Recently, the National Bank of Serbia (NBS) has refused to certify a report on amended loan agreement between a foreign bank and a Serbian corporate borrower because the original loan agreement, governed by Serbian law, contained a zero-floor Euribor clause. Zero-floor Euribor clause means that if Euribor is negative, it will be deemed to be zero for the purpose of the loan agreement and the bank will be entitled to the entire margin. The NBS’ position was that zero-floor Euribor is contrary to the general principles of the Serbian contract law embodied in the Obligations Act. Such interpretation of Serbian contract law is objectionable both on procedural grounds and on the merits.

Under Serbian foreign exchange rules, every cross-border loan, including any amendment to the loan agreement, must be reported by the Serbian borrower to the NBS on a pre-printed form, along with the executed loan agreement. Commercial bank of the Serbian borrower may credit the loan proceeds to the borrower’s account only if the NBS has stamped the loan report. The law limits the NBS’ to that of the recipient of loan reports. The central bank is not authorized by law to review the contents of the loan agreements as part of the loan reporting process. However, in practice, the NBS regularly interferes with the contents of the loan agreements reported to it. It conditions its stamping of the loan report by requiring the borrower to procure various amendments to an already signed loan agreement.

The practice is not authorized by law and is frustrating for both borrowers and lenders who can never know with certainty when they will be able to complete the transaction. The review takes place in a limbo. There are no procedural guarantees for the borrower to present its case. When the NBS’ refuses to put a stamp on the loan report, which practically amounts to a ban on the loan draw-down, it does not issue any formal decision. The borrowers, who have no legal remedy in this process, have no choice but to acquiesce to the NBS’ requests, if they want to utilize the borrowed funds.

Besides being unauthorized by law, the NBS’s objections to the contents of the loan agreement are entirely unpredictable and often dubious on the merits. In the case reported here, the NBS said it would not have objected to the zero-floor Euribor clause had the loan agreement been subject to a foreign law. This means the NBS does not think that zero-floor Euribor offends Serbian public policy, yet it prevents parties from agreeing to it. No statutory provision, court judgment, or relevant legal commentary supports the NBS’s view that zero-floor Euribor is outside the freedom of contract with Serbian contract law.

To make things more absurd, the NBS did certify the report on the original loan agreement even though the agreement contains the zero-floor EURIBOR clause. It changed its view a year later when it was presented with the amended loan agreement providing for a loan top-up. The motives for the change of heart are unknown while the explanation that the clause is contrary to the general principles of Serbian law is unconvincing.

Given that the parties are free to agree on a fixed-rate interest which is above zero, it is difficult to understand which principle of contract law is offended when two commercial actors, which must be presumed to be experienced and informed, agree on a variable interest rate provided it is above 0. Even if one accepts that zero-floor Euribor puts parties in unequal positions, this is still without legal consequence because the Obligations Act expressly provides that the disturbance of the principle of equality of mutual considerations has legal consequences only if a statute specifically provides so (not the case here).

In the interest of moving things forward, the parties involved in the case reported here backed down and deleted the zero-floor interest clause from their loan agreement. However, the consequences of a blow that an administrative authority makes to legal certainty and predictability when it usurps the role of legislator or judiciary, persist.