Mongolia is the only country where a bank loan is paid by a third party, not the borrower. If the loan is not paid by the borrower but by the client who had the job done, whoever granted the loan is a cashier (or just a cash distributor) rather than a bank. The governing authorities in 2011, the Mongolian People’s Party (MPP) and the Democratic Party (DP) coalition, and their handlers understood very well that using the premise of bank loans (as opposed to cashiers) was a great way to raise foreign capital and obtain financing outside of the state budget. As a result, Development Bank of Mongolia was set up. The bank has morphed into an institution that only serves the interests of political parties, their leaders, and their associated business groups. This specific group of people used Development Bank to obtain foreign loans with low interest rates, and they acquired wealth because they had control over the loan financing. Also, it looks like they took advantage of being the cashier to gain control over politicians, the financiers of political parties, and donating companies. The legitimate, de jure owner of Development Bank is the Government of Mongolia. Therefore, repayment of the bank’s loans (only seven percent have been repaid as of today, while 70 percent of the loans issued are non-performing) is coming out of the state budget. In other words, they are going to settle the bank’s debt using the money we – the people – paid for taxes.
BAD LOANSDevelopment Bank currently has capital of 250 million MNT and a loan portfolio of 5.9 trillion MNT. Their loans fall under three basic categories. The first category is loans that were provided directly to state-owned or private organizations and projects, and were supposed be repaid with income generated by these projects. Under this arrangement, loans were granted to 16 megaprojects. A breakdown of these loans shows that 14 billion MNT was spent on railway projects, 22 billion MNT on electrical power and energy, 446 billion MNT on processing factories (three concrete projects, one producing construction fittings, and one industrial complex for pre-fabricated home construction), 530 billion MNT on mining (370 billion MNT of which was granted to Erdenes Tavan Tolgoi), 316 billion MNT on construction, and 152 billion MNT on a single transport project. The 152 billion MNT transport project was the procurement of a new airplane by MIAT Mongolian Airlines, and it is the only project that is being repaid on time, with another 34 billion to be paid. As of November 30, 2016, these loans had a collective balance of 1.7 trillion MNT for a principal of 1.5 trillion MNT. Most of the loans were granted to state-owned companies with guarantees provided by the government. The second category of loans issued by Development Bank is loans that were issued through commercial banks, and were meant to be repaid with income generated by the projects receiving loan financing. A total of 11 commercial banks granted 1.15 trillion MNT to 1,619 projects. Thirty percent of these loans were distributed by Golomt Bank, 28 percent by Trade and Development Bank, and eight percent by Ulaanbaatar City Bank. The loans were considered to be low risk because the commercial banks would manage them and take on accountability. The third category of Development Bank loans is loans that funded projects and initiatives to benefit society. These loans were issued by government decree and were to be repaid with public funds. Under this framework, a total of 2.7 trillion MNT in loans was issued, which included 1.2 trillion MNT spent on paved roads (two-thirds of which was spent in rural areas), 491 billion MNT on engineering infrastructure, 126 billion MNT on the Gudamj (Street) Project, 347 billion MNT on railway, and 341 billion MNT on electrical and heating infrastructure. However, none of these loans have been repaid, and their collective balance has reached 3.2 trillion MNT. These are the bank’s lowest quality loans. Since the terms for these loans set out that they would be repaid with public funds, the government has to meet this obligation immediately. Only seven percent of the loans granted by Development Bank have been repaid. The bank’s receivables are growing larger every day due to interest rates and the hike in value for USD loans because of the tugrug’s decline.
HOW TO TURN A CASHIER INTO A BANK?We need to transform Development Bank from a cashier for politicians to a legitimate bank. First and foremost, the government has no choice but to respect their obligations and settle its 3.2 trillion MNT debt. Otherwise, they need to set up a risk fund (equaling the amount of non-performing loans) by the end of the year and close out all their bad loans. If they do not take these steps, the bank will not be able to function anymore. This is why some of Development Bank’s foreign lenders are demanding that their loans be repaid before their due date. Some reliable sources are saying that the evaluation of the projects to be repaid with public funds has been miscalculated, and a closer look at these loans would unveil large-scale corruption cases involving many politicians and the government that was led by N.Altankhuyag. What is also critical is that there is no institution to oversee and monitor whether or not Development Bank funded projects have been completed and are meeting expected outcomes. Some members of Parliament have even suggested setting up an agency focused on loan repayment. In any case, there must be reports on whether these projects have been implemented, who their owners are, and what audits have been done. MP Sh.Radnaased said that the 100 km road that was claimed to be built in Govi-Altai Province for 31 billion MNT is nowhere to be found, regardless of how hard the local people have looked for it. The next step is to increase the statutory fund of Development Bank. Finance Minister B.Choijilsuren sent a proposal to Parliament to raise the statutory fund to one trillion MNT before the new year. What is unclear is where our Finance Minister thinks 3.2 trillion MNT can be found, how state budget deficit will be resolved, and how the remaining 750 billion MNT would be used to meet the fund’s cap. The government issued a guarantee for 580 million MNT loaned by Development Bank, which means that the government has to meet this debt obligation within 90 days. In any case, the government believes that Development Bank is another channel to raise funds through international bonds as soon as its internal and external debts are settled and a normal balance is reached. Besides these financial issues, Development Bank has management flaws. Many measures need to be taken, such as strengthening its executive management, letting them have the power to make decisions, ensuring that its board of directors is free of conflicts of interest, not allowing the government to obtain loans again (putting a limit on how much a client can borrow), and steering the bank toward investment pursuits rather than commercial ones. This way, Development Bank can become a legitimate bank. Eventually, this bank needs to become a private company, government involvement needs to be minimized, and it needs to attract domestic and foreign investors. It will take time and effort to achieve such goals. Trans. by B.AMAR
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