The examination operations of the bank of Mongolia (BOM)[1]
Introduction
Before 1991 Mongolia was a poorly
developed agricultural country. It had followed Communistic social programs,
for 70 years. Also Mongolia had economic, trade, culture and political
relationship with only the former Soviet Union and its satellite countries.
After 1991 a new Mongolian Constitution was developed and instituted by the democratic
parliament. Under that law Mongolia transferred to a free-market economy,
particularly, it has implemented the vital measures of privatization on stocks;
opened country’s door with all countries inviting trade and market development
worldwide. The traditional centralized economic system was eliminated. Also, a
new banking system was developed. Mongolia is like a baby-starting all over
from the beginning.
Mongolia
has become a member of the World Bank and Asian Development Bank, and has
commenced the operations of inter-banking clearing settlement, as well as
issues of new banknotes to be in circulation in the near future. Finally, The
Bank of Mongolia (BOM) is considering
introducing central bank bills.
Under
the new banking law, Mongolia has developed a two-tier banking system. The BOM, the first tier, has become the
bank of banks, which is engaged in the following main functions: currency
management; inter-banking clearing settlement; leaders of the foundation of a
state foreign exchange operation; lending only to commercial banks in limited
amounts; creation of prudent ratios and requirements; and development of
policies of saving and loan interest rates. The BOM has 21 branches nationwide.
As a second-tier, Mongolia has
established 12 commercial banks. Four of them are private banks, which has
increased substantially in size due to a combination of inflation and increased
lending.
This report is briefly introducing a
general review of Banking supervision Department (BSD) functions of the BOM. The
BSD is a unit which has been
established in the Department of administration with a potential for performing
the internal audit function. This unit reports directly to the Governor. At
present BSD consists of 12 persons.
The Director and his legal assistant have begun to deal with complaints against
the Commercial banks. The director is currently establishing regulations and
guidelines dealing with policy matters.
The BSD
conducts exanimations to regulate banks both off-site and on-site. Off-site
regulation is effected by an examination and analysis of the returns made to
the BOM. These returns comprise
monthly balance sheet and quarterly data relating to large exposure, and sectoral
lending concentrations. On-site inspections have now been carried out at all
the commercial banks once every two years.
Before on-site inspection, the examiners, analyze the financial
condition and other materials, and prepare analytical brief information for
pre-inspection discussions. Due to that analyzing, the inspectors choose the
certain topics, method, length and team composition of verification in detail.
The BSD
is also involved in the implementation of monetary policy. At a joint meeting
with the directors of the commercial banks, the BSD may request the banks to restrict lending and encourage savings
with a view to restricting money in circulation. Periodically, BOM’s monetary policy department, as
well as accounting and settlement department jointly conduct with the BSD an off-site examination of balance
sheet returns.
The BSD
meet with the directors of commercial banks on a number of occasions to explain
the role of supervision and the rationale for prudent ratios and requirements.
The main areas of non- compliance in the
banking operations are loans, which is mostly inherited from the former state
bank. These areas include over concentration of lending to specific areas and
lending by banks to their shareholders.
The BOM
continue to strive to have the commercial banks observe various prudent
requirements and ratios, and the time limits related to: capital adequate of
financial institutions, liquidity, large loans, sectoral concentration of
lending, and the concentration of deposits.
The BOM
has instituted and considered following these ratios by monthly or quarterly
balance sheet of commercial banks:
·
Equity to total
assets (1:10)
·
Minimum loans to
deposits (1:1)
·
Liquid assets to
deposits (13% of deposits)
·
Single borrower
lending limit (20% of equity)
·
Minimum equity to
deposits (11% of deposits).
In connection with the on-site examination
requirements BOM has amended all of
the statement forms on the monthly or quarterly balance sheet. Some commercial
banking branches seek a separate legal status of their own, for example the
Central Asia Bank, a former branch of the Insurance Bank. The BSD considers very carefully the
dangers in allowing such a trend for branches to continue to have their own
“shareholders”.
The commercial banks are encouraged
to draw up policy statements relating to their lending. These statements
establish the principles against which banks may lend and are designed to
improve the overall quality of the loan portfolios.
Commercial banks commenced a
classification of loans by quality. Bad loans classify into two main
categories, such as losses because of no repaid loan on time, and doubtful
loan.
On the recommendation of the BSD all of the commercial banks have
commenced to establish internal control functions. The importance of an
internal control department, reporting to the highest level in the banks,
should be re-emphasized to the banks.
Results of each examination are
announced and considered at the mutual concluding meeting in which participate
managers of the examined bank, as well as examination group. If the bank has a
bad business condition, that would be discussed at the meeting of board of
directors at BOM.
The granting of new licenses is one of
the most important functions of the BSD.
It is essential that licenses be granted to persons of the highest repute only
and having sufficient resources and experience to oversee that the bank will be
managed to the highest standards on an ongoing basis.
Now 6 commercial banks have obtained
authorizations from the BOM in order
to engage in foreign exchange transactions. This is in addition to the BOM which is responsible for managing
the country’s official reserves.
I thank the Bank of Japan for the
opportunity to attend this training course and hope that the friends we meet
will be friends forever.
Note: This article is my first presentation in English edition, which had been translated
from Mongolian along with Gombo Dariimaa in 1993.
