Key event: The Central Bank of Mongolia revised the regulation of transparency of information on banking charges, fees and the methods of calculating interest rates on 23 July 2018. These newly enforced regulations can now be found on the Central Bank’s website.

Implications: As per the regulation, the Mongolian commercial banks are now to include insurance cost, any third-party charges, and other banking fees into the cost of borrowing and fully disclose it to a borrower. In compliance with common practice in the international banking, Mongolian banks will present all interest rates to customers on an annual basis as opposed to a monthly basis.

Outlook: These new regulations are aimed at helping protect consumers from potential debt burden and become aware of true the cost of borrowing going forward. However, as the impact of these regulations is limited to commercial banks only, it may create additional compliance and marketing related costs for the banks and create a less competitive environment for them compared to the other financial institutions such as non-banking financial institutions and credit unions that are not subject to these regulations.

The Central Bank of Mongolia ordered commercial banks to fully disclose any cost(s) related to obtaining loans under MNT 100 million to customers. Previously, commercial banks stated only monthly and annual interest rates and excluded other costs such as origination fees and insurance fees from financing cost in a loan agreement. The misleading nature of this practice was criticized by customers as they were unable to discern the true cost of financing. As a result, bank regulators are now taking measures to cease the practice.

However, costs pertaining to non-banking related activities and financial discipline of a borrower are excluded from the cost of borrowing, regulations state. For instance, state registration fees, notary fees, and penalty fees caused by the borrower’s default on loan repayments are not considered in the financing cost.

According to the Financial Stability Report by the Central Bank of Mongolia published in June 2018, in Q1 2018 nominal spending of Mongolia’s average household increased by 13.3% year over year (YOY) and the debt amount per household increased by 20.9% YOY to MNT 8.0 million. Further, the report revealed that, in terms of annualized household income and debt amounts, the debt burden of the average Mongolian household reached 63.1% for the period.

This signaled an alarm to regulators and as a result, the Central Bank issued another regulation on maintaining household debt-income ratios in order to prevent households from defaulting on their bank loans. The regulation will be effective from next year.
As of now, there are 14 banks with 1525 branch offices in Mongolia providing banking services, in aggregate terms, to 927,000 borrowers and 9.1 million customers (Financial Stability Report, 2018).

In addition, there are 539 non-banking financial institutions (“NBFIs”) in Mongolia providing financial services to around 150,000 customers and their total outstanding loan amount reached MNT 768.3 billion in Q2 2018. As it is not uncommon that customers who are not qualified for bank loans go to NBFIs, the cost of borrowing from NBFIs is higher than banks and those institutions look to remain exempt from the new regulations.

Therefore, even though the banking sector is accountable for 95% of the financial sector of Mongolia, these regulations may lead to additional compliance and marketing related costs to the banks and create a less competitive environment for them in terms of profitability compared to the other financial institutions such as non-banking financial institutions and credit unions.

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Published Date:2018-08-27