Banking and Finance

During the last 11 years, the Romanian banking system has undergone major restructuring in an effort to assist Romania in its transition towards a market economy. One of its key elements was to change the role played by the National Bank of Romania (hereinafter the "NBR") into a more traditional role for a central bank. The losses accumulated during the past ten years in the Romanian banking system due to an unstable economic environment and a weak banking management, have been significantly reduced at a very reasonable level.

In order to further improve the banking system the NBR has introduced more severe and prudent evaluation criteria regarding all main aspects of the banking activity (i.e. compliance with NBR's norms by both shareholders and management, accuracy of the reports submitted to the NBR by commercial banks, etc. Another important element which has contributed to the improvement of the banking system was the setting up of the Banking Risks Office, organised and operating within the NBR, and which provides information at the request of commercial banks about the risk exposure level associated to a certain loan.

In order to reduce the risks associated with payment instruments (i.e. cheques, bills of exchange, promissory notes etc.) the NBR has set up the Payment Incidents Office, managing the specific information related to all payment incidents occurring in the system.

The requirement as to the reserve level resulted in an increase of available resources of banks, and implicitly, increased possibilities to credit the economy. In other words, the firms have at their disposal more money in the form of loans that are to be used for financing productive activities.

Under the Banking Law (Law 58/1998), commercial banks can freely compete for business in the marketplace, taking deposits, granting loans and offering a full range of other banking services. The banking network now includes approximately 40 fully operational banks, including the representative offices of several major foreign banks.

Domestic Banks

Commercial banks operate in a manner similar to that of commercial banks in other parts of the world, taking deposits and offering a wide range of individual, commercial and foreign trade loan services to their customers.

Commercial banks can be established either as Romanian legal entities, i.e., joint stock companies, with at least five shareholders, or as branches of non-resident/foreign banks. Regardless of the form of incorporation, the banking entities operate under the supervision of the National Bank of Romania.

Presently, the minimum share capital and reserves of a bank is ROL 250 billion (representing approximately USD 7,570,000 at the exchange rate valid at the beginning of October 2002). The total amount subscribed by each shareholder must be paid up front and in cash, at the date of incorporation. According to recent norms issued by the NBR, the minimum share capital and reserves of a bank shall be increased within the next period as follows:

All commercial banks must open current accounts at the NBR and are required to maintain minimum reserves.

Commercial banks can take sight and term deposits in cash from both individuals and commercial entities. In addition to granting loans, banks may buy, sell, maintain in custody, and manage monetary assets. Banks themselves are forbidden to provide brokerage, leasing and insurance activities, but are allowed to have controlling interests in companies undertaking such activities. Banks may also carry out transfers and clearing operations, and other operations on their behalf and account as well as for third parties. Even though the banking market can be still characterised as fairly traditional, other banking services, such as custody, clearing etc., have been recently introduced on the market.

Supervision of the liquidity risk is ensured both by banks and the NBR. As such, all commercial banks must submit to the central bank monthly financial statements, including balance sheets and income statements.

In order to limit the liquidity risk, the banks must establish, in respect to each financial year: (i) a strategy for liquidity management, which will be reconsidered whenever the business environment makes it necessary and (ii) a strategy for liquidity risk in the event of potential crisis, and appropriate solutions for resolving the crisis. In order to meet these objectives, commercial banks have to initiate procedures for the pursuit and limitation of the liquidity risk.

In respect of bank privatisation, a great challenge for the next year is the privatisation of the major state-owned bank, the Romanian Commercial Bank (BCR). In order to prepare the privatisation strategy for this bank, on 22 March 2001, the Government nominated members of the Privatisation Commission while the privatisation strategy, structured in four steps, was approved on 8 October 2001.

International Banks

International banks may operate in Romania through branches or subsidiaries, i.e. joint stock companies. Foreign banks have the same rights and obligations as domestic banks. Both branches and commercial banks need a license issued by the National Bank of Romania.

Licensing

In applying for an authorisation, both foreign and domestic banks are subject to the same licensing criteria developed by the National Bank of Romania. These criteria include:

Generally, the authorisation process includes 3 stages:

Privatisation of State-Owned Banks

The Law on the Privatisation of Banks 83/1997, as subsequently amended, created a legal framework for the transfer of banks to the private sector in order to improve their financial position so as to enable them to expand their commercial lending activity. Until 1998, 60% of the capital of the six state-owned banks used to be held by the State Ownership Fund (further changed into "APAPS" or Authority for Privatisation). Presently, the percentage above has been reduced to approximately 35%, of which around 30% represent the share capital of the Romanian Commercial Bank ("BCR"). It should be noted that the privatisation of BCR, currently underway although postponed for several times, is expected by most analysts to be completed in the near future.

Another measure taken by the Romanian Government in order to strengthen the financial standing of the state owned banks, and to facilitate their privatisation, was to set up an agency for the recovery of banks' non-performing assets. This agency is meant to restructure the banks' portfolio, by "cleaning" it of non-performing loans, receivables etc. Thus, the agency purchases the non-performing assets at their net value from the bank and then tries to capitalise on them, either by foreclosing the collateral, or by public tenders or any other legal means. In exchange for the non-performing assets, the banks will receive T-Bills.

According to the banks' privatisation law, banks can be privatised through private capital increase or the sale of shares. A company or an individual, either Romanian or foreign, acting ndividually or on the basis of a prior mutual understanding may not acquire more than 20% of the share capital of a bank to be privatised, with the exception of highly reputable international financial institutions.

Individuals or commercial entities that intend to become significant shareholders of a commercial bank, i.e., their contribution to the share capital of the commercial bank exceeds 5% thereof, have to obtain the prior authorisation of the National Bank of Romania. In order to ensure the stability of the banking system, the National Bank of Romania introduced certain requirements to be met by such individuals or commercial entities (Government Emergency Ordinance 137/2001), as follows: (i) have a sound financial situation. (Please note that the National Bank of Romania has the authority to analyse the source of the funds used by the individuals or the commercial entities for gaining the position of a significant shareholder.) (ii) provide the necessary information related to the group they belong to, (iii) the commercial entities must have at least 3 years of business activity, (iv) adequate supervision is ensured by the competent authorities in the country of origin of the individual or the commercial entity.

Foreign Exchange Markets

Currency Convertibility

According to foreign exchange regulations 3/1997, subsequently amended, the national currency became convertible as from 30 January 1998. The so-called "Capital account" transactions need to be approved by, or notified to the National Bank of Romania, depending on their exact nature.

Foreign Exchange Operations

Foreign exchange rules stipulate that residents may conclude transactions on Romanian territory only in the local currency, the "leu", with its symbol "ROL". Transactions between residents and non-residents may be performed in foreign currency through accounts opened at Romanian banks or foreign banks authorised to operate in Romania. The exceptions to the above rules are strictly limited by law (i.e., for import-export commissioning houses). Romanian residents are entitled to freely hold and use their foreign currency proceeds derived from legal transactions and to make direct payments out of their foreign currency accounts for current account operations such as the import of goods or services, payment of dividends, repatriation of profits etc. Financial and capital operations are typically subject to an authorisation granted by the National Bank, except for financial loans and leasing operations (with a period of reimbursement of more than 1 year) which are to be simply notified to the NBR for registration in the Private External Debt Registry.

The "leu" is characterised by domestic convertibility. Resident companies can sell or buy foreign currency only on the interbank foreign exchange market, the transaction being performed by the company's bank. Each order for buying foreign currency must be justified by supporting documents (i.e. external contracts). The National Bank and Government Regulations also establish the obligation for companies and banks to make every effort to repatriate the foreign currency derived from international transactions as quickly as possible.

Resident and non-resident individuals are allowed to freely buy and sell foreign currency from authorised intermediaries.

Typically, Romanian residents are allowed to freely carry out foreign exchange operations.

The National Bank of Romania issued Circular 26/2001 and Circular 37/2002, modifying Regulation 3/1997 concerning foreign exchange operations.

Thus, for operations such as "capital and financial transfer" as listed hereafter, the authorisation of the NBR is no longer required:

For the following capital currency operations carried out by banks on their own behalf, NBR authorisation is not required:

The NBR must be notified in cases of trade credits with reimbursement periods longer than 1 year, financial credits with reimbursement periods longer than 1 year granted by non-residents to residents, including financial leasing, as well as in the case of certain guarantees or securities related to the aforementioned operations. Notification does not imply the approval of the NBR and it is made only for statistical purposes (the NBR monitors the status of the payment balance at a national level).

Non-residents may acquire, hold and use payment instruments, listed securities and other types of placement instruments in local currency (ROL). Non-residents may also open current accounts in ROL and in foreign currency as well as deposit accounts in foreign currency without the approval of the NBR. Nevertheless, deposit accounts in ROL, opened by non-residents in Romania are subject to NBR approval. Transactions in local currency/ROL between residents and non-residents are forbidden, with the exception of the following:

ROL amounts obtained by non-residents can be changed into foreign currency if supporting documents are provided. Residents must transfer or repatriate all amounts in foreign currency and/or local currency obtained from operations abroad, except for taxes, commissions etc. The repatriation obligation does not apply to:

Residents may open foreign currency or ROL accounts abroad only further to the authorisation of the NBR. The following categories of residents are not bound by this obligation:

Payments between residents are made in local currency, if this operation takes place on Romanian territory. Foreign currency operations on Romanian territory are allowed to the following categories of residents:

The banks are bound to correctly implement the present regulations, being entitled to request from their clients all necessary information and supporting documents. The NBR will check and supervise compliance with the foreign exchange regulations.

When entering or leaving Romania, individuals must declare at the border any amount exceeding USD 10,000. Any amounts not declared will be confiscated. Individuals are allowed to bring in or take out of Romania amounts of maximum ROL 500,000 (except for residents of the Republic of Moldova for whom the maximum amount is ROL 4 million).

In Romania, the legal framework governing open-end investment funds and investment companies is mainly provided by Emergency Government Ordinance 26/2002, as subsequently approved and amended under Law 513/2002, and by specific rules issued by the National Securities Commission as subsequently amended. Those collective investment bodies that do not fall under the provisions of Emergency Government Ordinance 26/2002, as well as the investment companies created under Law 133/1996 regarding the change of Private Ownership Funds into investment companies will be regulated by a special law to be issued. Until then, provisions of Government Ordinance 24/1993, as approved by Law 83/1994 remain in general applicable to these entities. Open-end investment funds are non-incorporated collective schemes, managed by a joint-stock company whose sole objective is that of managing investment funds. The fund units must be registered. The authorisation of a fund will be revoked if the fund does not register at least 100 unit-holders within 90 days of the registration date.

Investment companies are set up as joint stock corporations with at least 50 shareholders and therefore, unlike open-end investment funds, have legal personality. They must perform exclusively investment activities.

Both open-end investment funds and investment companies can invest only certain assets, such as securities, bonds, other credit titles.