Pete Morrow, CEO, Khan Bank: The Private Sector Must Provide Responsible Leadership

The potentials of an economy to secure financial resources from abroad are usually factored by the health of its banking and financial sector. Recently Moody’s lowered the ranking of three Mongolian commercial banks. How will that affect Mongolia’s chances to secure money from overseas?

All banks’ ratings were lowered because the country’s ratings were lowered. Mongolia’s potential for borrowing abroad depends on the country’s economy. The bad news is that the economy is doing badly right now in terms of export prices and the related budget deficit, foreign exchange reductions, etc. The good news is that these economic issues are correctable, probably more easily and quickly correctable in Mongolia than in other economies  because the economy is so small, and the projects that are on the horizon – Oyu Tolgoi and Tavan Tolgoi – are so large that they can lead a turnaround.

Will the Mongolian commercial banks be able to fully shoulder the crisis whatever financial difficulties we might encounter?  

Anod’s failure was not caused by the general economic situation. As Mongolbank made clear in its announcements, Anod bank was a unique situation. The central bank stepped in and backed the bank up with government guarantees and payouts to all depositors that wanted their money. So nobody lost any money when Anod bank failed.  Prudential measures are being taken – the deposits are guaranteed and the Mongol Bank is supporting the banking system. People shouldn’t worry about the banks. The people who are likely to suffer the most will be bank shareholders, because the profits are down, and borrowers because there is not enough money to provide loans in this environment. Because of the economic situation, banking system deposits are not growing, which means loan portfolios are also not growing, and banks generally cannot meet all loan demands.  This is difficult for borrowers, but again it does not threaten the system.

I should note that Khan Bank is still growing and still lending. Our deposits are up, thirty billion tug rugs so far this month, 20 days into February.  So we were able to increase our lending to help meet increased customer demand during the period leading up to Tsagaan Sar.

Khan Bank’s senior executive official spoke yesterday on TV about enabling the herders to get more loans and lowering its loan interest rate for teachers, which we see, would be helpful to mitigate the effects of economic recession on the public sector and the herders.  MMJ commends Khan Bank’s efforts.
Going back to the issues pertaining to the banking system, I am curious to know your views on bailouts: if any of the major commercial banks failed, is it correct for the Government to bail them out by buying them out or nationalizing toxic assets?

The government has already agreed it will take any necessary bail out measures, in effect, by guaranteeing the deposits, so all the consumers and businesses are safe in terms of their deposits in banks. If in fact a bank runs into a trouble, the government will have to stand behind the deposits, and that’s actually what the depositors rely on. Even in extreme cases like Anod the deposits were protected. What the government does beyond this guarantee will depend on the circumstances. I hope the government will not acquire any banks because the government has now sold all the banks it used to own. When I came to Mongolia there were three government owned banks – TDB, Argicultural bank and the Savings bank. All were sold to the private sector, which was a good thing, because most governments have figured out that they are not good owners of banks. However, these are hard times.  The US government is putting capital into banks, not taking control over banks yet, but they could, to stabilize the system.  Around the world, other governments have taken control of banks to stabilize their systems. If the Mongolian government has to do that, they will. But I hope the situation doesn’t come to that.

Banks are responsible to not abuse the chances for bailouts. Is moral hazard a problem?

Yes, that’s obviously a worry. Banking has always been a special business because it depends on public trust, and safeguards the public’s money as a result it’s always heavily regulated and monitored. There is an issue of moral hazard because if the government guarantees the deposits, the banks have political backing to raise deposits even if they don’t earn the public’s confidence.  That is why bank managers have a public responsibility to ensure the safety and soundness of operations.

Khan Bank has a very extensive network throughout the country which reaches herders and public servants in rural areas, but also supports mining activities. What services do you offer to miners?

Well, we have invested a lot in our expansion. Today, we have 491 branches that service small and large companies, herders, traders and households across Mongolia. Some years ago we began venturing out to the corporate banking market. Nobody explores for minerals in Sukhbaatar square. The miners are out there in the countryside. We have a network that can conveniently provide financial services to corporations working in the countryside, such as meat buyers, gas stations, merchandisers, cashmere companies and, of course, miners. To serve a new segment of the market, we opened a mining department, which handles relationships and business with both Mongolian and foreign investors.  We provide this sector with banking services that meet their corporate needs, such as international banking, trade finance, payroll services and foreign exchange.

Out there in the countryside we serve the very important local needs -  local expenditures, taxes, customs activity and, most importantly, employee needs. We pay salaries, issue cards and provide loans to employees.  Sometimes our clients are located near the existing branches, for example near a soum where we have a branch, but sometimes we open a branch in areas with mining operations.  For instance, we opened a second branch in Zaamar soum of Tov Aimag at the mine locations to meet  all of their needs.  We can also open a branch at a mine site as we did for Ivanhoe Mines at OT, where we are the only bank on the site servicing employees and contractors.  In locations where it is not feasible to open a full branch, we provide mobile banking services. For example, a company operating 30 km away of Dalanzadgad needs banking services for its employees, so we send a jeep out every two weeks with a wireless POS machine and a bag of cash to meet the needs of the company and its employees.

Your bank is everywhere - in the city, in the countryside, and even abroad – when walking in Seoul you see Khan Bank’s name and logo. How do you manage to withstand fierce competition? There are good news and bad news about your bank. Speaking of negative ones – Khan Bank takes away herders’ stock for the latters’ failure to comply with their loan servicing schedule? Amidst all such talks, how do you sustain your competitiveness?

Well, Mongolia is a market economy and all are free to compete. Any bank can choose to open many offices and compete with us, and some have.  It takes a lot of money, satellite networks, skills, good managers, good employees and a lot of other things, and anybody is open to do this.  It’s up to each bank to run their business. I don’t apologize for the fact that we have been very successful. We just go out and do our job as best we know to serve Mongolians. There is a lot of misunderstanding regarding herders, and most of it is because of news stories that carry lies.  Some of it is irresponsible journalism, and some is false information deliberately planted by people who want to attack Khan Bank. The fact is that Khan Bank pioneered herder loans.  Nobody provided loans to herders before we started to back in 2001.  We have made hundreds of thousands of herders loans. Herders have prospered, raised more animals and raised their incomes because of Khan Bank. Ninety-seven percent pay back loans as agreed. We foreclosed on only 1500 animals in 2008, out of tens of millions of Mongolian livestock. Our relationships with herders are extremely good. We understand that herders are having lots of problems today – prices are down, bad weather, the economy has been bad for the herding industry, but in the last two months we restructured almost ten thousand loans to help the herders stay in business. We extend loans, but we don’t want to take the stocks, it’s not our business, and we will keep helping the herders by lending them the money they need to stay in business.

Speaking of which, what innovations have you introduced in your practices and services to support our PM’s innovative approach in doing business?

We have always pioneered new banking services in Mongolia. We have 450 branches on-line, real time with fiber optic, wireless or satellite connections so that people can  transfer funds anytime, anywhere throughout Mongolia.  By the end of 2009, every office will be online. We have Internet banking and telephone banking, and we have just brought in another 60 ATMs, and will soon have 130 ATMs providing convenient financial services in every aimag.  We now have over 400,000 visa cards outstanding, and we are disbursing salaries, pensions and children’s welfare money with visa cards so customers can easily access their money through our ATM network.  We constantly upgrade our services.  In 2007, we spent 16 billion tugrugs for capital improvements, last year we spent 20 billion tugrugs on capital improvements that upgraded our electronic and IT equipment, and expanded our branch network.  

Bankers are strategists, you are careful analysts and watchful forecasters, and therefore I am interested to learn of your views on how to wrestle with the crisis. The private sector, including the banks, is likely to absorb all the major shocks, if not, it will have to provide some of the badly needed resources to the government. What should the private sector do, practically speaking, to mitigate the pains of the crisis.

Well, the private sector operates in the economy that we have. The private sector can’t control the price of copper, gold or cashmere -  the critical exports to support the economy.  Mongolia is, for better of worse, highly dependent on its exports and imports to advance its development, so, to some degree, the private sector will prosper with Mongolia’s economic prosperity. But, I think that the private sector has a responsibility to do what it can during the difficult periods – for example to maintain full employment if possible. For us, we hope to not have layoffs, we are maintaining our salaries where they are, we hope to increase salaries by the end of the year, and we still plan to pay bonuses to our people.  We hope to maintain all that, but if the situation continues to deteriorate, it may be hard to stick to this plan.   Already the government has proposed to decrease salaries 20-30 percent, that’s difficult, but better than layoffs. I am afraid that after Tsagaan Sar more Mongolian businesses might have to cut employment to maintain their businesses.  The private sector has an obligation to do as well as it can for our employees in this difficult time. We have to remember that employees are consumers, and if salaries are lowered or jobs lost, they will not buy as many things and that would hurt the economy.  There is little the private sector can do about the ger economic issues, but we need to do as well as we can with the circumstances we have.

So, your bank is not considering any cut backs and layoffs?

At the moment, no, but we don’t know how bad the economy will get, and obviously if things get tougher, we will have to reconsider.  Our first obligation is to keep Khan Bank strong and servicing the public. We told our employees that we are committed to maintain employment and terms as they are now. We are still growing, we are still profitable, and we are still able to do that.

The multiplier effect that is generated by the banking system is huge, so it’s important banks are maintained well. Some people say that Mongolia has the symptoms of the Dutch Disease. Expressions are maybe different from conventional revelations of the Dutch Disease, but in fact we are too much dependent on one single industry – exports of minerals. No other means to survive, to live off. Is this crisis really a disguised blessing for us to undertake economic restructuring and reforms?

This crisis is causing problems, but it doesn’t change the fundamental situation. Mongolia has tremendous resources under ground, all kinds of minerals – gold, silver, copper, iron ore, uranium etc. That’s the economic future of Mongolia. We will never compete with China in terms of manufacturing activities, and there are severe disadvantages, such as lack of a seaport, transportation, and other infrastructure.   Now, the Dutch disease - in fact, the reverse is happening – devaluation of the tugrug.  In Mongolia, the economy is so small and dollar transactions are still large that it could cause currency revaluation, but I don’t think this will happen.  The key to Mongolia’s development is not just having a mine and earning royalties, dividends and profits from that mine.  If companies just bring labor and trucks from China, haul out ore and pay the government royalties, Mongolia doesn’t really achieve much.  The key is to develop the value-added processing, the supply chain, the growth of local businesses, the creation of jobs, the development of Mongolian-based services to these mines that can build-up the economy. There are not many mines in Mongolia right now.  Erdenet, 30 years old, employs 6 thousand people and 90 thousand people live in Erdenet. So you see the multiplier effect and the economic activities the mine creates. Eredent gives you a scope of the growth, jobs and prosperity that can result from the new, larger mines.