OFFICIAL DOCUMENTS LOAN NUMBER 8832-YF Loan Agreement (State-Owned Financial Institutions Strengthening Project) between REPUBLIC OF SERBIA and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN AGREEMENT AGREEMENT dated as of the Signature Date between REPUBLIC OF SERBIA ("Borrower") and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ("Bank"). The Borrower and the Bank hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to this Agreement) apply to and form part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II- LOAN 2.01. The Bank agrees to lend to the Borrower the amount of forty million one hundred thousand Euros (EUR 40,100,000), as such amount may be converted from time to time through a Currency Conversion ("Loan"), to assist in financing the project described in Schedule 1 to this Agreement ("Project"). 2.02. The Borrower may withdraw the proceeds of the Loan in accordance with Section III of Schedule 2 to this Agreement. 2.03. The Front-end Fee is one quarter of one percent (0.25%) of the Loan amount. 2.04. The Commitment Charge is one quarter of one percent (0.25%) per annum on the Unwithdrawn Loan Balance. 2.05. The interest rate is the Reference Rate plus the Variable Spread or such rate as may apply following a Conversion; subject to Section 3.02(e) of the General Conditions. 2.06. The Payment Dates are April 15 and October 15 in each year. 2.07. The principal amount of the Loan shall be repaid in accordance with Schedule 3 to this Agreement. ARTICLE III - PROJECT 3.01. The Borrower declares its commitment to the objective of the Project. To this end, the Borrower shall carry out the Project in accordance with the provisions of Article V of the General Conditions and Schedule 2 to this Agreement. -2- ARTICLE IV - EFFECTIVENESS; TERMINATION 4.01. The Additional Condition of Effectiveness consists of the following, namely, that the Borrower has adopted the Project Operations Manual in a manner acceptable to the Bank. 4.02. The Effectiveness Deadline is the date one hundred and eighty days (180) days after the Signature Date. ARTICLE V - REPRESENTATIVE; ADDRESSES 5.01. The Borrower's Representative, who, inter alia, may agree to modification of the provisions of this Agreement on behalf of the Borrower through exchange of letters (unless otherwise determined by the Borrower and the Bank), is its Minister of Finance. 5.02. For purposes of Section 10.01 of the General Conditions: (a) the Borrower's address is: Ministry of Finance 20 Kneza Milosa St. 11000 Belgrade Republic of Serbia; and (b) the Borrower's Electronic Address is: Facsimile: E-mail: (381-11) 3618-961 kabinet@mfin.gov.rs 5.03. For purposes of Section 10.01 of the General Conditions: (a) the Bank's address is: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America; and (b) the Bank's Electronic Address is: Telex: Facsimile: E-mail: 248423(MCI) or 1-202-477-6391 sndegwa@worldbank.org 64145(MCI) -3- AGREED as of the Signature Date. REPUBLIC OF SERBIA By Authorized Representative Name: Iv5/\^4 . V 3 Title: W Date: JUAe,A 2 INTERNATIONAL BANK FOR RECONSTRUCTIO DEVELOPMENT By Authorized Representative Name: grI' Title: ___ ___ Date: ryaOz 9,.11 -4- SCHEDULE 1 Project Description The objective of the Project is to improve the performance of Banka Postanska Stedionica AD Beograd and promote the reform of Development Finance Institutions and Other State-Owned Financial Institutions. The Project consists of the following parts: Part 1: Support the Reform of State-Owned Financial Institutions 1.1 Providing financing for an Eligible Expenditure Program to support the Borrower in the restructuring of BPS, including, inter alia: (a) reorienting BPS towards retail and micro and small business lending in line with a new business plan; (b) exiting the corporate lending business; (c) decreasing its operations with SOEs; and (d) reducing its stock of NPLs. 1.2 Providing financing for an Eligible Expenditure Program to support the Borrower's SOFI reform program, including, inter alia: (a) implementing the reforms embedded in the Development Fund Conclusion and the AOFI Conclusion; (b) developing a strategy on Development Finance Institutions; (c) implementing the Borrower's strategy for State- Owned Banks; and (d) improving the recovery of bad assets from SOFIs. Part 2: Strengthen Institutional Capacity 2.1 Provision of technical assistance and acquisition of equipment in critical areas to support the achievement of the DLIs/DLRs, including, inter alia: (a) the acquisition of a new core banking system for BPS and the provision of technical assistance to implement the BPS Conclusion, dated August 15, 2016 and BPS' business plan; and (b) the provision of technical assistance to assist MoF to: (i) carry out their oversight function over SOFIs; (ii) implement the Borrower's strategy for State-Owned Banks; and (iii) develop and implement strategies for NPL resolution and Development Finance. 2.2 Provision of technical assistance to support the Central Fiduciary Unit (CFU) to perform its fiduciary functions, including provision of support for financial management and procurement. -5- SCHEDULE 2 Project Execution Section I. Implementation Arraneements A. Institutional Arrangements 1. Without limitation to the provisions of Article V of the General Conditions and except as the Bank shall otherwise agree, the Borrower shall maintain throughout Project implementation, with composition, resources, terms of reference and functions acceptable to the Bank: (a) a Project implementation unit within MoF (PIU), to be responsible for: (i) the overall coordination of all Project implementation activities; (ii) ensuring that the requirements, criteria, policies, procedures and organizational arrangements set forth in the POM are applied in carrying out the Project; (iii) preparation of all Project implementation documents, including Project supervision reports, and (iv) monitoring and evaluation of the Project; and (b) a Central Fiduciary Unit (CFU), within MoF, to be responsible for the procurement and financial management of the Project, and appoint an MoF staff to coordinate and oversee the CFU, as detailed in the POM. 2. Not later than three (3) months after the Effective Date, the Borrower, through the CFU, shall hire an entity with experience, qualifications and terms of reference acceptable to the Bank, for purposes of verifying the compliance of DLRs. B. Project Operations Manual 1. The Borrower, through the PIU and CFU, shall carry out the Project in accordance with the provisions of a manual (the Project Operations Manual), in a manner and with contents acceptable to the Bank, including inter alia: (a) a detailed description of the EEPs; (b) the indicators to be used in the monitoring and evaluation of the Project; (c) the procedures for Project monitoring, supervision and evaluation, including the format and content of the Project Reports; (d) the DLI and DLR verification protocols; and (e) procurement and financial management procedures including clearly defined procedures related to payments verification and processing, and record and management of Eligible Expenditures financed with the Loan proceeds. 2. Except as the Bank may otherwise agree in writing, the Borrower shall not abrogate, amend, suspend, waive or otherwise fail to enforce the POM or any provision thereof. 3. In case of any conflict between the terms of the POM and those of this Agreement, the terms of this Agreement shall prevail. -6- C. Safeguards In the event that Collective Redundancies become necessary as determined by the Borrower, a result of Project implementation, the Borrower shall: (i) prior to taking any action in connection thereto, prepare and furnish to the Bank one or more retrenchment plans (as determined by the Borrower) satisfactory to the Bank; (ii) thereafter implement, or cause to be implemented, each of such plans in accordance with their respective terms; and (iii) once the retrenchment plans have been implemented, promptly prepare and furnish the Bank a report on the results of said implementation. Section II. Project Monitorine, Reporting and Evaluation The Borrower, through the PIU and CFU, shall furnish to the Bank each Project Report not later than one month after the end of each calendar semester, covering the calendar semester. Section III. Withdrawal of Loan Proceeds A. General Without limitation upon the provisions of Article II of the General Conditions and in accordance with the Disbursement and Financial Information Letter, the Borrower may withdraw the proceeds of the Loan to: (i) finance Eligible Expenditures; and (ii) pay the Front-end Fee; in the amount allocated and, if applicable, up to the percentage set forth against each Category of the following table: Amount of the Loan Percentage of Expenditures Category Allocated to be financed (expressed in EUR) (inclusive of Taxes) (1) EEPs under Part 1 of the 100% Proect27,969,750 10 Project (2) Goods, non-consulting services, consulting services, Training and 12,030,000 100% Operating Costs for the Project (3) Front-end Fee Amount payable pursuant to Section 2.03 of this 100,250 Agreement in accordance with Section 2.07 (b) of the General Conditions TOTAL AMOUNT 40,100,000 B. Withdrawal Conditions; Withdrawal Period 1. Notwithstanding the provisions of Part A above, no withdrawal shall be made for payments made prior to the Signature Date, except that withdrawals up to an aggregate amount not to exceed EUR 7,500,000 may be made for payments made prior to this date but on or after May 1, 2017 (but -7- in no case more than one year before the Signature Date), for Eligible Expenditures under Categories (1) and (2). 2. The Closing Date is August 1, 2022. Section IV. Other Undertakings 1. Without limitation to the provisions set forth in Section III.B.1 of this Schedule, each withdrawal under Category (1) shall be made only after the Borrower has furnished to the Bank: (a) evidence acceptable to the Bank in its form and content and following the requirements set forth in the POM, confirming the achievement of the respective DLR set forth in Schedule 4 to this Agreement; and (b) supporting documentation acceptable to the Bank confirming that Eligible Expenditures under the Eligible Expenditure Program in an amount at least equal to the amount to be withdrawn under this Category in respect of each DLR, have been incurred, and that said Eligible Expenditures have not been presented before to the Bank as satisfactory evidence for withdrawals under this Agreement. 2. Notwithstanding the provisions of paragraph I of this Section, if DLR 1.3 and/or DLR 1.5 have not been achieved by the date by which each DLR is set to be achieved, the Bank may, at any time, by notice to the Borrower, decide, in its sole discretion, to: (a) authorize the withdrawal of the unwithdrawn portion of Loan proceeds then allocated to the unachieved DLR, at a later date (prior to the Closing Date) if and when the Bank shall be satisfied that the pertinent DLR has been fully achieved; or (b) authorize the withdrawal of such lesser amount of the unwithdrawn proceeds of the Loan then allocated to said DLR, which in the opinion of the Bank, corresponds to the extent of achievement of said DLR, said lesser amount to be calculated in accordance with a formula set out in the POM; or (c) reallocate all or a portion of the proceeds of the Loan then allocated to said DLR to any other DLR; or (d) cancel all or a portion of the proceeds of the Loan then allocated to said DLR. -8- SCHEDULE 3 Amortization Repayment Schedule The following table sets forth the Principal Payment Dates of the Loan and the percentage of the total principal amount of the Loan payable on each Principal Payment Date ("Installment Share"). Level Principal Repayments Principal Payment Date Installment Share On each April 15 and October 15 Beginning April 15, 2023 5% through October 15, 2032 -9- SCHEDULE 4 Disbursement DisburementAmount of the Loan Linked Disbursement Linked Results A llofated Indicator For Category (1) (expresed Descrption(expressed in EUR) Description DLI 1. DLR1.1. BPS has adopted a business plan for the 15,939,750 Restructure calendar years 2018-2020, consistent with the Banka quantitative and qualitative requirements of the BPS Postanska Conclusion (EUR 802,000) Stedionica AD Beograd DLR 1.2. An agreement detailing the business model for joint operations between BPS and PTT has been executed (EUR 3,107,750) DLR 1.3. (a) the gross amount of BPS Performing Credit Exposures to medium and large private sector enterprises has been reduced by not less than 60% by December 31, 2020, compared to December 31, 2016; and (b) the limit on BPS lending to SOEs, as set forth in the BPS Conclusion, has been complied with by December 31, 2020 (EUJR 4,010,000) DLR 1.4. BPS has complied with all prudential ratios, as set forth in Selected National Bank of Serbia's Decisions, by December 31, 2020 (EUR 4,010,000) DLR 1.5. BPS gross NPLs have been reduced by not less than 50% by December 31, 2021, compared to December 31, 2016 (EUR 4,010,000) DLI 2. DLR 2.1. A diagnostic study for the Development 4,812,000 Complete Fund and AOFI have been completed (EUR 802,000) Reforms and Develop a DLR 2.2. The supervisory boards of the Strategy on Development Fund and AOFI have each adopted Development Decisions consistent with the quantitative and qualitative requirements of the Development Fund Finance Conclusion and AOFI Conclusion, respectively (EUR 1,604,000) DLR 2.3. The Borrower has adopted a strategy for Development Finance (EUR 2,406,000) -10- DLI 3. DLR 3.1. A tender for the sale of the SOFIs' NPLs, 7,218,000 Implement in an approximate amount of EUR 145,600,000, has NPL been issued by the Borrower (EUR 2,406,000) Resolution Strategy and DLR 3.2. A tender for the sale of the Prime Bucket State-Owned of SOFI's NPLs based on the NPL Resolution Banks Strategy Strategy, in an approximate amount of EUR 832,300,000 has been issued by the Borrower (EUR 2,406,000) DLR 3.3. (a) The Borrower has adopted a Conclusion on corporate governance for State-Owned Banks by December 31, 2019; and (b) any appointment of a board member of State-Owned Banks after the Conclusion becomes effective until December 31, 2021, has been done in accordance with the requirements of said Conclusion (EUR 2,406,000) - 11 - APPENDIX Definitions 1. "Anti-Corruption Guidelines" means, for purposes of paragraph 5 of the Appendix to the General Conditions, the "Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants", dated October 15, 2006 and revised in January 2011 and as of July 1, 2016. 2. "AOFI" means the Serbian Export Credit and Insurance Agency, established pursuant to the Borrower's Law on the Export Credit and Insurance Agency of the Republic of Serbia, duly published in the Borrower's Official Gazette No. 61/2005 and 88/2010. 3. "AOFI Conclusion" means the Government Conclusion SC 05 No. 00-348/2017, dated December 5, 2017. 4. "Banka Postanska Stedionica AD Beograd" or "BPS" means a Borrower's owned bank, established pursuant to the Borrower's Law of Banks, duly published in the Borrower's Official Gazette No. 107/2005, 91/2010 and 14/2015. 5. "BPS Conclusion" means the Government Conclusion SC 05 No. 00-56/2016-3, dated August 15, 2016. 6. "BPS Performing Credit Exposures" means BPS loans that are not classified as non- performing, as further defined in the BPS Conclusion. 7. "Category" means a category set forth in the table in Section III.A of Schedule 2 to this Agreement. 8. "CFU" means Central Fiduciary Unit, the unit referred to in Section I.A of Schedule 2 to this Agreement. 9. "Collective Redundancies" means the termination of the employment contract of thirty or more employees over a period of thirty days or twenty or more employees over a period of ninety days, due to technological, economic or organizational changes, in a circumstance when a particular job becomes redundant or volume of work is to be reduced, including instances when employees are offered incentive severance payments to voluntarily leave the company. 10. "Decisions" means a legal instrument to be issued by the Development Fund and/or AOFI in accordance with their respective statutes. i1. "Development Finance" means financing provided for development purposes, including but not limited to financing for micro and small enterprises. 12. "Development Finance Institutions" means AOFI and the Development Fund. - 12 - 13. "Development Fund" means the Borrower's Fund for Development, established pursuant to the Borrower's Law on the Fund for Development of the Republic of Serbia, duly published in the Borrower's Official Gazette No. 36/09, 88/10, 119/12 and 5/15. 14. "Development Fund Conclusion" means the Government Conclusions SC 05 No. 00-345/2017, dated December 5, 2017. 15. "Disbursement Linked Indicator" or "DLI" means in respect of a given Category, the indicator related to said Category as set forth in the table in Schedule 4 to this Agreement. 16. "DLR" means in respect of a given Category, the result under said Category as set forth in the table in Schedule 4 to this Agreement; on the basis of the achievement of which, the amount of the Loan allocated to said result may be withdrawn in accordance with the provisions of Sections IV of Schedule 2 to this Agreement. 17. "EEPs" means a portion of the Borrower's budgetary allocation for salaries of MoF's and MoE's employees, under budget lines 411 and 412 or their successors acceptable to the Bank. 18. "General Conditions" means the "International Bank for Reconstruction and Development General Conditions for IBRD Financing, Investment Project Financing", dated July 14, 2017. 19. "MoE" means the Borrower's Ministry of Economy, or its successor thereto. 20. "MoF" means the Borrower's Ministry of Finance, or any successor thereto. 21. "NPL" means non-performing loan, as defined by the National Bank of Serbia's Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items, duly published in the Official Gazette of the Republic of SerbiaNo. 94/2011, 57/12, 123/12, 43/2013, 113/13, 135/14, 25/15, 38/15, 61/16, 69/16, 91/16, 101/17 and 114/17, and the National Bank of Serbia's Decision on Reporting Requirements for Banks, duly published in the Borrower's Official Gazette No. 125/2014, 4/2015, 111/2015, 61/2016, 69/2016, 103/2016 and 101/2017. 22. "NPL Resolution Strategy" means the Borrower's strategy aimed to support meaningful debt resolution and put NPL levels in the Borrower's territory on a downward trajectory, issued by the Borrower and duly published in the Borrower's Official Gazette No. 72/15. 23. "Operating Costs" means the reasonable cost of incremental recurrent expenditures of MoF related to Project implementation such as, inter alia, consumable items, utilities and supplies, which would not have been incurred absent the Project. 24. "Operations Manual" or "POM" means the manual referred to in Section I.B of Schedule 2 to this Agreement. - 13 - 25. "Other State-Owned Financial Institution" means for purposes of the Project, any State- Owned Financial Institution (as defined below) excepting AOFI, the Development Fund and BPS. 26. "PIU" means the unit referred to in Section I.A. 1(a) of Schedule 2 to this Agreement. 27. "Prime Bucket of SOFIs' NPL" means SOFI's NPLs comprised of one hundred fourteen borrowers in total, which were deemed eligible for successful disposal. 28. "Procurement Regulations" means, for purposes of paragraph 85 of the Appendix to the General Conditions, the "World Bank Procurement Regulations for IPF Borrowers", dated July 2016, revised November 2017. 29. "PT'" means Post of Serbia, the Borrower's public enterprise in charge of the national postal service. 30. "Selected National Bank of Serbia's Decisions" means the National Bank of Serbia's Decisions: (a) Decision on Capital Adequacy of Banks, published in the Borrower's Official Gazette No. 103/2016, dated December 22, 2016; (b) Decision on Reporting on Capital Adequacy of Banks, published in the Borrower's Official Gazette No. 103/2016, dated December 22, 2016; and (c) Decision on Liquidity Risk Management by Banks, published in the Borrower's Official Gazette No. 103/2016, dated December 22, 2016. 31. "Signature Date" means the later of the two dates on which the Borrower and the Bank signed this Agreement and such definition applies to all references to "the date of the Loan Agreement" in the General Conditions. 32. "SOE" means an enterprise established by the Borrower, vested with legal personality, where the Borrower has significant control through full, majority, or significant minority ownership. 33. "State-Owned Bank" means a bank in which the Borrower holds an ownership interest. 34. "State-Owned Financial Institution" or "SOFI" means a financial institution in which the Borrower holds an ownership interest. 35. "Training" means expenditures (other than those for consultants' services) incurred by MoF to finance reasonable transportation costs and per-diem of trainees and trainers (if applicable) and rental of training facilities, materials and equipment under the Project.