– Mongol Bank: The five percent interest mortgage is impossible –

Trans. by O.Shurentsetseg

Prime Minister of Mongolia J.Erdenebat, Head of the Cabinet Secretariat J.Munkhbat, and Deputy Finance Minister Kh.Bulgantuya held a meeting with banking sector representatives last week.

Prime Minister J.Erdenebat opened the meeting and said he is seeking solutions to the current economic downturn with the private sector.

“Parliament approved the government’s action plan for 2016-2020. Throughout this economic downturn we are facing, the government has held meetings with various industry representatives to find a way out of this challenging time,” the Prime Minister said.

“The government is looking for financial sources to continue the mortgage loan program. We are planning to make amendments to the criteria that limits apartment purchase through mortgage to less than 80 square meters in space, which will be increased to 100 square meters. Banks are not providing mortgage loans as financing hasn’t been provided yet.

“People who want to buy apartments bigger than 100 square meters in space will be able pay a down payment of 30 percent plus fees and acquire the eight percent interest mortgage loan,” said Prime Minister J.Erdenebat.

The 80 square meter cap was originally issued to the mortgage criteria to support low and middle income families acquire homes. Those capable of purchasing bigger apartments were not considered target group of the mortgage loan program of the government.

To close the meeting, the Prime Minister said, “Last year, the only profitable sector was the banking sector. Previously, meetings were held with business representatives, people complained about banks and financial institutions’ monopoly in the market. Mutual understanding is required.”

The following are views expressed by banking and financial sector representatives at the meeting with the Prime Minister.

Deputy executive director of Khan Bank R.Munkhtuya: It is better if the government stops implementing small projects that cause damage to the market created by the banks. These projects should be implemented through the fund for the development of small and medium-sized enterprises (SMEs). Banks are consistently updating their user data through advanced technology. If we can integrate user information with state information, the combined accuracy of information registration will facilitate a better decision making process for banks. Therefore, we ask the government to pay more attention to data accuracy.

Executive director of the Mongolian Bankers’ Association J.Unenbat: Non-performing loans are increasing and banks tend not to provide additional loans. There is a need to decrease non-performing loans and improve active assets. Banks are discussing to establish an asset management department.

Deputy CEO of Trade and Development Bank L.Soronzonbold: The government should provide support to increase aggregate demand. For example, we face a real need to continue the mortgage loan program. Mortgage loan is limited to apartments smaller than 80 square meters in size. Many have requested mortgages for larger apartments.

Currently, the Mongolian Credit Guarantee Fund is working to support SMEs. This fund only supports SMEs and first time apartment buyers, and if the fund provides guarantee for young families, sales turnover might increase accordingly.

Vice President of Mongol Bank B.Lkhagvasuren: The financial sector always had a bias systematically. The banking sector makes up 96 percent of the financial sector, while the rest – insurance, securities trading and non-bank financial institutions (NBFI) – make up only four percent of the market share. This has been so for the past two decades. Mongol Bank (BoM) and the Financial Regulatory Commission of Mongolia are discussing at policy level to develop securities trading and NBFIs. During an economic crisis, not only the government but the private sector needs to cooperate. Decreasing loan interest rate has two possible outcomes. If BoM decreases the policy interest rate, this will be an authoritarian measure. This should be regulated by the market. If banks decide to stop paying interest fees for current and savings accounts, BoM is ready to support it.

The most intriguing issue today is loan quality. Loan repayment has slowed down due to economic conditions, legal environment and interruptions in regular business operations. We are working to improve the legal environment. The movable property registration law should be mentioned; if the movable property is put into market circulation, loan quality could increase to a certain extent. This law will be implemented soon. The other legal framework is the transfer of collateral assets outside of court decision. The resolution has been approved enforcement is lacking.

The Mongolian Bankers’ Association, BoM, Ministry of Justice and Internal Affairs of Mongolia and other government agencies need to cooperate to put everything on the right track. In general, transfer of property outside of court decision is common worldwide. However, this is not enforced in Mongolia yet.

The five percent interest mortgage loan was not a right decision from the start, while the eight percent interest mortgage loan was implemented correctly from the beginning. Consequently, there was no need to decrease the interest rate. Hence, BoM is unable to continue the five percent mortgage loan, but the eight percent interest mortgage loans must be continued in the future.

However, certain steps are required prior to issuing mortgages again. In other words, mortgages accounted for 30 percent of the total loans of the banking system. This figure is much higher than other industries’ loans, such as mining and construction. Increase of mortgages has another negative impact on expenditure. In other words, mortgage holders repay their loan with interest and are left with insufficient finance for other spending. This could lead to deflation; absence of demand decreases procurement. BoM is being very cautious on mortgage related issues but intends to continue it further.

Director of an insurance company N.Batzul: I want attention on three main issues. The insurance law’s enforcement is very poor. Insurance is developed in two main categories world-wide; life insurance and property insurance. However, life insurance hasn’t developed well in Mongolia. This needs to be addressed. Additionally, compulsory insurance makes up 25 percent of the total insurance.

Executive Director of Bogd Bank G.Saruul: Non-performing loans take two to three years to process through the court and related expenditures are quite costly.

BTSec representative Dayanbilguun: The government should simply issue special purpose bonds. The bonds should finance enterprises to increase overall revenue. Investors’ activity has been stopped to a certain extent. Furthermore, it is possible to reduce domestic bond interest rate traded in the stock market.