By Lucy Hornby
ULAN BATOR, Oct 28 (Reuters) – Mongolia’s cabinet on Tuesday authorised a capital injection into the nation’s commercial banks but will hold off implementing it for now, government officials said on Tuesday.
Former central bank governor O Chuluunbat said earlier on Tuesday that a rescue package of around $500 million could be ready as early as next week for the country’s pressured banks, which have struggled for months with a frozen mortgage market.
By late Tuesday, Finance Minister S. Bayartsogt said although he’d been authorised by the cabinet to act, the central bank made a convincing case that there was no need for a bailout at this time.
The central bank explained this is because the country’s commercial banks meet its prudential requirements, though other officials say about $500 million is needed to allay public concerns and ensure liquidity.
“It depends, because if everything is safe you don’t need to… We have already discussed it in cabinet, and I have the right (to act) if something is wrong,” Bayartsogt told Reuters.
“Now all banks have fulfilled the requirement of the central bank, and he has said everything is fine,” Bayartsogt said, referring to the central bank governor.
He did not disclose the size of the capital injection authorised by the government.
However, he said unofficial discussions with heads of banks indicated they need about 500 billion togrog ($437 million) to work “normally” for the next nine to 12 months.
Governments worldwide have committed more than $4 trillion to prop up banks, whose capital has been depleted by the year-old credit crisis as part of efforts to stave off a potentially deep global economic recession.
Kazakhstan on Tuesday became the latest country to spring into action, offering to inject $5 billion into its four largest banks. [ID:nLS708251]
Ch. Khurelbaatar, chairman of parliament’s standing committee on the budget, also said there was no need for a bailout in Mongolia because fewer than 3 percent of banks’ loans had turned sour.
“Maybe by the beginning of next year, monetary policy will be a little looser to fix the problem,” he told Reuters.
Mongolia’s banks have frozen most mortgage lending since May, as interest rates have risen and concerns have grown about a rapid deterioration in their loan portfolios.
That, in turn, has dried up sales of apartments and squeezed the construction sector. Small businesses have also found it hard to get credit.
“The commercial banks as well as the government are under pressure,” said O Chuluunbat, the former central banker who is now a member of parliament.
A potential bailout would target “not all banks, maybe three or four large banks where the most of these mortgage loan packages are placed,” Chuluunbat said.
He would not name specific banks facing difficulties.
Some banks had been lending against the collateral of mining licenses, but prolonged uncertainty over Mongolia’s minerals law has led some mining investors to exit the industry, he added.
“Because of market circumstances, the assets significantly and suddenly declined,” Chuluunbat said.
The banking industry’s loan-to-deposit ratio is about 120 percent, with most credit concentrated in a few large banks, said Arshad Sayed, the World Bank’s representative in Mongolia.
He declined to speculate on the health of the banking sector.
Inflation of over 30 percent in Mongolia means that real interest rates on bank deposits are negative.
($1=1,144 togrog) (Additional reporting by Jargal Byambasuren; Editing by Alan Wheatley and Andy Bruce)