Tussle over bank reform puts spotlight on debt pile

By Reuters 24 November 2017

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 cliff-edge scenario that some bankers warned could have destabilized 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 Daw 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 he said it was “dangerous” to try to estimate how much money the banks had lent in loans that are unlikely to be repaid.

Overdraft Loans

Officials and bankers say around 70 percent of Myanmar’s more than $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 Aung San Suu Kyi, whose promise of a modern, reformist government that would end Western sanctions and attract investment is under threat.

The Rohingya crisis 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.

Non-Performing Loans

Despite having one of the least developed financial sectors in the region, Myanmar’s banking assets have jumped to 55 percent of its GDP in 2016 from 15 percent 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 of banking,” said Sein Maung, chairman of Yangon-based First Private Bank, adding banks often lend money to “people in their networks”.

The new rules introduced in July, which also included stricter curbs on banks’ exposure to individual borrowers, were an attempt to change lending practices and force lenders to deal with riskier loans in a banking system that has remained poorly regulated.

Deputy governor Soe Thein said the central bank still needed to evaluate the real state of the banks and “know the magnitude of the non-performing loans”.

He said that, while major banks regularly report a healthy NPL ratio at 5-6 percent of total loans, “that is lower than the real situation”. He did not elaborate.

Than Lwin, former deputy central bank governor and senior adviser at Kanbawza Bank, said lenders and the central bank hold a “different definition” of what constitutes an NPL. He said banks evaluate loans based on the borrower’s background and potential ability to repay, whereas the central bank — in line with international practice — judges them on number of days in arrears.

As part of Myanmar’s lending reforms, Soe Thein said the central bank was set to raise the maximum lending rate to 16 percent from 13 percent so that banks could generate capital by offering higher risk loans.

The central bank was also considering allowing non-collateral loans, Soe Thein said, ending a long-standing restriction that limits loan guarantees mainly to land and buildings. He did not elaborate on the timeframe.

With home prices in the commercial hub of Yangon dropping some 20 percent over the past three years, according to property consultancy Colliers, the move could help ease concerns about lenders’ over-exposure to higher-risk property.

Soe Thein said the central bank’s forthcoming follow-up directive would allow banks to convert overdraft facilities to loans with terms of three years from July this year, with the exception of those loans already declared by the banks as NPLs.

After that, he said, the central bank would request full disclosures on all loans from banks and enter into further, if necessary one-on-one, negotiations on how to clean up their balance sheets, starting with loans above 5 billion kyat ($3.67 million).

Some in the industry, however, have warned that if the central bank rows back on its hard line when negotiating with the banks it may jeopardize much-needed reforms.

“They can’t afford to delay the implementation because if they do that, they lose full leverage,” said a financial professional involved in lending to local businesses, who declined to be named due to the sensitivity of the matter.