Strategy approved to reduce non-performing loans to 2 percent by 2023

As part of the extended fund facility, a strategy to decrease the number of non-performing loans has been approved. The document was signed by the minister of finance, chairwoman of the Financial Regulatory Commission, governor of Mongol Bank, and CEO of the Deposit Insurance Corporation.

The ratio of non-performing loans has been on the rise, threatening stability in the financial sector. The newly approved strategy will determine the state of non-performing loans in the overall banking sector and enact appropriate legal and judicial reform to tackle the issue.

Currently, the non-performing loan ratio stands at eight percent. The strategy outlines objectives to lower that rate to four to five percent by 2021 and two to three percent by 2023.

The main measure of the strategy is to create and enact a unified procedure and organization on managing non-performing loans. Legal reform includes introduction of new laws and amendments to existing laws. Meetings with financial organizations will be held in order to change the structure, operations, and organization of said lender organizations.

New procedures could be aimed at disincentivizing usury lending practices, which have been a point of frustration for the public. The Monetary Policy Commission of Mongol Bank recently introduced a new 70 percent debt-to-income ratio (DTI) limit for consumer loans. DTI is calculated by adding up all of an individual’s monthly debt payments and dividing them up by their gross monthly income. The lower the percentage, the better the financial position of the individual.

In the absence of a DTI limit, banks have complete authority on who to lend to, which usually results in lending being skewed towards individuals and creates the risk of usury lending. A 70 percent DTI limit being enacted in 2019 means that banks will be incentivized to lend to individuals in a good financial position and gear their lost lending opportunities towards businesses.