| Interview with Peter Morrow, Chief Executive Office of Khan Bank: Liberalizing Loan Products |
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| Thursday, 09 July 2009 11:10 |
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source: Mongol Messenger Q: Confidence in the banking sector swooned toward the later half of 2008 and into early this year. The stresses on the banking system was evidenced by a withdraw of deposits and restrictions on new lending. What is the situation at Khan Bank now? In Khan Bank’s case, we have had deposit inflows and we find ourselves with excess liquidity. We have 251 billion MNT on our balance sheet. We only need about 150 billion MNT to fulfill internationally accepted 18% liquidity requirements. We have money to lend, and it’s a good time to start lending, for several reasons: 1) the economy and the tugrik have stabilized, and we are in a better situation now, 2) we believe that the Mongolian economy needs loans and financing at this moment for households to improve their lives and for businesses to grow, 3) there are opportunities in a market like this one and we want to help our clients participate in these opportunities. Khan Bank’s capital has continued to grow. We maintain a capital adequacy of over 14%, our liquidity is still strong, and we have made money every month through these most difficult times. Today, we are still making a considerable profit, and doing well. We are not be growing as fast as we used to grow, and that is what we are trying to reverse by increasing lending, and announcing new products and extended loan programs. Q: You claim that liberalizing lending will help fuel economic recovery. Can you explain? A: Yes. It goes without say that if an economy is going to grow, it has to have credit for household needs and business growth. That’s been the big problem internationally over the last couple of years. In Mongolia, we believe that we can now safely make mortgages, which, for example, will allow people to buy apartments with longer and more favorable terms than we had made available before. We intend to make money available for restoration of apartments, homes, and for construction and building. We’re introducing new and better products for herders, which are both longer and medium-term products that are tailored for their needs, and that will allow them to expand and grow their economic activity. We are also restructuring loans to herders to allow the good borrowers to get their finances in shape, and get back to normal. With a depreciated tugrik there is a better opportunity to manufacture in Mongolia. We think we will be able to move more local production forward and promote import substitution. At the same time prices are down, and there are opportunities for companies to buy production assets. We want to help them capitalize on these opportunities so we are, for example, reintroducing our investment loan for a term of up to five years so that businesses have the time to grow their businesses, and to make investments. We are liberalizing and opening up consumer lending, not only for our traditional purposes, such as our salary and pension loans, but for other purposes with a new consumer product loan that can be used for anything, such as medical, educational, travel or for larger purposes. We are also working with our good customers to complete buildings that are 80% completed, but they lack funds to finalize them. We are providing financing for this type of activity. We believe that pumping money into the housing market both to complete buildings and to provide mortgages to buyers will considerably improve the construction sector. Q: Are you offering new loan products? A: Yes. There is one completely new product that is a consumer loan secured by real estate where the purpose of the loan will be unrestricted. We can lend up to 10 million MNT for a variety of purposes, such as medical, educational, etc. This is not a product that we previously offered, but we think that people have the need for this product. We are offering different and better loan products for herders. Previously we had only one herder loan product – a one year loan tailored for the herders’ cash flow. We continue to offer this product, but we will also offer longer-term loans and leasing loans to herders, which they can use to purchase motorcycles, TVs, cars, etc. We have always had a full set of products for a range of borrowers, we are simply making many of them a little more flexible to meet current customer needs. For example, we increased our investment loans from a three-year term to a five-year term. We have also liberalized our lending criteria in a number of other ways in order to meet demand. We are lowering interest rates in a number of areas because lower rates will help our customers to do a better job in repaying their loans. We are extremely competitive in our interest rates, and I think when people come to Khan Bank they will find that we offer lower rates in a number of categories. Q: How did KB manage to restore lending while other banks are still limiting credit? A: We hear that there are a number of other banks in the market that are still very restrictive on credit, and that there are some that are not making loans at all in certain products. We’re not really sure how much restriction is going on, but, in the first quarter, bank lending overall was still decreasing. By liberalizing credit, we hope to set an example for other banks that have liquidity, and encourage them to also step up and announce increased lending. But, each bank will need to make that decision based on its own financial standing. The relationship between a bank and its customer is one where the two parties need to work together to succeed. No borrower or lender created this unfavorable economic condition. We see it as our job to work with a borrower. If the borrower with good collateral cannot repay a loan, we restructure the loan so that it can be paid. We’ve done that with our solid borrowers, who are simply trapped with lower commodity prices, but can ultimately repay their loan. We restructure those loans to give them the time to get their finances together and pay back their loans. Last year, Khan Bank had 10-15 million animals as collateral, but only 1,500 animals were foreclosed on according to the Court decision. We took a similar approach with our construction borrowers, who were trapped in this economy inflicted by a credit and material crunch, which was not their fault. Again, if a building is 80% completed it is not in the bank’s or developer’s interest to leave it 80% completed. We give them the financing to finish it so that they can find consumers, and we make mortgages available for people to buy those apartments. We have over 20 contractors that we are assisting in this way. Many other borrowers, both household and businesses have encountered cash flow issues, and we’ve been willing to work with them closely to come up with the right solution. Q: According to the World Bank’s Monthly Economic Brief in May, the aggregate number of Non Performing Loans in the system surged by 31 percent from February to March, reaching 10.6 percent of outstanding loans in April. What’s the situation at Khan Bank? A: I’ve seen those official numbers as well. I don’t know the situation of other banks. We do know Khan Bank’s situation. We have worked exceedingly hard to work with our clients. Khan Bank is different from other banks. We have almost 500 branches all over Mongolia. We deal with 80% of the households, which means we have lots of little loans, over 300,000 now, to pensioners, herders, salaried workers and traders as well as to corporate and small and medium-sized businesses. We lend to everybody in many sectors. We are known for herder loans, but these only represent 11.56% of our loan portfolio. We also have a lot of corporate loans, but these are less than 20% of our portfolio. As of the end of May, 4.71% of our loans were past due, which is far below the system average. This may be higher than in the past at KB, but still low. Q: Moody’s recently readjusted it’s rating for three Mongolian banks, including KB. Why are these banks rated together, and why the change in status? A: I think people have misunderstood what Moody’s did. There are only three banks in Mongolia that are rated, and all three of them: TDB, Xac and Khan Bank were downgraded. Moody’s announced the reason for the downgrade to reflect the increasing link between the government's ability to support the banks and its own debt capacity. Prior to early 2009, Moody’s looked almost entirely at each individual bank, and on that basis Khan Bank was one or two steps higher than the other banks. Now, they announced that henceforth they were going to put greater focus on the capacity of the government to rescue the banks that need to be rescued. In their latest rating, they assessed Mongolia as having trouble and decided to downgrade all three banks to the same level. In fact, none of these three banks have any serious problems. I think that it is inappropriate that Moody’s put these three banks in the same category based on the country rating. The rating is not related to the performance of the individual banks. As I just sited, Khan Bank’s capital and liquidity continue to grow, and we continue to be profitable, and yet we were downgraded because of the country rating. Q: How did the Mongol bank shift in interest rate impact KB? A: Mongol Bank did a good job in responding to the inflation that began to inflict Mongolia at the end of 2007 – 2008, when inflation rose to 34%, which was simply unacceptable for the economy to operate properly. Mongol Bank tightened the money supply, raised interest rates, stopped selling dollars and created a tight money supply, which made it more difficult for people to borrow money. While that was painful and difficult, it was also the essential tool to bring down inflation, which hurts everyone. Mongol Bank was criticized for those moves, but I think they reacted in the proper way. Once things were under control and inflation started to come down as the price of petrol and other inputs came down, and once the tugrik stabilized after its sharp devaluation in early 2009, Mongol Bank relaxed its policy, and we can begin to see interest rates come down further. Q: What’s your economic outlook for the rest of 2009? A: It’s difficult to say. Mongolia is the only country in the world where the government has an immediate fix to its economic problems, and that is to approve the Oyu Tolgoi Investment Agreement. The investment contemplated at OT is upwards of $5 billion USD, and that’s about the same as Mongolia’s GDP. We can start spending money now to build that mine and eventually operate it, and a lot of that money that will come into the Mongolian economy and have a huge impact. If the investment agreement is passed, Mongolia will be transformed economically. The supply chains will start to form, Mongolians and foreigners will start to gear up to buy factories and hire employees, and to prepare to provide the enormous supply that will be needed for OT. It has a huge potential impact. If it does not happen, Mongolia will be in the same position as many other resource-based economies – it’s a bad economy. China is healthier than most, but still growth rates are off and have come down. Europe, Japan and America are negative. Some of these commodity prices have rallied in the past few months, but they will go down again. So it will be a slow recovery worldwide and in Mongolia, unless Mongolia takes matters into its own hands and moves to get these mining projects into operation. If you ask me what’s going to happen in the rest of 2009, you need to tell me if we are going to have a OT project or not. If we do, the economic outlook is superb. If we don’t, it will be more of the same. Mongol Messenger
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