Analysis of Obstacles to Sales of Non-Performing Receivables of Serbian MSMEs
Summary
Non-performing accounts receivable can be described as receivables that have become due but have not been paid by the debtor, either in whole or in part. However, nonperforming receivables go beyond just late payment, because they can become nonperforming even before they mature. In this context, a deterioration in the debtor’s liquidity position, accompanied by an account freeze and enforced collection actions by other creditors and other similar circumstances, indicate a particular account receivable has become non-performing.
Non-performing receivables are a major challenge that has been slowing growth of Serbia’s economy, especially in the MSME sector. Late payments jeopardize the liquidity of businesses and can seriously threaten their operations, which is a particular concern for MSMEs, whose performance depends on their ability to regularly collect debts.
The Serbian regulatory framework does not significantly constrain the sale of accounts receivable. From the perspective of substantive law, assignment of accounts receivable does not require any particular conditions to be met, nor do businesses face any restrictions in engaging in such assignment. Exceptions to this rule are factoring and assignment of claims owed to banks by natural persons, which are governed by two specific legislative acts, the Factoring Law and the Financial Consumer Protection Law.
The Serbian non-performing receivables market is not specifically regulated and is open to all businesses, except for receivables owed to banks by private individuals, businesses, and farmers, which may only be assigned to other banks. Types of accounts receivable can be divided into several categories: (1) corporate or consumer receivables; (2) performing or non-performing receivables; (3) receivables with or without third-party guarantees; and (4) receivables secured or unsecured by collateral. Debt buyers offer debt collection in exchange for a commission, and outright debt purchase. Receivables may be purchased singly or in a portfolio.
The MSME receivables market is underdeveloped due to poor demand for these receivables, which are insufficiently profitable for both buyers and MSME creditors, and these generally sell smaller individual accounts receivable. The main shortcomings of this market are: 1) high discount rates, the direct consequence of poor receivables management by MSMEs; 2) large gap in valuation of accounts receivable by potential investors, on the one hand, and MSME creditors, on the other; and 3) lack of awareness and capacity at MSMEs to effectively manage accounts receivable and realistically assess their profitability.
The market in accounts receivable arising from commercial transactions is highly suited to alternative financing models, especially non-bank services geared towards MSMEs. In contrast to traditional financial services providers, which are focused on large corporate clients, a multitude of digital solutions have emerged in recent years that permit MSMEs to access finance that fits their needs. Key amongst these are financial services based on information technology (fintech), which include MSME receivables financing.
