Tussle over Myanmar bank reform puts spotlight on debt
They need reasonable time for the transitional period... Sometimes international practice can’t work domestically. We are very aware of and careful about the situation.
NAYPYITAW: Myanmar’s central bank has backed off from a demand that the country’s private banks clear most of their loan books by January, averting a cliffedge scenario that some bankers warned could have destabilised the financial system.
Myanmar’s central bank deputy governor, Soe Thein, told Reuters that three years – instead of the original deadline of six months – would be given to lenders to recover the mostly open- ended ‘overdraft loans’ that make up the bulk of their lending.
The compromise ends a lengthy tussle over regulations introduced in July to bring the country’s banks closer to international standards.
Reforming the banking sector is a key goal in leader Aung San Suu Kyi’s plan to complete Myanmar’s democratic transition after decades of isolation under military rule.
“They need reasonable time for the transitional period... Sometimes international practice can’t work domestically. We are very aware of and careful about the situation,” said Soe Thein in an interview.
“The economy is not in a strong position, so we want the financial sector to be in a stable position. We have to establish an understanding between the banks and the central bank.”
The new regulations also include stricter guidelines for bad loans - also known as “non-performing loans” ( NPLs) – and an increase in the amount of capital banks are required to set aside to cover losses.
The central bank says it fears that the amount of bad debt on private lenders’ books is greater than has so far been declared to the authorities.
But officials are also concerned that pushing too quickly on reform could trigger volatility in the financial system.
“It’s not easy, we agree, but we have to try,” said Soe Thein, declining to provide an estimate of the scale of the problem because
Soe Thein, Myanmar central bank deputy governor
he said it was ‘dangerous’ to try to estimate how much money the banks had lent in loans that are unlikely to be repaid.
Officials and bankers say around 70 per cent of Myanmar’s more than US$ 9 billion lending pool is in the form of so- called overdraft or evergreen loans – typically made on preferential terms to lure customers and rolled- over indefinitely.
The central bank moved in July to end such practices with the new regulations drafted with the help of the International Monetary Fund.
The curbs would force the banks to end indefinite roll- overs of the loans, asking them to get the loans repaid for a period of two full weeks on an annual basis.
Banks complained they were being given only six months to fix years of junta- era mismanagement and to recover most of their loans amid a sluggish economy.
“They (central bank) know what’s going on in our books, but what they are asking for is almost impossible...
All the local banks are in a difficult position,” said Pyi Soe Htin, executive director of international banking for Yangon-based Asia Green Development Bank.
After at least three rounds of talks since July, Soe Thein told Reuters the central bank would “in the next few days” issue “follow-up instructions”, allowing the overdraft loans to be converted into regular, three-year loans – a compromise that offers breathing space to Myanmar’s 24 private banks.
“The payment terms and conditions will be a bit relaxed, so the customers can be a little relaxed on the payment as well as the banks can get more collection from their customers,” said Soe Thein.
He did not give details of the terms of those new loans.
Some in the fledgling financial sector said that attempting to get so much debt repaid by January could trigger a run on the banks, which are deeply entwined both with one another and with the conglomerates run by businessmen close to the former ruling elite that dominate key sectors from real estate to aviation.
“This would create panic and we would have bank runs because our general public is very cautious,” said Kim Chawsu, managing partner at Katalysts Investment Group and former chief financial officer of the parent company of Myanmar’s largest lender, Kanbawza Group.
“If one of the banks fails, there will be a domino effect...you need to be careful on how strict you are.” The compromise by the central bank underlines the daunting challenge facing Suu Kyi, whose promise of a modern, reformist government that would end Western sanctions and attract investment is under threat.
The Rohingya crisis in the northeast means some aid to Myanmar is being withheld, investors have turned wary and the country faces reinstatement of some of sanctions, making reforms more difficult.
Despite having one of the least developed financial sectors in the region, Myanmar’s banking assets have jumped to 55 per cent of its GDP in 2016 from 15 per cent in 2011, when the junta handed power to a semi- civilian government, according to German state development agency GIZ.
But even after widespread political and economic reforms began in 2011, bankers say the banks have continued to lend largely on preferential terms to a small group of well- connected customers.
“These cronies, who have a lot of money, set up banks without experience or any knowledge on banking,” said Sein Maung, chairman of Yangon-based First Private Bank, adding banks often lend money to “people in their networks”. — Reuters