Accounting

2012-11-30

The examination operations of the bank of Mongolia (BOM)

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.

 

         

     

      


[1]Bank of Japan., The Central Banking Training course. 1993


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