECURITIES 36 21 60
DEPOSITS WITH NBY 48 t09 343ST LOANS 98 210 410
LT LOANS AND INVESTMENTS 347 534 1391
LESS: PROVISION 0 0 598
NET LOANS 44S 744 1203FIXED ASSETS 4 7 18
OTHER ASSETS 65 65 20
TOTAL ASSETS 598 947 1644
LIABILITIES
LOCAL DEPOSITS 99 107 172
FOREIGN DEPOSITS 52 112 354
ST BORROWINGS 36 81 174
LT BORROWINGS 348 557 1309
OTHER LIABILITIES 76 93 88
TOTAL LIABILITIES 61; 949 2096
FUNDS
PROPERTY AND EQUIPMENT FUND 4 9 25
OTHER FUNDS -17 -11 -477MET WORTH *13 -2 -452
TOTAL LIAB. AND FUNDS 598 947 1644
........ . .
102 Annex VIII ,Page_1 o0f 7.
1987 Financial Results of the Nine Commercial Bank Groups
VOJVWANSKA BANA NOVI SAD (VON)
Table 1
Structure of depnsits and borrowing1987
(as X of total liabilities)
Local: 49XDeposits 29XST borrowing 16XLT borrowing 41
Foreign: 45SDeposits 221ST borrowing 1XLT borrowing 22X
Source: SOK report and Commercial banks.
Table (2)1987 Changes in Dinar and Foreign Exchange liabilities
Real Terns (1986 Prices) /a
L FSh'.rt- term: ---Deposits -331 49XBorrowing -202 791X. .................................... .......... ............ ...
Long- termDeposits -37X 191
Borrowing -401 151................. .................................... .................. ........................ ........ ..................................
a/ Reaf figures were obtained by dividing the nominal figuresby the revaluation factor.
Source: SOK reports and counercia' banks.#Y--s-Xs-w-=a5:gX8X'J--sDz33:5t52XD
103
VON
Table (3)Structure of Dinar Liabilities
1987
Deposits 59.4XDemand 27.2XSavings 19.7XTime 12.4X
Banks 6.3X
N8Y 34.32Selective 33.0X
Specific 1.32others 3.8X
Total Dinar liabilities 100.02
Source: SOK reports and commercial banks.. ... ....... ........... ........ ................ .... ...... . ..... ...... ........
Table (4)Structure of Assets
Dinar 2 totaL assets
Cash and liquid assets 185.6 4.92Deposits with NEY 797.0 20.92Loans 2670.1 70.12Other assets 155.7 4.12Deferred FE losses 16.5 0.42
total assets 3824.9 100.42Adjusted total assets 3808.4 100.02
Source: SDK reports and commercial banks...............................................................................
104
VONTaOlt (S)
Change in loans
During 1987 in Real Terms (1986 prices)
L F
Short-term 1. 8 42.0X
Loan-term -44.9X 27.0X
Total loans -19.1l 22.2X
Source: SOK reports and comnercial banks.
Table (6)Lending Portfolio (1987)
Dinar X of Total loans
1. Foreign currency 831.0 31.21
2. Local currency 1835.1 68.8X
Selective 575.0 21.6X
Non-seLective 990.5 37.2X
Fixed Interest rate 198.4 7.4X
Doubtful 71.2 2.7X
Source: SDI reports and commercial banks...............................................................................Table (7)
Contingent Liabilities - 1987
(X of total assets)
Foreign guarantees 11.1X
Domestic guarantees 24.9X
Total guarantees 36.0X
Letter of credits 0.8X
Commoercial papers 15.8X
currency pool 0.0O
Total 52.6X~~~~~~~~~~~~~~................................................. ...................................................................... ..
105
VIMTable (8)
Inco"e statement 1987 as per SDK Audit Report(in Dinar billion)
Interest collected 99.6Revalustion interest 630.4
Collected 0.0capitalized 28.8uncollected 601.6
Interest paid 404.3Other incr 17.4Provision 65.1Operating expenses 58.7Foreign exchange losses 36.4
current losses 34.2defterred 2.2
Other revaluation 25.8Statutory obligation & taxes 3.5Met income 205.2
Source: S0K reports and co mmercial banks.
Table (9)Adjustment of net inecme for 1987Based on the Mission's Assurptionon Collectibility of RevaLuction interest
Met income per S0K 205.2
Adjusted net income before provision (a) 181.6
Required provision for (b):capitalized 2.9uncollected 300.8
Adjusted net income -122.1
Ratios:Unadjusted net income / average tGtal assets 7.5X
Adjusted net income / average totail assets -4.5X............ ..........................................
(a) This has been calculated as follows: Met income according to SDK less"other revaluation" (since it does not represent real income) plus deferredforeign exchange losses (since these have been written off against equityin these analysis, see table 11).
(b) The figure used for 1987's provisions, includes only astimateduncollectable revaluation interest. The value of accumulated uncollectabletcans at the end of 1987, has been estimated through sensitivity analysis(pleas. see table 11) at Dinar (920) billions.This amount has been directly deducted from capital.If this adjustment were to be made tCrough provisions in the income statent,resulting net income would have amounted to Dinar (739) biLlions...............................................................................
106
VBNTable (10)
Capital Funds as per SDK Reports(in Dinar Billions)
JLF
19S6 19.4
1987 151.2
Increase 131.8RF
1986 12.0
1987 54.0
Increase 42.0
PEF1986 29.1
1987 88.1
Increase 59.0
Total ftunds
1986 60.5
1987 293.3
Increase 232.8
Total funids as X risk assets
1986 3.74X1987 10.50l
Increase 6.762
Source: 0K Reports............................. ............................................ ..................... .......................... :.
Table (11)
Capital according to different assumptonsfor Uncollectibility of Estimated Problem Loans a/
1987
Uncollectibile percentage Adjusted capital
of problem lons (in Dinar itllions)
10 S
20X (179)
30X (363)
40X (547)
50s (731)
a/ Cepital exludes Property and Equipuent Fund and is adjusted forforfign exchango losses................ ............................... ................ ........................ ........................ ..............
107
vaN
Table (12)Net equity of the banks under difffrent assu,ptfons
As to the ratio of provisions to loaws
1987(in Dinar Billions)
102 (75)122 (128)14X (180)16X (233)181 (286)20X (339)
Source: Mission estimates............. ........................ ... >....... .....................................
Table 13
BALANCE SHEETAS PER SOK AUDIT REPORT
(IN DINAR BILLION)
ASSETS 1985 1986 1"T.... .... . .... ......
CASH, DUE FRON BANKS AND SECURITIES 66 112 186DEPOSITS WITH NBY 134 253 797ST LOAS 355 537 1381LT LOANS AND INVESTM4ENTS 367 603 - 1319
LESS: PROVISION 5 4 30NET LOANS 718 1136 2670
FIXED ASSETS 11 25 56OTHER ASSETS 89 109 100DEFERRED FOREIGN EXCHANGE LOSSES 26 19 17
TOTAL ASSETS 1043 1654 3825
LIABILITIES
LOCAL DEPOSITS 408 609 1036FOREIGN OEPOSITS 119 232 791ST BORROWINGS 192 277 591LT BORROWINGS 226 347 900OTHER LIABILITIES 59 129 214
TOTAL LIABILITIES 1003 1593 3532FUNDS
PROPERTY AND EQUIPNENT FUND 17 29 8OTHER FUNDS 23 31 205
NET WORTH 40 61 293TOTAL LIAB. AND FUNDS 1043 1654 3825
............................... ...........................................................................................
108
VBNTabte 14
ADJUSTED BALANCE SHEETFOR DEFEERRED FOREIGN EXCHANGE LOSSESAND 50X COLLECTIBILITY OF PROBLEM LOANS IN 1987
(IN DINR BILLION)
ASSETS 1985 1986 1987
CASH, DUE FRCM BANKS AND SECURITIES 66 112 186
DEPOSITS WITi, NBY 134 253 797ST LOANS 355 537 1381
LT LOANS AND INVESTMENTS 367 603 1319
LESS: PROVISION 5 4 950NET LOANS 718 1136 1750
FIXED ASSETS 11 25 56OTHER ACSETS 89 109 100
TOTAL ASSETS 1018 1635 2888
LIAUILITIES
LOCAL DEPOSITS 408 609 1036FOREIGN DEPOSITS 119 232 791ST BORROWINGS 192 277 591LT BORROWINGS 226 347 900OTHER LIABILITIES 59 129 214
TOTAL LIABILITIES 1003 1593 3532FUNDS
PROPERTY AND EQUIPMENT FUND 17 29 88OTHER FUNDS -2 13 -731
NET WORTH 14 42 -643TOTAL LIAB. AND FUNDS 1018 1635 288d
....................................................................................... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.
lQ9ANNEX IX
ANALYSIS OF THE INTERMEDIATION SPREAD IN YUGOSLAVIA
1. Definition. The intermediation spread is defined in this analysis as thedifference between the average int:erest rate on non-priority lending and theaverage interest rate charged to depositors. Because of the high rate ofinflation, a geometric average is used over the four quart' of 1987.
2. Analysis. The following analysis decomposes the total spread intomeasurable and meaningful components in order to help assess the relativecontribution of these components.
From the consolidated income statement of the banks, we have:
IR - IP + OI - GM + OC + V + FE + P
Where:
IR - interest receivedIP - interest paidOI - other incomeGM - gross marginOC - operating costsV - provisionFE - foreign exchange lossesP - profit
From th4s identity, we can derive:
(0) IR - IP - OC + V + FE + P - OI
The left side of equation (0) could be elaborated as follows:
(1) IR - idpDnp + ipLp + ip,TL, + ib, + iR + ilL, + 'dD, + iC + i,.Ix
(2) IP - i dD + idXD. + ib,B, + i4,B, + ib.B.
110
Wheret
Lnp a interest rate on non-priority lendingLnp * average non-priority lendinglp - interest rate on priority lending not rediscounted with NBYLp - average priority levfdng not rediscounted with NtYLpr - interest rate on priority lending rediscounted with NBYr a average priority lending rediscounted with NBY
if - fixed interest rateLf. average lending at fixed interest rateir - interest rate on obligatory reserve requirement on depositsR . average obligatory reserve requirementiLr - interest on reserve fundLr - average reser-e requirement deposlted in cashidc . interest on foreign exchange deposit with NBYDc deposits with NSY in connection with foreign exchange depositsic i nterest rate on cash witheldC average cash witheldil - interest rate on foreign exchange lendingjX - average foreign exchange lendingid - average interest rate on local depositsD - average domestic depositsidS - interest rate on foreign exchange depositsDx - average domestic foreign exchange deposits'ibr i interest rate on rediscounted priority lending8r n average priority lending rediscounted with NBYibl a interest rate on local borrowingBI _ average local borrowingibx * interes. rate of foreign exhang, borrowingBx average foreign exchange borrowingOA average other assets
From the consolidated balance sheet, we have that:
(3) C + R + Lr + DC + Lor + L* + Lf + Lnp + Lx + OA - T - av. total assets
As proportions of total assets, we can define:
(4) C - cT(5) R - rT(6) 4 - aT(7) D. - dT(8) Ly - bT(9) L - pT(10) 1, - fT(11) Lw - nT(12) t - xT(13) OA - eT (n-l c-r.-a-d-b-p-f-x-e)
ill
Likewise for income statement items, we can define:
(14) OC - gT(15) V - vT(16) FE - hT(17) P - JT(18) 01 - kT
Given the banking regulations in Yugoslavia, we can set:
(19) Lx - Bx(20) Dc - Dx(21) Pr - Br
Substituting from (l) to (21) into (0), we obtain an expression for thespread:
[g + v + h + j + k + p(i,-ip) + f(id-it) + r(id-i,) +(ib -i )b + (ib -i¶X)x + (idx-i,.)d + (id-iL,)a + (i 8 -i.)c]
(22) ip -id -
n
This expression has the advantage that it decomposes the spread into
meaningful componients. For instance, c(i 1-_) expresses the effect of the
ncost of holding cash on the spread, Z shows the effect of operating costs on
nthe spread; while b(iz_i measures the impact on the spread of the margin
nwhich NBY allows the banks for handling NBY rediscounted priority loans.
r
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