“The crisis is entering its last and hardest phase, but we shall overcome”

It was in October and November 2008 that for the first time since 2000 people began withdrawing their savings from bank accounts. This expression of customers’ lack of faith undermined the solvency of banks. The most important tasks before the Central Bank were thus minimizing risks and providing support to the banking sector, and recapturing people’s confidence. A very important step on the way to stabilization was taken when the State Great Hural (Parliament) adopted a legislation that guaranteed the security of all savings accounts in banks. The Central Bank lent MNT265 billion to prop us banks’ liquidity. These measures averted the threat of any full-scale crisis in the banking sector and also restored customer confidence. Any further disastrous run on banks was prevented.

In addition, the Central Bank increased its policy interest rate to allow commercial banks freedom to decide how best to use their capital in the circumstances. It also introduced incentive equal to ¼ of the policy interest rate for the mandatory MNT reserve with the Central Bank. Terms of Central Bank bonds were extended and other measures taken so that the risk arising from the difference between actives and passives was reduced, providing for better management of resources in a rapidly changing market.

Taken together, all these steps helped relieve the pressure on banks and aided their profitability. In another move the State Great Hural transferred MNT65 billion from the Mongolia Development Fund to three commercial banks.

We are now streamlining and strengthening the process of monitoring banks’ activities, making regular evaluation of their capacity and risk level, their true requirement of funds, and how they raise resources, from both external and internal sources. Audits have become more frequent, and a working plan for overcoming crisis is being implemented under our supervision. All this has led to a gradual increase in people’s savings, and more and more accounts in USD, in both savings and loans, are being converted into MNT.

Most banks have no difficulty in making quick payments. Despite these gains, problems persist. Loan repayment rates are decreasing, and the total amount of overdue loans and bad loans keeps growing. At present bad debts are 3.6 times higher than they were in August 2008, and the volume of outstanding loans has increased by 8.4 points to reach 11.4%. Banks have stopped lending, and the quality of existing loans is worsening. This means revenues from interests are suspended. Because of the increase of risk funds in the first 7 months of 2009 banks had a negative balance of MNT36.1 billion.

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