Forex-starved lenders ask Central Bank for policy shift

Private financial institutions want the use of Nostro accounts — held in a foreign country and denominated in the currency of that country — to become mandatory for banks making import payments on behalf of clients, according to sources at private banks.

The Yangon Foreign Exchange Market Committee submitted the policy request to the Central Bank at a meeting on December 7, said U Mya Than, the committee’s chair. Private banks no longer have sufficient foreign exchange reserves to facilitate import payments, he said.

The central bank has yet to issue instructions on import payments, but is investigating the issue and will make an announcement soon, said one official with knowledge of the monetary authority’s plans.

The central bank has been examining the volume of foreign exchange transactions across private and state banks since December 1, the official added.

Private banks have been allowed to use Nostro accounts for several years, but the familiarity and lower fees of the local interbank market, has meant many institutions choose not to. This reliance on the interbank market, however, has drained it of foreign exchange reserves.

The Central Bank uses state lenders’ foreign exchange reserves to sell millions of US dollars every week to private banks. But over the long term the Central Bank will be unable to provide enough, said U Win Lwin, deputy managing director of Kanbawza Bank, who attended the meeting with the Central Bank.

If it becomes mandatory for banks to hold foreign exchange in Nostro accounts for the purposes of import payments, this should also help create a more active interbank foreign exchange market, said the official.

However, banks will also face higher charges with Nostro accounts, potentially twice as high as those in the local market, he added.

A policy shift could also help private banks take a larger share of import financing, which is largely dominated by state banks. Myanma Foreign Trade Bank and Myanma Investment and Commercial Bank, for instance, have hundreds of Nostro accounts. State lenders have strong relationships with exporting firms – a key source of foreign currency – and find it easier to provide clients with US dollars, giving importers little incentive to move to private banks.

A thriving interbank foreign exchange market should be a welcome development for importers. But exporters, which have become unofficial sources of foreign exchange, are less happy at the prospect.

“Exporters are functioning as mini-banks in the foreign exchange market,” said the official. “For this reason some of them don’t like the proposed policy, because their profits from currency exchange might drop.”

Source: Myanmar Times

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