The Head of the Parliamentary Standing Economic Committee and Member of Parliament, D.Damba-Ochir, spoke on the draft amendment to the Banking Law being discussed by Parliament and the impacts it will have on the banking sector. Specifically, in regards to the proposed interest rate ceiling, MP D.Damba-Ochir said it is not feasible on commercial loans.
What is the main strategy for the new draft Banking Law?
Draft bills on the Law on the Central Bank, Law on Commercial Banking, and the Law on Investment will soon be discussed in Parliament. In addition, the Law on Savings Insurance will be amended. This is all part of the agreement that Mongolia made with the International Monetary Fund. But this is something that had been discussed long before the IMF agreement and is finally being finalized now.
Mongol Bank as the central bank, and must regulate the risks in commercial banking. Commercial banks must have an optimal ratio on its assets. The Law on Commercial Banking must be discussed thoroughly. The Law on the Central Bank only concerns one organization. However, when it comes to amending the Law on Commercial Banking, we must listen to the stances and concerns of all the commercial banks. We organized a meeting between the banks and the relevant government officials to hammer out the issues.
A wide-reaching and large measure must be taken in order to decrease the interest rates of loans. For instance, we must stop taxing loans that have been taken out from foreign countries. This could be accomplished through amendments made to the Law on Banking, decreasing the tax burden, and looking into avenues to decrease the policy interest rate of Mongol Bank.
Moving forward, we also need to consider decreasing the interest rate on savings. Because there is a shortage of money on the market, banks are increasing the interest rates offered on savings in order to increase savings. When the savings interest is high, it is very difficult to decrease the interest rate on loans. Therefore, more comprehensive measures need to be taken.
The new Law on Banking will include articles concerning the implementation of a regulatory system that is supposedly up to international standards. What is your view on this matter?
An audit is being conducted on several commercial banks. The results of these audits will be discussed in a closed-door session between the Parliamentary Economic Standing Committee and Mongol Bank. The central bank must always be supervising and regulating the operations of commercial banks. There have been cases where the owners of commercial banks establish companies in their own names and take out loans from their bank. This puts the customer’s money at risk and we are trying to address this issue.
Of the total assets of a commercial bank, 90 percent belongs to the customers of the bank. Only 10 percent is owned by the shareholders of a bank. Therefore, banks must provide loans through savings and cover their operational costs on the interest rate payments of those loans. They cannot divert the money into other ventures.
In order to maintain the security of customers’ savings and to minimize risk, the bank must be diligent. In order to ensure this, Mongol Bank will regulate commercial banks by remaining up to date on risks and take appropriate measures where necessary.
Of course, the regulatory system must be up to international standards, meaning it will be risk-based and transparent.
Before presenting the new Law on Banking, the authors of the bill included an article stating that Mongol Bank will be allowed to employ an interest rate ceiling. Do you believe it is feasible for Mongol Bank to enforce an interest rate ceiling?
The interest rate ceiling proposed by the authors of the bill is not feasible and it cannot be included in the bill. It is correct to set a cap or determine the interest rate of the mortgage program because it is a loan that has a different purpose.
The government determining the interest rate on commercial loans is wrong and it is virtually impossible.
However, a large working group is being established between Cabinet and Parliament to work towards decreasing the interest rate. All relevant parties must convene and decide who will take what action and the role of Mongol Bank. Forcing a cap on the interest rate is just not feasible. This is a measure that will put a stranglehold on the economy.
The new Law on Banking includes articles pertaining to a move away from a system where only a few individuals own commercial banks to a system where banks are public enterprises and possibly traded on the stock exchange. Is this really a smart policy decision?
The new Law on Banking includes articles that require banks to trade some of their stocks on the stock exchange, increasing the number of shareholders and improving transparency.
In addition, banks must get their balance sheets audited. These are measures to improve the discipline and responsibility of banks. This is crucial. A bank with one owner will not expand or develop. Mongol Bank determines the capital requirement of banks.
Recently, the decision was made to increase the minimum capital requirement to 100 billion MNT, this is the correct policy decision. This will help improve the operations of banks in the long run.