M.Bold: The banking system will have no future in the long-term

The Executive Director of the “Tenger” financial group, one of the most well-known bankers, M.Bold, spoke with The National Post Newspaper regarding recent issues in the banking sector.

- What conclusion can you draw about the issue of “Khadgalamj” bank in your position as a person who has been working for many years in the Mongolian banking sector?

- I agree with the decision to merge it with State Bank. The capital of depositors will be at risk when the bank’s fixed assets are inadequate. The shareholders aren’t able to increase these assets and more than half of its loans are unsecured and cannot be paid back. Therefore, the Khadgalamj Bank and State Bank merger is needed in order to protect depositors’ interest.

- Even if the Supervision Department of the Bank of Mongolia revealed that Khadgalamj Bank was operating with a lack of fixed assets two years ago, they still allowed the bank to operate upon meeting certain requirements. Was it a right decision on their part?

- Specialists in the banking sector knew that Khadgalamj Bank was operating at a loss. The public can also remember that this bank was a result of a previous merger of two failed banks three years ago. Those two banks’ fixed assets were inadequate, shareholders were unable to invest in them, and their credit quality was poor. Hence, they decided to merge those two banks along the same vein that Khadgalamj Bank and State Bank were to merge. Everyone knew that week that those two banks were merging. For that reason, Khadgalmaj Bank was operating under a plan made by the Bank of Mongolia and its stockholders for the past two years. Unfortunately, its operations weren’t successful as planned, so they had to take this compulsory measure. It wasn’t wrong that the Bank of Mongolia had been taking flexible measures for re-establishing the bank by cooperating with its stockholders. It is more appropriate to take consensual than compulsory measures.

- After Khadgalamj Bank merged with State bank, depositors withdrew 30 million MNT in just one day. If depositors keep on withdrawing money from their accounts, what difficulties will arise?

- It is obvious for depositors to be cautious. Even so, the Ministry of Finance and the one responsible for this bank’s supervision, the Bank of Mongolia, claim that bank accounts will still be secure under the state’s disposal. Therefore, account holders can be calm.

- It is said that some interference in Khadgalamj Bank’s operation was the cause of this situation. Hence, people believe that political or business people influenced the banks’ operations, not only the management of Khadgalamj. Is there any influence, especially political, on commercial banks?

- I don’t know much. I can’t say that what happened was because I wasn’t involved in the bank’s operations. But as a specialist, I confirm that any bank is at risk if others exert some sort of influence on it. Interferences including by the government and political parties increase any bank’s risks. On one hand, banks provide credit without conducting adequate research. Specifically speaking, any political influence on a bank’s credit policy is very dangerous. On the other hand, stockholders taking endless loans increases this risk. According to the law, a stockholder can take out a loan of up to five percent of their own assets. If their loan is more than their stated extent of credit, the bank will be at risk. Furthermore, the bank’s executive administration and board of directors obtaining a credit more than what the law allows can end a bank’s future. This kind of loan is called a related party loan. About 30 banks have gone bankrupt within the past 22 years in Mongolia. The commercial banking system has been developed since 1990. Currently, there are 14 banks in Mongolia. Within this period, many banks have closed down due to related party loans or improper administration and lack of relevant management experience. In some cases, political influence is very possible. According to the Bank of Mongolia, Khadgalamj Bank approved loans that were more than the five-percent limit. This is very wrong.

- How secure are the related party loans that banks provide?

- According to the laws and regulations on banking from the Bank of Mongolia, the information on loans which is provided to the related parties should be made public. For example, commercial banks should put this information on their websites. Some banks have recently done this. It is one of the ways of showing that they adhere to the law. There’s a clause which indicates that all loans which is provided to related parties shouldn’t be over 20 percent of the bank’s fixed assets. In other words, if there are four related parties, each of them can only take out a loan of up to five percent. It is prohibited to provide more. The bank is an organization which services the public, and should not intend to enrich shareholders or the administration. The Bank of Mongolia supervises banks in order for them to follow the law. They receive annual, seasonal, and monthly reports from banks. If some banks violate the law, the Bank of Mongolia has the authority to fine banks or shut them down. Therefore, if banks don’t adhere to the law, they won’t last longer and will be closed soon. This system exists not only in Mongolia, but also in foreign countries.

- Most of the people are customers of five of the 14 banks. Is this small number risky for these banks’ account holders?

- The fixed assets of these five banks account for about 90 percent of the sector’s assets. It is said that such concentration of deposits is risky. But I think that this situation is expected and normal for Mongolia which has a small economy. Assets placed in many banks lowers the risk, but it makes services more expensive. Every bank rents building space, recruits people, buys computer software systems, and pays salaries to their employees. They won’t be able to limit these kinds of costs. In other words, it endangers expenses to be in excess of income. Then, they have no choice but to place this burden on customers and increase their interest rates. Hence, it’s important to find a proper way to avoid this situation. The market decides on its own. For instance, while there are five licensed banks in Great Britain, there are 14 licensed banks in Mongolia.

- How well organized is the Mongolian commercial banking system?

- Comparing today with 1990, it has achieved progress. However, if banks violate the Bank of Mongolia’s regulations and do not meet its standards, the banking system will have no future in the long-term even if seems to be progressive in the present. There are banks which have good administration and employees, but its structure and systems are very volatile. If stockholders, the board of directors, or the executive administration violate existing regulations, any bank will be at the risk of shutting down. Therefore, if banks obey the sector’s laws, their operations can be both safe and stable.

- Was the issue surrounding Khadgalamj Bank a very big warning for other banks?

- Yes, obviously. Learning from this situation, stockholders should have more responsibilities. A bank is an organization which takes people’s deposits. Since they have this exclusive right, they should also bear exclusive liability. In other words, they should assume obligations that are equal to their rights. Understanding their own obligations completely is easy to say, but hard to follow on a day-to-day basis. Thus, it’s very important to strictly obey the law.

- It is seen that the banks’ unsecured loan rates are high based on monthly statistics. What should’ve been done to make these loans secure?

- The first reason for providing unsecured credit is that the research conducted is incomplete. The bank overestimates the capacity of its borrowers to pay. In actuality, borrowers aren’t able to pay back their loans. They deceiving banks by giving them wrong information and hiding their real situation. Another reason is the insurmountable obstacles which are irrelevant to both banks and borrowers. Obstacles include a crisis in the foreign market, fall in prices, and inflation which can affect the credit system. Therefore, the banking environment is a full of risks. Even if there’s no risk at all, banks should still be cautious of the danger of a falling comet. The judicial system is also to blame. A main judicial problem is the slow execution of judgment that is usually in favor of the borrower. Sometimes, it takes five to six years to confiscate a borrower’s property. Within this period, banks can bear losses and depositors suffer from them. For this reason, if the execution of judgment is faster, the number of unsecured loans will decreased. However, Mongolia’s unsecured loans in its banking sector aren’t so bad compared with those of other countries.

- It is believed that the lack of proper checks and balances in the banking sector led to Khadgalamj Bank’s failure. Is there any other system of control aside from the Bank of Mongolia in the country?

- The present system of checks and balances is already sufficient. There should be internal control in a bank’s structure. This system should control all of its operations. The Internal Control Office should report all problems and violations to the board of directors and shareholders. If the internal control system doesn’t operate well, the bank will fail. Its board of directors is actually responsible for supervising the bank. But how far can they control the bank if its shareholders take up a loan? This is where the Bank of Mongolia gets in the picture. It is this organization that looks at financial reports. Apart from this, there is a system of control by independent audit companies. There are many of them – both domestic and foreign audit companies – in Mongolia. Larger banks are controlled by foreign audit companies. Furthermore, foreign companies which set ratings examine banks that operate under international regulation. Another biggest form of checks and balances is by the customers. They are able to control the bank’s operation daily. Financial reports are published in newspapers seasonally. People can get professional advice by using these reports. This kind of service is lacking in Mongolia. Market observers draw a conclusion on banks and recommend the best ones to potential customers. But such a dual system of control is not adequate. It should be strong, reliable, and truthful. For Khadgalamj Bank, I guess the lack of internal control led to this situation.

- How do you think should banks operate in the future?

The stockholders should be very responsible. The Bank of Mongolia needs to demand more responsibility and accountability from banks. Secondly, the viewpoint of banks has to be changed. A bank is not an organization for profit. It should be of service to the public. Loans from banks have to improve a company’s operations and the people’s lives. But then, loans don’t have to be a burden for debtors. Banks and customers have to negotiate with each other with regard to loans. Consequently, a loan should favor customers and be secure for banks at the same time. In addition, loans shouldn’t be destructive for the economy. Banks have to provide loans with stringent requirements to avoid defaults. Banks should develop this viewpoint. The next main thing is that banks should be far from any political influence. For instance, the “Tenger” financial group ordered an issue to be cut-off from any kind of politics and its employees have been following this order since July 1. A financial group is an organization which takes deposits and provides credit without any regard to political views. Hence, the banks’ administration and employees don’t have to be part of any political activity. The employees of “Tenger” who still want to be involved in politics should make up their minds. They should either choose to independently work in “Tenger” and free from any kind of influence, or be dismissed from their jobs. It is believed that it is very important for banks to be separate from politics. I want other banks to agree with this point of view.

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