Local banks struggle to meet CBM regulations amid slower economy

Local banks are finding it difficult to meet a set of new regulations set by the Central Bank of Myanmar (CBM) in July 2017 to modernise the domestic financial sector and better attract foreign direct investments at a time of slower growth.

Under a new Financial Institutions Law, the CBM has ordered banks to maintain higher capital adequacy ratios, limit lending exposure to single borrowers, reclassify loans and advances and recover overdraft loans. Drafted with assistance from the International Monetary Fund, the regulations are in line with international Basel III standards.

“The regulations imposed by the CBM are meant to align the Myanmar financial sector with the international banking industry. They are very good regulations and should be implemented,” said U Than Lwin, senior adviser at Kanbawza Bank and former CBM vice governor.

But banks have so far struggled to comply with those requirements. “The CBM has given the banks too little time to comply with the regulations given the current state of the domestic economy. It is too difficult for them,” U Than Lwin added.

Among the toughest of those regulations is one requiring banks to convert all overdraft loans to term loans within a deadline of six months. The CBM has since relaxed that rule in November, allowing banks to recover the open-ended loans that make up the bulk of their loan books, within a maximum of three years.

Not the right time

Despite the move however, banks say many borrowers are still unable to repay their loans due to the slower economy. In Myanmar, borrowers have come to rely on overdraft facilities, or loans which were rolled over indefinitely by their lenders, as long as interest payments on the principal were made. About 70 percent of Myanmar’s $9 billion-odd lending pool is in the form of overdraft loans, according to Reuters.

Now though, the banks are pressuring their customers to repay loans as soon as within the year to ensure that they are in compliance with the CBM’s requirements. That has led to concerns the regulations will further stump economic growth at a time when businesses are already constrained by falling demand, lack of financial assistance and low property prices.

“Currently, businesses are in need of more financial assistance to expand. Instead, the banks are putting pressure on us to repay our loans with 3-6 months,” said local businessman Dr Nyan Thit Hlaing. “If this continues, we will not be able to execute our business plans. Instead, we may be forced to give up our collateral.”

“The CBM’s rules and regulations are pretty good but it is not the right time to enforce them. In this environment, the banks should be establishing good relationships and working with their customers to help them repay the loans,” said U Ye Min Oo, a member of the National League for Democracy’s economic committee.

Deadline looming

But with the CBM’s deadline to comply with its other regulations looming near though, banks have little choice but to raise the pressure on borrowers to pay up. For example, by March 31, banks must submit a list of borrowers to which it has large exposure, together with a plan to bring down exposure to a more acceptable limit.

“Other than the relaxation on overdrafts, the CBM has not relaxed its 3 other regulations. A solution should be found to balance the difficulties between the CBM and local banks. Amendments should be issued so that banks can comply with the regulations over the long term,” said economist Dr Aung Ko Ko.

Source : Myanmar Times

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