ID :
140509
Fri, 09/03/2010 - 16:42
Auther :
Shortlink :
http://m.oananews.org//node/140509
The shortlink copeid
MONGOLIA QAURTERLY ECONOMIC UPDATE ISSUED BY WORLD BANK
(continuation)
BANKING SECTOR
Although real interest rates on deposits are falling, MNT deposits continue to rise, fuelled by currency appreciation expectations and supported by the deposit guarantee law
Nominal interest rates on both lending and deposit rates remain high mainly due to the search for funds by banks facing liquidity difficulties. However, in real terms, interest rates are falling as a result of the acceleration in the inflation rate. If inflation continues on its upward trajectory, real deposit rates should soon turn to be negative.
MNT deposits have continued to rise in recent months, hitting a new peak of MNT1.4 trillion in May, up 47 per cent from a year ago. This is mainly due to expectations of a currency appreciation and the “blanket guarantee law” covering bank deposits. This was introduced as an instrument for restoring confidence in the banking system in late 2008.
Depleted bank capital is constraining lending growth
With the economy rebounding, the nominal stock of loans outstanding grew for the sixth consecutive month in May, rising by 12.5 per cent year-to-year (yoy). However, with the annual rate of inflation in May at 11.6 per cent yoy, real total lending growth is barely positive.
Banks remain cautious in lending in part due to uncertainties about the sustainability of the recovery and the weak quality of loan applications. The presence of large NPLs still on their books and depleted bank capital also constrain them from extending credit. Although the weighted average lending rate ranges between 18-20 per cent, which is much higher than the central bank bill rate (11 per cent), banks are still buying central bank bills (which are much less risky than private lending). Bank holdings of central bank bills reached over MNT 500 billion in May compared with MNT 150 billion a year ago. It is vital that bank restructuring reforms move forward in order to clean up bank balance sheets and improve credit availability within a banking system with improved credit risk management.
Banking sector reform remains a priority
Although the steady increase in recorded NPLs seen last year appears to have moderated, solvency concerns remain important. NPLs and loans in arrears stand at 20 per cent of total outstanding loans, down from a peak of 24.6 per cent in November 2009. Excluding the two failed banks, NPLs and loans with principal in arrears as a percent of total loans outstanding amounted to 13.4 per cent as of end-May, down from a peak of 19.7 per cent in September 2009. Banks are starting to contribute more retained profits to their stock of capital: MNT 12.4 billion as of May compared with a contraction of MNT 143.4 billion for 2009 as a whole.
The NPL ratios differ across sectors, reflecting the differential impact of the crisis and underlying credit quality. Solvency concerns remain significant in construction, agriculture and transportation sectors characterized by the highest NPL ratios. However, quarterly changes (2010 Q1compared to 2009 Q4) show improvements in NPLs and loans in arrears in all of major sectors, particularly in construction and other sectors.
While NPLs are trending down, they may increase further due to a number of reasons. First, loans in arrears are still very high: MNT 130 billion (5 per cent of the total loans). Second, according to the BoM, loans to related parties exceeded the regulated ceiling by MNT 93 billion and there are no loan loss provisions currently for such lending. Loans to single borrowers also exceeded the regulated ceiling by MNT 360 billion and only MNT 42.5 billion is available for provisions. In fact the concentration of bank lending has increased with the 50 largest borrowers accounting for slightly more than a quarter of total loans. Third, commercial banks have already restructured 12 per cent of the performing loans 1 to 2 times, suggesting that NPLs and loan in arrears could continue to rise without further restructuring.
Out of the total banking sector assets of MNT 4.5 trillion around MNT 3.1 trillion comprises deposits and current accounts for which the government has issued a blanket guarantee. These deposit guarantees have reduced the incentives of bank owners to inject much needed private capital into the banking system. Given the upcoming mining boom, when demand for credit will increase substantially, it is essential that banks are well-capitalized and able to extend credit. Financial and commercial transactions of larger mining companies are likely to be executed by foreign banks rather than local banks in the future if local banks are not deemed sound enough. Accordingly, bank restructuring - to the benefit of the economy - is imperative.
A key issue in the blanket guarantee law is that it also covers interbank deposits. As a result, domestically stronger banks (including foreign banks) may lend to weaker financial institutions, attracted by the interest rates offered, but not bear the risk because of the state guarantees. This state of affairs has led the central bank to propose amendments to the law. These proposed amendments were discussed by the Cabinet which decided to urgently submit it to the parliament for review during the spring session. Under these amendments the government is also planning to impose a fee for deposit guarantees equal to the CBB rate deposit rate, place a threshold on the size of the deposits that can be guaranteed, and exclude related-party and interbank deposits from the guarantee's coverage. The fee from deposit insurance will be collected from the banks, accumulated in a fund and used to repay depositors in case a bank goes bust, thereby limiting the fiscal cost of bailouts for taxpayers. In addition, the government and central bank have jointly drafted the Limited Deposit Insurance Scheme Law which aims to gradually replace existing blanket guarantee.
A wider bank restructuring strategy was recently drafted by the Bank of Mongolia, reflecting lessons from international experience. The draft was discussed with various stakeholders, including the banks and members of parliament. The plan will now be submitted to parliament for discussion and endorsement. The proposed strategy is founded on three principles. First, there should be well capitalized, strong and effective banks with fit and proper private owners and managers who can enforce banking laws and regulations. The banking sector is only as strong as its weakest link. Second, if owners cannot inject the additional necessary capital to comply with the existing prudential regulations, public funds to support banks could be used, but only as a last resort, and under stringent conditions, in order to limit the fiscal cost. Lastly, the recapitalization process should be fully transparent in terms of objectives and rules to pursue, and all banks should be treated fairly and equally.
(to be continued)
BANKING SECTOR
Although real interest rates on deposits are falling, MNT deposits continue to rise, fuelled by currency appreciation expectations and supported by the deposit guarantee law
Nominal interest rates on both lending and deposit rates remain high mainly due to the search for funds by banks facing liquidity difficulties. However, in real terms, interest rates are falling as a result of the acceleration in the inflation rate. If inflation continues on its upward trajectory, real deposit rates should soon turn to be negative.
MNT deposits have continued to rise in recent months, hitting a new peak of MNT1.4 trillion in May, up 47 per cent from a year ago. This is mainly due to expectations of a currency appreciation and the “blanket guarantee law” covering bank deposits. This was introduced as an instrument for restoring confidence in the banking system in late 2008.
Depleted bank capital is constraining lending growth
With the economy rebounding, the nominal stock of loans outstanding grew for the sixth consecutive month in May, rising by 12.5 per cent year-to-year (yoy). However, with the annual rate of inflation in May at 11.6 per cent yoy, real total lending growth is barely positive.
Banks remain cautious in lending in part due to uncertainties about the sustainability of the recovery and the weak quality of loan applications. The presence of large NPLs still on their books and depleted bank capital also constrain them from extending credit. Although the weighted average lending rate ranges between 18-20 per cent, which is much higher than the central bank bill rate (11 per cent), banks are still buying central bank bills (which are much less risky than private lending). Bank holdings of central bank bills reached over MNT 500 billion in May compared with MNT 150 billion a year ago. It is vital that bank restructuring reforms move forward in order to clean up bank balance sheets and improve credit availability within a banking system with improved credit risk management.
Banking sector reform remains a priority
Although the steady increase in recorded NPLs seen last year appears to have moderated, solvency concerns remain important. NPLs and loans in arrears stand at 20 per cent of total outstanding loans, down from a peak of 24.6 per cent in November 2009. Excluding the two failed banks, NPLs and loans with principal in arrears as a percent of total loans outstanding amounted to 13.4 per cent as of end-May, down from a peak of 19.7 per cent in September 2009. Banks are starting to contribute more retained profits to their stock of capital: MNT 12.4 billion as of May compared with a contraction of MNT 143.4 billion for 2009 as a whole.
The NPL ratios differ across sectors, reflecting the differential impact of the crisis and underlying credit quality. Solvency concerns remain significant in construction, agriculture and transportation sectors characterized by the highest NPL ratios. However, quarterly changes (2010 Q1compared to 2009 Q4) show improvements in NPLs and loans in arrears in all of major sectors, particularly in construction and other sectors.
While NPLs are trending down, they may increase further due to a number of reasons. First, loans in arrears are still very high: MNT 130 billion (5 per cent of the total loans). Second, according to the BoM, loans to related parties exceeded the regulated ceiling by MNT 93 billion and there are no loan loss provisions currently for such lending. Loans to single borrowers also exceeded the regulated ceiling by MNT 360 billion and only MNT 42.5 billion is available for provisions. In fact the concentration of bank lending has increased with the 50 largest borrowers accounting for slightly more than a quarter of total loans. Third, commercial banks have already restructured 12 per cent of the performing loans 1 to 2 times, suggesting that NPLs and loan in arrears could continue to rise without further restructuring.
Out of the total banking sector assets of MNT 4.5 trillion around MNT 3.1 trillion comprises deposits and current accounts for which the government has issued a blanket guarantee. These deposit guarantees have reduced the incentives of bank owners to inject much needed private capital into the banking system. Given the upcoming mining boom, when demand for credit will increase substantially, it is essential that banks are well-capitalized and able to extend credit. Financial and commercial transactions of larger mining companies are likely to be executed by foreign banks rather than local banks in the future if local banks are not deemed sound enough. Accordingly, bank restructuring - to the benefit of the economy - is imperative.
A key issue in the blanket guarantee law is that it also covers interbank deposits. As a result, domestically stronger banks (including foreign banks) may lend to weaker financial institutions, attracted by the interest rates offered, but not bear the risk because of the state guarantees. This state of affairs has led the central bank to propose amendments to the law. These proposed amendments were discussed by the Cabinet which decided to urgently submit it to the parliament for review during the spring session. Under these amendments the government is also planning to impose a fee for deposit guarantees equal to the CBB rate deposit rate, place a threshold on the size of the deposits that can be guaranteed, and exclude related-party and interbank deposits from the guarantee's coverage. The fee from deposit insurance will be collected from the banks, accumulated in a fund and used to repay depositors in case a bank goes bust, thereby limiting the fiscal cost of bailouts for taxpayers. In addition, the government and central bank have jointly drafted the Limited Deposit Insurance Scheme Law which aims to gradually replace existing blanket guarantee.
A wider bank restructuring strategy was recently drafted by the Bank of Mongolia, reflecting lessons from international experience. The draft was discussed with various stakeholders, including the banks and members of parliament. The plan will now be submitted to parliament for discussion and endorsement. The proposed strategy is founded on three principles. First, there should be well capitalized, strong and effective banks with fit and proper private owners and managers who can enforce banking laws and regulations. The banking sector is only as strong as its weakest link. Second, if owners cannot inject the additional necessary capital to comply with the existing prudential regulations, public funds to support banks could be used, but only as a last resort, and under stringent conditions, in order to limit the fiscal cost. Lastly, the recapitalization process should be fully transparent in terms of objectives and rules to pursue, and all banks should be treated fairly and equally.
(to be continued)
