Loan extension now effective until end-2020
- By Dulguun Bayarsaikhan -
- Aug 11,2020
The Monetary Policy Committee of Mongol Bank decided to extend the implementation of restructuring and extending the maturity of consumer loans for individuals struggling to repay their loans until December 31, 2020.
This is a continuation of the decision made by the committee on April 13 this year. Under this decision, banks reportedly amended lending contracts of around 76,000 individuals with consumer loans amounting to 663 billion MNT. This measure has been providing support to alleviate economic downturn by easing negative impacts of the pandemic on household consumption and financial burden on borrowers. It has also helped maintain stability in the banking system.
Director of the Monetary Policy Department of Mongol Bank B.Bayardavaa noted, “We view that our top priority is to ease financial burdens on businesses and families if we want to overcome the pandemic with minimal economic impact. The pandemic has affected loans worth 5.6 trillion MNT in the banking system. Loan holders of around 15 percent of these loans weren’t able to get their contracts restructured or asset clarification changed even though they are experiencing financial strains, according to a study. ”
The committee decided to allow people to re-extend their loan term to up to 12 months if their previous extension to maturity was less than 12 months and for those who didn’t get an extension before are allowed to get 12-month extension without the initial six-month deferral only if they are confirmed to be in financial crisis. The committee believes this will lessen financial burdens on loan holders and prevent them from being listed on the bad debt holders’ list.
Fewer people applied for loan extension in June and July as most borrowers who urgently needed a loan repayment deferral got their contracts amended in April and May. In particular, 9,000 individuals made changes to their lending contracts in a week on average in April and May, but this figure decreased to 3,300 people in June and down again to around 1,800 in July, according to Mongol Bank.
A spokesperson for the central bank answered a couple of questions after the press conference.
Does the new decision apply to mortgages?
As you all know, a separate decision was made for mortgages with eight percent interest rate. Parliament approved the Law on Prevention, Combat and Mitigation of Socioeconomic Impacts of COVID-19, which allows people to get loan repayment deferral of up to six months or two-percent interest rate cut without the deferral. Mortgages will be regulated under that system. Since consumer loans account for 25 percent of total loans, the committee decided to extend the loan repayment deferral until the end of the year to ease burdens in this area.
Is it possible to cut down the loan interest rate to a one-digit figure?
The Financial Stability Council has passed a strategic policy on loan interest cut. Parliament recently agreed that this type of policy is necessary and now Mongol Bank has almost finished drafting the strategic policy. Representatives from commercial banks are participating in the drafting process. A working group is working to reduce the current average loan interest rate of 16.2 percent, which is considered high. This rate was 20 percent in 2016 but has been lowered by four percentage points. Legislative changes would help speed up the process for cutting down the interest rate again.
The main reason the average loan interest rate is so high is because of the interest of the financial source. The interest of source implies to the interest paid to current accounts at the end of day and savings interest rate. Viewing that it’s crucial to reduce this amount, the daily interest paid to current accounts was suspended under the recent law. Mongol Bank has proposed to continue to enforce this in the long term under the draft strategic policy.
Another factor that raises costs of banks is overdue repayment of loans. Banks have issued a total of 20 trillion MNT, of which loans worth 2 trillion MNT, or 10 percent, are classified as nonperforming. Most of these nonperforming loan are stuck in lawsuits, which tend to continue for about five to seven years. If the loan repayment is improved, banking costs will go down and make it possible to lower loan interest rates. This matter has also been reflected in the draft policy.