What is the bank bell ringing about?
Mongolians have been concerned about what happened recently to Khadgalamj Bank (Savings Bank) and as such, have been trying to figure out why it happened, what the next step should be, and how other banks can avoid similar incidents in the future.
Ring 1: What exactly happened?
What happened is that the government took over Savings Bank’s healthy assets. If they had let Savings Bank declare insolvency, the government would have had to reimburse up to 20 million MNT of every one of the 500,000 deposit accounts held by Mongol Bank, as required by the new deposit insurance law.
Furthermore, deposit accounts that had more than 20 million MNT would have been disadvantaged on their reimbursement and a total of 3,300 people would have lost their jobs. In addition to this, 1.7 million bank clients would have suffered a loss.
In order to avoid this scenario, Mongol Bank appointed a cessionary to transfer Savings Bank’s assets to the State Bank; they moved the bad assets in the morning and the healthy assets and liabilities in the afternoon. Mongol Bank viewed the 162 billion MNT loan, granted by Savings Bank to its 12 subsidiary companies, as bad assets. On the other hand, Sh.Batkhuu, head of Just Group, informed the press that the bad assets also included the bad loan of 60 billion MNT provided by the Zoos and Anod banks belonging to the company, Olon Ovoot.
The procedure can also be seen as a precaution to prevent the banking sector from becoming unable to handle pressure from the loan that had been acquired by Just Group from a foreign bank (using Erdenet Mining Corporation as collateral). The debt has already reached 100 million USD, which is a heavy burden.
The total assets of State Bank, which was established after Zoos Bank was closed down, expanded five times overnight, whilst its own assets were increased by 100 billion MNT. This is money paid by our taxes.
Sh. Batkhuu stated that the government’s overestimation of the value of the Olon Ovoot gold deposit was the main cause of the problem. Just Group, who were once quite influential players in our economy (mainly in fuel imports, sales and meat) have now handed over its banking business to State Bank, and its fuel business to Magnai Trade LLC. They also closed down Just Agro LLC.
Ring 2: Why did it happen?
A commercial bank is prohibited by law to grant one of its closely associated parties (shareholders, executive management teams, and members of representative council) a loan greater than five percent of its own assets. If such a loan is provided, it means either the chief executive officer granted the loan without the knowledge of the loan committee, or the members of the committee were influenced by their leader and broke the law.
It also implies that Mongol Bank found out about it later and failed to take appropriate measures in time. It is also possible that, after discovering the existence of such a loan, Mongol Bank followed procedure and established risk funds in every instance. So when the total deficit exceeded Mongol Bank’s assets, State Bank took over. Why such a great amount of money (which belonged to public service) was drawn back all of a sudden, is questionable, especially if there was enough supervision- as they claimed there was.
Mongol Bank has recently injected one trillion MNT into circulation and started offering soft loans through commercial banks. If Mongol Bank keeps pulling such a huge amount of public money without warning, they have the power to take any bank out of the picture. Mongol Bank has no representative council members who are not affected by outside influences, and their executive officers (who were appointed by an agreement between political parties) make decisions on their own. It is a risk, along with the sudden pull of an enormous amount of public money.
Ring 3: What is the next step?
It has been a week since this small car was loaded with too heavy a burden, one that only a truck could handle. They say that it will be discussed in a cabinet meeting, after the ministers finish their summer break. The day after the transfer of the assets between Savings Bank and State Bank, talks stated that State Bank will be privatized after its assets are increased. Privatization is the right step towards strengthening corporate governance of State Bank and would require more operational transparency. The public money is to be spent on the expansion of State Bank assets and should be used this way.
The only problem is the decision regarding who State Bank should be privatized to. If the ownership is transferred to a commercial bank, like before, there will be no difference at all. The old orchestra will still be playing the same music despite some musicians being replaced. Furthermore, if State Bank’s ownership is given to someone who has direct or indirect affiliations with the current authorities, people are likely to view the takeover of Savings Bank as a deliberate action planned from the beginning. Even if our faith in government falls through the floor, the culprits and their puppet politicians will be held responsible for their actions one way or another.
Nevertheless, State Bank shares should be offered on the domestic stock exchange by making an IPO. For a start, 60 percent of the shares should be offered, and the 100 billion MNT of public money used to expand the bank’s assets ought to be recovered along with its interest payments. Then, the rest of the money generated by the IPO should be transferred into State Bank’s own assets. As the price of shares goes up in the future, the remaining 40 percent should be sold and collected for the State Fund.
This privatization should create a public company where one legal entity is not allowed to own more than five percent of the shares. This will strongly boost the development of our capital market and pave the way for a future reduction in the savings rates.
Ring 4: How can we make sure that it does not happen again?
First of all, we have to demand that commercial banks disclose information about who their shareholders are. It will allow people to see which political parties, politicians or decision makers are behind which banks and enable them to make better choices based on that information. These politicians, who share hardly any difference in political ideology, are the ones who know best about what their money can do.
Furthermore, only ten percent of the total assets of our commercial banks belongs to their actual owners. The remaining 90 percent are assets that belong to deposit accounts. Therefore, it is only fair to disclose information about ownership. A bank is the only organization that is capable of pulling public capital in one place through savings. Hence, banks must be separated from politics.
Secondly, a law needs to be passed that if a bank gets bigger than one fifth of the banking system, 60 percent of its shares go to the public and privatization should be carried out. Also, we can mitigate risk by appointing a public representative to the bank’s representative council. This step will play the biggest role in reducing savings and loan rates.
O.Magnai, head of the Agency for Fair Competition and Consumer Protection, must realize that banks, usually the small ones, start the battle of high-interest deposit rates. This must be stopped immediately.
Relevant organizations and associations must work hard to strengthen the independence of internal auditing of commercial banks, improve corporate governance, and enhance accountability. It is also time to put our banks into a ranking system.
If foreign triple-A rated banks come to Mongolia, there will be much fiercer competition and the necessity to carry out the above-mentioned tasks will come naturally. A bank is a trust-based organization.
The bank bell is ringing to remind us that every action a bank takes must enhance trust rather than diminish it.
-Translated by B.AMAR
Short URL: http://ubpost.mongolnews.mn/?p=5330
Ring 1: What exactly happened?
What happened is that the government took over Savings Bank’s healthy assets. If they had let Savings Bank declare insolvency, the government would have had to reimburse up to 20 million MNT of every one of the 500,000 deposit accounts held by Mongol Bank, as required by the new deposit insurance law.
Furthermore, deposit accounts that had more than 20 million MNT would have been disadvantaged on their reimbursement and a total of 3,300 people would have lost their jobs. In addition to this, 1.7 million bank clients would have suffered a loss.
In order to avoid this scenario, Mongol Bank appointed a cessionary to transfer Savings Bank’s assets to the State Bank; they moved the bad assets in the morning and the healthy assets and liabilities in the afternoon. Mongol Bank viewed the 162 billion MNT loan, granted by Savings Bank to its 12 subsidiary companies, as bad assets. On the other hand, Sh.Batkhuu, head of Just Group, informed the press that the bad assets also included the bad loan of 60 billion MNT provided by the Zoos and Anod banks belonging to the company, Olon Ovoot.
The procedure can also be seen as a precaution to prevent the banking sector from becoming unable to handle pressure from the loan that had been acquired by Just Group from a foreign bank (using Erdenet Mining Corporation as collateral). The debt has already reached 100 million USD, which is a heavy burden.
The total assets of State Bank, which was established after Zoos Bank was closed down, expanded five times overnight, whilst its own assets were increased by 100 billion MNT. This is money paid by our taxes.
Sh. Batkhuu stated that the government’s overestimation of the value of the Olon Ovoot gold deposit was the main cause of the problem. Just Group, who were once quite influential players in our economy (mainly in fuel imports, sales and meat) have now handed over its banking business to State Bank, and its fuel business to Magnai Trade LLC. They also closed down Just Agro LLC.
Ring 2: Why did it happen?
A commercial bank is prohibited by law to grant one of its closely associated parties (shareholders, executive management teams, and members of representative council) a loan greater than five percent of its own assets. If such a loan is provided, it means either the chief executive officer granted the loan without the knowledge of the loan committee, or the members of the committee were influenced by their leader and broke the law.
It also implies that Mongol Bank found out about it later and failed to take appropriate measures in time. It is also possible that, after discovering the existence of such a loan, Mongol Bank followed procedure and established risk funds in every instance. So when the total deficit exceeded Mongol Bank’s assets, State Bank took over. Why such a great amount of money (which belonged to public service) was drawn back all of a sudden, is questionable, especially if there was enough supervision- as they claimed there was.
Mongol Bank has recently injected one trillion MNT into circulation and started offering soft loans through commercial banks. If Mongol Bank keeps pulling such a huge amount of public money without warning, they have the power to take any bank out of the picture. Mongol Bank has no representative council members who are not affected by outside influences, and their executive officers (who were appointed by an agreement between political parties) make decisions on their own. It is a risk, along with the sudden pull of an enormous amount of public money.
Ring 3: What is the next step?
It has been a week since this small car was loaded with too heavy a burden, one that only a truck could handle. They say that it will be discussed in a cabinet meeting, after the ministers finish their summer break. The day after the transfer of the assets between Savings Bank and State Bank, talks stated that State Bank will be privatized after its assets are increased. Privatization is the right step towards strengthening corporate governance of State Bank and would require more operational transparency. The public money is to be spent on the expansion of State Bank assets and should be used this way.
The only problem is the decision regarding who State Bank should be privatized to. If the ownership is transferred to a commercial bank, like before, there will be no difference at all. The old orchestra will still be playing the same music despite some musicians being replaced. Furthermore, if State Bank’s ownership is given to someone who has direct or indirect affiliations with the current authorities, people are likely to view the takeover of Savings Bank as a deliberate action planned from the beginning. Even if our faith in government falls through the floor, the culprits and their puppet politicians will be held responsible for their actions one way or another.
Nevertheless, State Bank shares should be offered on the domestic stock exchange by making an IPO. For a start, 60 percent of the shares should be offered, and the 100 billion MNT of public money used to expand the bank’s assets ought to be recovered along with its interest payments. Then, the rest of the money generated by the IPO should be transferred into State Bank’s own assets. As the price of shares goes up in the future, the remaining 40 percent should be sold and collected for the State Fund.
This privatization should create a public company where one legal entity is not allowed to own more than five percent of the shares. This will strongly boost the development of our capital market and pave the way for a future reduction in the savings rates.
Ring 4: How can we make sure that it does not happen again?
First of all, we have to demand that commercial banks disclose information about who their shareholders are. It will allow people to see which political parties, politicians or decision makers are behind which banks and enable them to make better choices based on that information. These politicians, who share hardly any difference in political ideology, are the ones who know best about what their money can do.
Furthermore, only ten percent of the total assets of our commercial banks belongs to their actual owners. The remaining 90 percent are assets that belong to deposit accounts. Therefore, it is only fair to disclose information about ownership. A bank is the only organization that is capable of pulling public capital in one place through savings. Hence, banks must be separated from politics.
Secondly, a law needs to be passed that if a bank gets bigger than one fifth of the banking system, 60 percent of its shares go to the public and privatization should be carried out. Also, we can mitigate risk by appointing a public representative to the bank’s representative council. This step will play the biggest role in reducing savings and loan rates.
O.Magnai, head of the Agency for Fair Competition and Consumer Protection, must realize that banks, usually the small ones, start the battle of high-interest deposit rates. This must be stopped immediately.
Relevant organizations and associations must work hard to strengthen the independence of internal auditing of commercial banks, improve corporate governance, and enhance accountability. It is also time to put our banks into a ranking system.
If foreign triple-A rated banks come to Mongolia, there will be much fiercer competition and the necessity to carry out the above-mentioned tasks will come naturally. A bank is a trust-based organization.
The bank bell is ringing to remind us that every action a bank takes must enhance trust rather than diminish it.
-Translated by B.AMAR
Short URL: http://ubpost.mongolnews.mn/?p=5330
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