Banks mandated to double their capital

The Mongol Bank Governor made a decree to set the minimum of authorized capital of banks to be Tgs16 billion. The decree demands that the minimum of authorized capital be at the mentioned level by May 1, 2013. It is one of the important indicators that the higher authorized capital improves risk bearing capacity and heightens responsibility. Therefore, the central bank is taking step by step measures to increase authorized capital of commercial banks and has increased it from Tgs 4 billion to Tgs 8 billion from March of 2006.

B. Lkhagvasuren, Mongol Bank’s Supervision Department head said, “Commercial banks have the possibility to increase their authorized capitals until May 1, 2013 or a given term by the central bank. Total assets put into circulation by banks reached Tgs 7.5 trillion by the end of second quarter of 2011. It means it has increased by 50 percent compared with the same period of the previous year. Actually, the stability of banking and financial organizations is improving. The banking business is expanding.
Also, the size of loans being issued by banks has increased by 50 percent. It shows sufficient resources. Current deposits make up 60 percent. Therefore, it is possible to increase the authorized capital by increasing benefits and attracting investment. Mongolia’s economy is fast growing in recent years. Therefore, whether the commercial banks bear such fast growth is an issue. This decision was made based on consideration that it is time to raise the authorized capital.”
It is believed that the decision is not an act to pressure banks with authorized capital, but will support increased participation of bank owners and give them a stronger position in the market. “For example, when any bank issues a loan of Tgs100 to a borrower, it pays Tgs85 from deposits of clients and Tgs15 from its own money. So to increase loans, there must be money of bank owners along with money of clients. We are demanding banks to increase participation of bank owners while savings holders deposit their savings by putting confidence in banks,” said B. Lkhagvasuren.
The Mongol Bank made relevant surveys and estimations before it issued the resolution to raise authorized capital. According to the Mongol Bank, the average authorized capital of the banking system reached Tgs19.7 billion by March 31, 2011. Also, accumulated profit of the system is estimated to be Tgs223 billion and total authorized capital is approximately Tgs275.2 billion. As of today, authorized capital of 7 out of 14 currently operating banks reached Tgs16 billion. Other banks can accumulate capital if they find more Tgs4 or 5 billion. Few banks are working to increase their authorized capital by two-fold.
The decision to raise the minimum of authorized capital by two-fold contains a policy to merge many banks to make them stronger. “It is very important that domestic banks have reliable and strong operations at this time when huge foreign investment is coming from sectors such as mining, even though Mongolia has a small market. If domestic banks are smaller, foreign powerful banks may enter with force. Therefore, domestic banks need to merge and increase their capital. Along with the extent of getting stronger, they can retain their space in the financial market. There is the possibility to merge if some banks are incapable to increase authorized capital to Tgs16 billion,” said B. Lkhagvasuren.

Mongolia has had a two-tier banking system as the law on banks was adopted in 1991. Under the law, the minimum bank’s authorized capital was set as Tgs50 million. According to the amendments of the law in 1995, it was raised to Tgs400 million. The law was amended again in 1999 saying that the Governor of central bank has right to set the minimum authorized capital. Accordingly, the minimum authorized capital was decided to be increased to Tgs2 billion in 1999, Tgs4 billion in 2001 and Tgs8 billion in 2008 under the decree of Governor of the Mongol Bank.
There is one state-run ‘State Bank’ among the total 14 operating banks in Mongolia, three 100 percent foreign invested banks (Chinggis Khaan, Savings and Credit banks) and four joint stock banks (Trade and Development Bank, Khaan Bank, National Investment Bank and Trans Bank) and six 100 percent domestic banks (Golomt, Capital, Capitron, Ulaanbaatar, Erel and Xac banks). As of the first half of last year, Savings Bank was the bank with the most authorized capital or Tgs60 billion while the lowest were Ulaanbaatar and Erel banks.
By the end of the second quarter, the banks issued loans worth Tgs4.4 trillion in total, 93.5 percent of which is normal, 1.7 percent in arrears and 4.9 percent are non-performing loans. The increase of loans connects with the uninterrupted decline of loan interest. For instance, interest for loans in Togrogs declined to 16.2 percent by 3.5 points as compared with the previous year while foreign currency loan interest declined by 1.7 points.




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