Banks continue to pay high interest rates, at risk of instability

Time deposits earn different rates of interest at different banks but most of the 12 commercial banks pay the same interest rate for ordinary savings accounts. MNT accounts always get more interest than accounts in a foreign currency. Some banks also pay more for higher deposits or for accounts where the minimum balance is never allowed to be less than a predetermined figure.

Fixed deposits can be for periods between two months and a year, but the rates will vary depending on the period chosen. At about 18%, Capital Bank and Transportation Bank appear to pay the most interest for MNT deposits, higher than the Mongolbank policy. This is true of other banks also. No bank has as yet brought down its interest rate to one that is lower than the central bank rate of 11%, as proposed by Parliament when it amended the law guaranteeing the security of all deposits in banks.

The Government is worried that banks could make imprudent use of funds they collect with promise of higher returns and this could result in a big burden for it as guarantor of deposits. The international practice is for commercial banks to take its cue from the policy rate of the country’s central bank, but this is not happening in Mongolia. This poses risks to the entire economic system, particularly to the stability of the banking sector.