Is it right to ‘forgive and forget’ bad borrowers?

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Credit history serves a critical role in obtaining loans as lenders use it to decide whether or not to offer a new line of credit and set the terms of the loan. It shows a borrower’s total debt load, number of credit lines and timeliness of payment. And a single negative record can instantly toss out your chances of getting that loan you need to make ends meet, kick start your business and satisfy other needs.

Like many around the world, countless Mongolians have acquired a negative record or two due to the unexpected financial struggles caused by the COVID-19 pandemic. This has made it impossible for them to secure funding for their household needs and/ or resuming their business. By the end of May 2021, approximately 71,000 individuals and enterprises were wearing a “bad borrower” tag due to defaults, such as being unable to make timely payments, missing payments, or stopping payments, according to the Mongolian National Chamber of Commerce and Industry (MNCCI).

Understanding their situation, the government has decided to let bad borrowers off the hook through one-time forgiveness on bad credit record in light of the unceasing challenges stemming from the COVID-19 pandemic. This initiative, first proposed by MNCCI in mid-May, the act is designed to swiftly revive and reactivate the economy by giving better access to credit.

“More than 71,000 individuals registered in Mongol Bank’s credit database have bad credit history – they’ve been blacklisted for being unable to repay their loans, missing repayment, and having overdue payments. These people need to be given another chance by concealing these negative records in their credit report. This is not a matter of waiving of loans of defaulters. The classification of bad creditors is amended every six years. In other words, a person who is blacklisted today will be able to get a loan in six years. However, in the case of COVID-19 emergencies, there is an urgent need to amend this provision. This is because individuals running family businesses account for the majority of bad borrowers,” said O.Amartuvshin, president of MNCCI.

Presently, the central bank’s credit information database holds accounts of 65,105 individuals with loans totaling 879 billion MNT and 2,428 companies with 2.2 trillion MNT loans. These individuals and businesses are in a situation where they cannot obtain new loans from banks. As a result, some businesses, especially micro, small and medium-sized enterprises are starting to shut down their doors. However, the one-time forgiveness is showing a flicker of hope for these borrowers, enabling them to get access to loans four to five years earlier. Borrowers can get their credit report improved on the condition that they fully repay their loans before the end of June as final adjustments to the credit database will be made on July 1.

“This is not a loan pardon but an adjustment. We’re erasing black histories of individuals and businesses struggling due to the pandemic from the credit information database. So, people should pay their loans on time from now on. If a violation or default is made, their previous negative items will be made visible. This isn’t a tax relief either,” Speaker of Parliament G.Zandanshatar asserted.

While it is good that this measure can restart businesses and help families better cope with emerging economic challenges, all sides need to know that it can have adverse impacts. Lenders will be at risk of accepting potential high risk borrowers who are likely to default, while borrowers may take out loans that they might not be able to repay on time. Especially since the government’s deferrals for loans and coverage of household utility bills are scheduled to end on July 1, individuals and businesses are advised to be responsible and assess risks before taking on debt.

In addition, the government announced the one-time forgiveness just ahead of the presidential election. Some people speculated whether it was another ploy for winning votes. Previously, the government pardoned pension-backed loans, gave out cash allowances and lowered mortgage interest rates during election years. Politicians and economists raised concerns that these acts could set a bad precedent, leading to the notion that borrowers shouldn’t repay their loans and simply wait for the next election year for forgiveness. Hence, the authorities should make sure this work doesn’t derail from its original purpose, which is to increase access to loans, support businesses and revitalize the economy.

‘65,105 INDIVIDUALS AND 2,428 ENTERPRISES ARE ELIGIBLE FOR BAD CREDIT RECORD ADJUSTED’

Head of the Credit Information Department of Mongol Bank S.Ganbayar provided an update on the credit database.

Speaker of Parliament G.Zandanshatar announced in May a one-time forgiveness on poor credit record to prevent around 71,000 “bad borrowers” from getting blacklisted. Borrowers must meet two requirements to get the adjustment. How many are eligible for it right now? 

As Speaker G.Zandanshatar informed on May 28, the 71,000 individuals and enterprises that fell into the bad borrower category or blacklisted for overdue and late repayment are now allowed to get their create history adjusted to some extent. This measure was initiated to curb the adverse impacts of the global COVID-19 pandemic on businesses, stabilize the economy, increase financial accessibility, and reduce the accumulated risks in the banking and financial sector.

Following the speaker’s announcement, Mongol Bank decided on June 2 to offer struggling borrowers one-time opportunity to have their bad loan history not included in their credit inquiry provided that they meet two requirements.

The two requirements are:
1. Only if the borrower’s loan is either overdue or non-performing
2. The overdue/ non-performing loan must be fully repaid by July 1, 2021.

Based on a preliminary study, 65,105 individuals and 2,428 enterprises are eligible to get their poor credit record adjusted. Mongol Bank is taking progressives steps to complete this work. The final adjustments will be completed on July 1, 2021. To date, around 40,000 people and companies have applied for forgiveness, which can improve their credit history and inquiries.

Economists are saying that most businesses will not be able to satisfy these two requirements because 95 percent of all businesses are small and medium enterprises, and 74 percent are financially struggling due to the pandemic. Can you
comment on this?

According to the World Bank’s 2019 survey, 190 countries have independent credit information system. These systems commonly serve to ensure financial discipline of individuals and companies, as well as prevent non-performing loans and maintain financial stability by improving credit risk management in the banking and financial sector. Taking into account the negative impact on the stability of the banking and financial sector, it was considered appropriate to amend the loan inquiries of individuals and companies that have violated their loan agreements only once due to financial difficulties amid the COVID-19 pandemic. On the other hand, it is giving borrowers the opportunity to repay their overdue loans and debts by the end of June.

Wouldn’t it be hard for people to fully repay their overdue and non-performing loans in less than a month? Have you made a preliminary estimation on how many of the 71,000 borrowers with poor credit history can repay their loans before the deadline?

So far, 40,000 individuals and entities, or about 60 percent, have amended their credit inquiries and the work is progressing smoothly. Only those who have managed to pay off their remaining loans within June 2021 can get their poor credit record cleared. At the moment, we cannot provide such information.

How will removing defaulters from the blacklist affect the economy?

The positive impact of Mongol Bank’s decision should outweigh the adverse impacts. First of all, with a better credit record, people and companies will have better access to finance, allowing them to overcome economic challenges and lead
the economy to recovery. Secondly, it is part of the “Post-COVID-19 Great Reset” comprehensive plan for reducing negative economic impacts of the pandemic. Thirdly, it is motivating people to repay their overdue and non-performing loans, creating a favorable condition for mitigating accumulated risks. 

The average household revenue is unlikely to increase in the next two years, according to analysts. Starting July, families will start paying utility bills and make mortgage payments. This is expected to spike commodity prices. This is raising concerns about the accuracy of the two requirements.What is your opinion on this?

As mentioned before, considering its impact on ensuring stability in the financial sector, this work is directed to individuals and entities that slightly lost their financial discipline amid the pandemic. We can’t forget the role of the credit information system in the economy. Therefore, it is considered appropriate to exclude credit information from credit inquiries of individuals and business entities.

Can it be understood that after getting their poor credit record erased, borrowers can get new loans from July 1?

The final amendments to the credit information database will be completed on July 1, 2021. So far, around 40,000 borrowers got their credit record improved, meaning they’ll become able to get loans and other financial products and
services.

Dulguun Bayarsaikhan

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