Myanmar moves to stave off credit crunch

NAPYITAW — Myanmar’s banking system is facing tough new regulations that could take more than $1 billion worth of local currency out of circulation, severely curtail lending and badly hurt the economy if a tight compliance deadline is not eased, senior bankers have warned.

The Central Bank of Myanmar published its first set of modern prudential regulations in July, in some cases replacing rules made nearly 30 years ago. Drafted with help from the International Monetary Fund, the regulations mark a significant step in bringing Myanmar into line with international standards. But critics warn that “unrealistic deadlines” for compliance could put some of Myanmar’s 28 banks in jeopardy .

Many curbs, such as stricter treatment for non-performing loans and an increase in minimum capital requirements, were flagged to banks well in advance. Others, including much higher risk weightings for fixed assets and some types of loans, were less expected.

But bankers and analysts say the regulation with the greatest impact covers overdraft lending. Most Myanmar borrowers do not take out traditional loans but opt for using an overdraft facility, paying interest only on the amount of overdraft they use. Using an overdraft facility also avoids a central bank restriction that limits traditional loans to one year — because they have no requirement to repay by a certain deadline, overdrafts allow customers to borrow indefinitely.

Senior bankers and analysts estimate that this misuse of overdraft lending may account for 75-80% of the banking sector’s total lending portfolio. Significantly, some of the biggest — and most moribund — loans have been on banks’ books since earlier years of pre-2011 military rule.

“All these overdrafts are just loans forever,” said Melvyn Pun, CEO of Yoma Strategic Holdings, which owns Yoma Bank, a local lender.

Recognizing this danger, the central bank will require all banks from January 2018 to clear these overdraft facilities for at least two full weeks of every year — forcing the banks to call in all outstanding bad loans made in this way. Overdrafts that are not cleared annually will be treated as non-performing loans, for which the central bank is also enforcing stricter capital requirements. But bankers and analysts say many borrowers will be unable to repay these overdraft loans on demand.

All about timing

Most of the other new regulations, which include higher capital adequacy ratios and stricter rules on exposure to individual borrowers, came into effect immediately on July 7. No bankers interviewed by the Nikkei Asian Review opposed the content of the regulations, but all said that seeking compliance on all the new rules by January was unrealistic.

“There’s no doubt [the new prudential regulations] are a step in the right direction,” Azeem Azimuddin, chief financial officer of AYA Bank, one of Myanmar’s three largest private banks, told a recent Euromoney conference in Naypyitaw. “The issue is the timing and the timeline for compliance.”

Source: Nikkei Asian Review