radovan jelasic : development of the municipal bond market in serbia speech by mr radovan jelasic, governor of the national bank of serbia, at naled – national alliance for local economic development, belgrade, 13 may 2009. * * * it gives me great pleasure to welcome you all on behalf of the national bank of serbia. we in the national bank have long been advocating the development of bond markets by not only the government and local government bodies, but by other issuers as well. it is the crisis period that shows best that bankcentric systems – elsewhere and in europe, but more poignantly in serbia where banks account for over 90 % of the financial sector – face significant challenges, such as : a ) how to refinance loans due for repayment, b ) how to obtain fresh capital in the market, and c ) how to preserve public trust in the banking system. of course, one should also think in terms of catering for the needs of our clients since a bank is not an end in itself but represents a transmission mechanism between those who save and those who need the money. inefficacy of the banking sector necessarily affects the overall economy, and bank debtors are no exception. allow me to illustrate this idea by the following example : even if the european central bank cuts its policy rate ( which, at the moment, measures 1. 0 % only ), that does not necessarily mean that banks will automatically have access to cheaper funding especially if the risk premium for banks is increased. bank clients would in such a situation have two options : a ) to take more expensive loans from banks, or b ) to bypass banks altogether and borrow directly in the capital market by issuing own securities. as the nbs is also entrusted with the supervision of insurance companies and voluntary pension funds, urgent development of the securities market, including securities issued by local government bodies, is of our utmost interest. such development is also in the interest of commercial banks since securities operations are a typical segment of investment banking operations – issuing securities without undertaking credit risk. for that particular reason, the nbs is of the opinion that amid numerous projects and proposals relating to the development of the capital market, it is high time a concrete project was finally undertaken. some of the major prerequisites for the successful implementation of such a project are as follows : 1. local government bodies should have their own sources of income instead of relying on the “ transfer of funds ” which can be

infrastructure debt funds ( idfs ). these initiatives are presently at a nascent stage, but hold long - term promise. 22. over the longer - term, an efficient and vibrant corporate bond market is a sine qua non for ensuring viable financing of infrastructure. by facilitating long - term funding for the sector, it can provide much - needed debt capital that will be beneficial to both borrowers and investors alike. this will also ensure deep and broad financial markets, one of the key pillars of rbi ’ s financial sector policies. financing of smes 23. a second issue i would like to touch upon is the financing of micro, small and medium enterprises or msmes, as we call them. in 2011 – 12, the sector accounted for a significant proportion of manufactured output and over 12 per cent of our gdp. in addition to their strong export orientation, they also have a strong employment potential, providing bread - and butter to nearly 100 million people, perhaps next only to the agricultural sector. with a big chunk of them being located in rural areas, it also offers tremendous potential for rural development. given their forward and backward linkages with the corporate sector, i view them as “ silent ” engines of growth, especially in slow economic cycles. 24. numerous studies have documented that, given the lack of reputation and tangible collateral, debt financing, mostly from informal sources, comprises the primary source of external funds for these entities. given the often onerous documentation requirements for banks, these entities tend to get a raw deal when it comes to bank finance. the fourth census of msme revealed that only 5. 2 per cent of the units ( both registered and unregistered ) had availed of finance through institutional sources ; the majority of units – 93 % of them in fact – had either no finance or depended on self - finance. a world bank enterprise survey in 2011 also reinforces these conclusions. the moot point is that the credit flow to msmes from institutional sources is not commensurate with the economic activity undertaken by them. 25. a rbi discussion paper in 2013 had propounded an innovative combination of banks and private equity, with a potential role of state in providing credit enhancement mechanisms / solutions as a way out of this credit constraint. it also put forth the proposal that small banks can provide a useful role by catering to the needs of this segment, for example, through relationship banking. 26. there is also an oft - heard complaint from bankers that msmes are