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Myanmar: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2018
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Banking Sector Developments1

Latent banking sector risks are surfacing, following a period of rapid credit growth and as banks adjust to updated financial regulations. Over time banks will need to enhance their credit risk management, and reduce the over-reliance on collateral values to safeguard lending. A banking system action plan has been developed, to enhance the banking system’s resilience, as well as strengthen the supervisory and resolution framework. The ongoing overhaul of the prudential framework and financial sector reforms will strengthen the banking sector and its role in supporting the economy.

A. Background

1. Myanmar’s banking system has grown significantly in recent years, but remains relatively small. Credit to the private sector started to surge in 2009, peaking at nearly 70 percent per annum, amid strong optimism that built as Myanmar moved towards its recent reform period. In part, rapid private credit growth was an outcome of fiscal dominance, which drove an accommodative monetary policy stance and an expansion in reserve money. The rudimentary bank supervision and unchecked growth in reserve money fueled credit growth to a relatively narrow customer base. However, strong credit growth also reflected the small base of private sector credit, and low development of preceding years. Myanmar experienced a banking crisis in 2003 (Box 1), and a decade passed before private sector credit as a share of GDP recovered to its modest pre-crisis level, of just over 10 percent. More recently, credit growth has started to moderate, against a background of banks’ adjustment to new prudential regulations. Nonetheless, credit growth remained rapid at 27 percent (y/y) in September 2017. The ratio of loan assets to GDP is relatively low, at around 40 percent, and private sector credit to GDP is currently around 25 percent of GDP (September 2017).

Credit to the Economy

(In percent of GDP)

Sources: Autthorities; and IMF staff calculations.

Private Sector Credit

(Percent change y/y, and in percent of GDP)

Source: Myanmar authorities.

2. The banking sector is comprised of state-owned banks (SOBs), domestic private banks, and foreign bank branches (FBBs). Myanmar has four SOBs, 24 private banks, and 13 FBBs. In addition, five more private banks are in the process of being licensed by the Central Bank of Myanmar (CBM). Private banks account for more than half of banking system assets (Text Table), and the largest six private banks hold around 80 percent of private bank assets (as of March 2017). Several small private banks are “policy banks” that are sponsored by a line ministry with private sector contributions. They take deposits and extend loans, but tend to have a narrow focus for lending (e.g., tourism, construction, and agriculture).2 Risks in policy banks could create contingent liability risks for government.

Myanmar: Structure of the Banking System as of March 2017In Kyat billions
NumberBranchesTotal Deposits% of SystemTotal Assets% of SystemTotal Loans% of System
State owned Banks45169,97928%17,34736%2,23412%
Private Banks24152023,32466%26,88955%16,15586%
Foreign Bank Branches13132,1206%4,5979%3272%
Total banking system35,42448,83418,716
In percent of GDP44%61%23%
Source: Myanmar authorities.
Source: Myanmar authorities.

Private Banks: Credit by Sector and Growth 1/

(Left: percent of GDP; right: percent change, y/y)

Sources: Myanmar authorities; and IMF staff calculations.

1/ Private banks only (excludes state-owned banks). “Other” includes credits to local stores and specialized shops.

State Banks: Credit by Sector and Growth 1/

(Left: in percent of GDP; right: percent y/y)

Sources: Myanmar authorities; and IMF staff calculations

1/ Other includes credits to local stores and specialized shops.

3. Once-dominant SOBs remain systemically important, but have a smaller share of banking system assets and deposits.3 From 1963 to 1990, Myanmar’s banking system was completely state owned, and SOB dominance of the banking system has extended to relatively recent times.4 The SOBs undertake quasi-fiscal operations through subsidized lending, mainly to the state and the agricultural sector (a major employer and source of household income5). They also offer conventional banking products, which puts them in competition with the private banks. Although the SOBs’ market share of lending has declined (Text Table), concerns remain that the SOBs crowd out private bank lending in some niche areas (e.g., in agriculture).6 Subsidized lending and other inefficiencies have eroded profitability and led to losses in SOBs. The authorities have embarked on an SOB restructuring program with World Bank assistance, which aims to reduce fiscal risks to the government from the SOBs and improve the overall competitiveness of the banking sector.

4. FBBs were licensed to operate in Myanmar in 2015 and 2016, subject to restrictions. FBBs have largely offered services to foreign companies in Myanmar, due to restrictions intended to limit competition with the still-developing domestic banks. For example, a prohibition on paying interest on kyat deposits means that FBBs have limited access to kyat deposit funding, which in turn restricts their ability to lend in kyat. However, foreign banks are permitted to lend locally in partnership with a domestic bank, and more recently the CBM has eased restrictions by allowing foreign banks to provide trade finance to exporting firms. Although the foreign banks have been small in terms of asset size, they hold a disproportionate share of the banking system’s capital.

5. Lending is a relatively small share of total assets; most private bank lending is to corporate borrowers. Domestic banks are largely deposit-funded, and take deposits and lend mainly in domestic currency. Partly for this reason, FX mismatch in the aggregate data is low, though this may mask larger net open positions in some individual banks. Aggregate loan-to-deposit ratios are also relatively low, reflecting difficulty in deposit transformation in some banks, including SOBs. Private bank lending is primarily in the form of corporate overdrafts, in the trade, construction, services, and manufacturing sectors. Around 95 percent of private sector lending is to business, suggesting that among other things collateral requirements have been a hurdle to smaller borrowers. Households and SMEs have relied heavily on credit from nonbank and informal lenders, at significantly higher interest rates.

Banking Sector: Local Currency Loans to Corporates

(In percent of total local currency loans to private sector)

Source: IMF’s Monetary and Financial Statitistics database.

Myanmar: Composition of Bank Assets

(In percent of total assets)

Source: Monetary and Financial Statistics database.

Loan to Deposit Ratios

(In percent, ratio of banks’ loan assets to total deposits)

Source: IMF’s Monetary and Financial Statistics.

6. Given recent moderation in credit growth, evidence of a credit “boom” is mixed. Credit booms occur in periods of excessively fast credit growth, and have been used as an indicator of potential risks to financial stability and growth. The risk of a “bad boom”, that leads to low growth or ends in crisis, increases when the starting point level of credit to GDP is high, or when the boom is of long duration7. Not all credit booms are “bad booms”—some booms can reflect genuine credit deepening, particularly in developing countries. Credit booms are often evaluated using credit gaps (deviation of credit from an estimated trend), but these can be difficult to use when trend credit growth is not stable, as is likely to be the case in Myanmar given ongoing structural change. Following Dell’Ariccia, et. al. (2012) we therefore define a credit boom as occurring when the credit to GDP ratio grows faster than 20 percent per annum.8 While this definition points to a credit boom between 2010–2014, more recent data is less indicative of a credit boom. Nonetheless, vigilance is required given the strength of credit growth in recent years and data limitations.

Growth of Credit-to-GDP Ratio

(In percent)

Source: IMF’s Monetary and Financial Statistics database.

7. Regardless of whether a credit boom is identified, banking system fragilities have developed.9 Much credit growth has been in the form of one-year overdrafts secured on real estate and fixed assets, to a relatively limited pool of borrowers, and continuously rolled over. This reflects requirements that lending must be collateralized by real estate or other immovable assets, and have a maximum contractual maturity of one year (unless offset by matching long-term deposits). In addition, the lending interest rate is capped at 13 percent, and deposit rates are subject to floors of 6 percent and 8 percent for call and term deposits, and a cap of 10 percent.10 These lending practices increased banks’ exposure to property values, while potentially obscuring risks. Controls have restricted banks’ ability to price risk, and may have hindered the development of risk management capabilities. In addition, by limiting profitability, interest controls have likely acted as a deterrent to capital accumulation in the banks. Several banks are part of large conglomerates with extensive commercial interests, adding to related party and large exposure concerns. Limited data is available for prudential supervision, and accounting and auditing practices need to be improved.11

8. As noted in previous Staff Reports, the banking system is undercapitalized. The banking system capitalization is low even under current NPL loss recognition levels, and the CBM is working with banks to bring loan classification and capital levels up to the requirements of the 2016 Financial Institutions Law (FIL).

B. The Evolving Regulatory Environment

9. Progress is being made towards financial system reform, and supervisory capacity is improving. The 2013 Central Bank Law provided for the establishment of an autonomous CBM, enabling the CBM to move from the Ministry of Finance. The law provides the CBM a clear mandate for price and financial stability, with authority for monetary policy, and the licensing, supervision and regulation of banks. Strengthening of the foreign currency system and monetary policy framework have been key achievements. Dissemination of financial sector data has improved. Efforts are also being made to build banking supervision capacity, with progress on strengthening onsite and off-site supervision with Fund TA. However, the supervision function remains at a relatively early stage and is under-resourced, albeit with the recruitment of additional staff in late 2017. Supervisory resources will be further challenged by the licensing process for five new domestic banks.

10. The passage of the FIL was a major step forward in financial regulation. Four key regulations to support implementation of the FIL were released on July 7, 2017, pertaining to capital adequacy, large exposures, asset classification and provisioning, and liquidity requirements. The CBM also issued a directive on credit risk management (March 2017), and a directive that allows for the restructuring of viable overdrafts to term loans of up to 3 years, incorporating regular payments of interest and principal (November 2017). The authorities intend to allow unsecured lending where adequate risk management frameworks are in place, with a proposed interest rate cap of 16 percent. Under the new regulations, minimum capital adequacy ratio requirements are 4 percent for tier 1 capital, and 8 percent for regulatory capital. Large exposures are limited to no more than 20 percent of core bank capital, and all overdraft loans must be cleared each year for a period of two consecutive weeks.

11. The new regulations should be implemented in a manner that supports financial stability and deepening. The four regulations issued in July 2017 come into effect at varying times: the liquidity requirement and large exposure limit were effective July 7, 2017; however, the minimum capital requirement, and the asset classification and provisioning requirements, came into effect following a 6-month transition period. Banks were also given three years from July 7, 2017 to phase in their provisioning needs. Where applicable, banks will submit conversion plans (for large exposures, overdraft transformation) to lay out how they intend to come into compliance with the new regulations, and capital improvement plans where necessary. A key short-term challenge will be to restructure viable overdrafts into term loans, and wind down large exposures in an orderly manner that avoids a credit crunch or excessive property price correction. Recapitalization needs will need to be reassessed, as banks submit their overdraft and large exposure conversion plans, and recognize losses as loans become overdue. The CBM will need to carefully handle compliance on a bank-by-bank basis, eschewing general forbearance.

12. A banking system action plan (BSAP) has been developed in collaboration with the World Bank. In order to deliver the benefits of the new regulations the BSAP provides a transition plan to strengthen credit risk management, provisioning and capital. It encourages a phased conversion of overdrafts to risk-based term lending, and further supervisory capacity building, including on resolution frameworks. The BSAP will feed into the broader financial system development strategy that was developed with IMF and WB TA and adopted in 2013. It will also draw on other development plans to ensure a coordinated approach across development partners. Key recommendations from the BSAP are briefly discussed below.

  • Issue remaining regulations and key directives as soon as possible. These include regulations on related party transactions (including new reporting requirements), external auditors (including requirements to use IFRS), and directives on substantial interest, and fit and proper criteria, and Boards of Directors.

  • Strengthen credit risk management in banks. Further supervisory guidance on credit risk management is recommended. This guidance should require banks to develop and implement robust credit policies, processes and controls, including underwriting practices with affordability assessments for all loans through cash flow analysis. It should also restrict new loans with a maturity of greater than one year to those that are fully amortized (i.e., with both principal and interest repayments).

  • Move ahead with restructuring of SOBs. As noted in the Staff Report, following the review of diagnostic reports with World Bank assistance, key tasks will relate to requiring state-owned banks to submit plans for remedial actions, with associated timeframes and follow-up action plans to ensure compliance.

  • Build supervisory capacity, including on recovery and resolution frameworks. This includes resourcing the function at the CBM to develop contingency plans for bank recovery and resolution, and enabling lender of last resort operations to solvent banks while avoiding public sector bailouts.

  • Increase bank capital. Banks with capital shortfalls will need to be brought into compliance with the new regulations within realistic timeframes, or face penalties. Gradual interest rate liberalization will help banks better price credit risks and raise capital through improved profitability. Capital can also be injected through foreign minority equity investments, following amendments to the Companies Act.

  • Carefully liberalize constraints on the banks. The CBM should continue financial sector and interest rate liberalization at a pace commensurate with the CBM’s capacity to regulate and supervise. The CBM intends to allow banks to lend unsecured where adequate risk management is in place, and have issued a directive to permit foreign banks to provide retail export financing services. Lifting of the tiered interest rate caps should be carried out in a gradual manner, and foreign banks’ domestic lending activities liberalized once the domestic banks are in a stronger and more competitive footing. Gradual interest rate liberalization will assist with improving monetary policy framework, by enabling the operation of the interest rate channel.

C. Summary

13. The banking sector is in a period of adjustment, following strong credit growth and improvements in bank regulation. Latent banking sector risks are being addressed in the context of an ongoing overhaul of the regulatory and supervisory framework, which will strengthen the banking sector over time. Despite its small size, banking sector fragilities may pose risks to broader macroeconomic stability, as demonstrated by the 2003 crisis (Box). New regulations need to be implemented in a manner that supports financial stability and deepening – with realistic time frames for compliance, while avoiding general forbearance. At the same time, further development of supervision capacity is urgently needed. Over the medium term, gradual liberalization of banking system controls will be part of a move towards risk-based (as opposed to collateral-based) lending.

Box 1.The 2003 Banking Crisis

Accounts of the bank crisis primarily attribute the crisis trigger to the collapse of ‘informal finance companies’ in 2002.1 These companies offered high rates of return (in excess of the bank deposit rate ceiling), but engaged in highly speculative investments and were described as “little more… than ponzi schemes” (Turnell 2009). At the same time, financial system confidence was weakened by rumors, including of large-scale deposit withdrawals in the wake of new anti-money laundering legislation, a political scandal linked to one of the large banks, and others. These events were followed by heavy deposit withdrawals from five large private banks, that turned into a systemic deposit run.

Initial actions taken by the banks and the CBM in response to the crisis were unsuccessful. In February the banks started to limit deposit withdrawals and attempted to recall loans. The loan recalls aimed at 20 percent to 50 percent repayment of outstanding balances, with a central bank-endorsed timetable for repayment (Turnell 2009). Although the CBM attempted to quell the crisis through providing public reassurance and liquidity support (February 21), the crisis continued.

Anecdotal reports suggest a severe macroeconomic impact.2 At the time of the crisis, the banking system was small, private banks were still relatively new, and credit penetration and use of bank accounts was low. Despite these factors, the economic impact of the crisis according to anecdotal reports in the literature and media was severe. Lack of access to deposits prevented firms from making payments to employees and suppliers, with cascading effects. At the same time, loan recalls led to asset fire sales. Beyond the immediate impacts, the crisis has had long-term effects on confidence in the banks. As noted above, recovery in the ratio of private sector credit to GDP has taken several years.

1 This box primarily draws on Turnell 2003, 2009, as well as contemporary media reports.2 For example, the 2003 Economist magazine article “Kyatastrophe: A bank run in Myanmar” http://www.economist.com/node/1650080.
References

    ArenaM.BouzaS.Dabla-NorrisE.GerlingK. andNjieL.2015Credit Booms and Macroeconomic Dynamics: Stylized Facts and Lessons for Low-Income CountriesWorking Paper No. 15/11 (Washington: International Monetary Fund).

    Dell’AricciaG.IganD.LeavenL.TongH. withBakkerB. andVandenbusscheJ.2012Policies for Macrofinancial Stability: How to Deal with Credit BoomsStaff Discussion Note 12/06 (Washington: International Monetary Fund).

    Department of Labor Ministry of Labor Immigration and Population Myanmar; and ILO2016Report on Myanmar Labor Force Survey – 2015” Nay Pyi Taw.

    Economist2003Kyatastrophe: A bank run in Myanmarhttp://www.economist.com/node/1650080

    Office of the Auditor General Action Plan Committee and GIZ2013Country Strategy and Action Plan: Improving Financial Reporting in Myanmar’s Banking Sector.”

    TurnellS.2003Myanmar’s Banking CrisisASEAN Economic Bulletin Vol. 20 No 3 December 2003.

    TurnellS.2009Fiery Dragons: Banks Moneylenders and Microfinance in BurmaNias Press.

    World Bank2016Myanmar Financial Sector Development Project (P154389) Project Appraisal DocumentInternational Development Association Report No. PAD1350 (Washington: World Bank).

Prepared by Leni Hunter.

See Myanmar Article IV Staff Report 2015, Box 4.

The state-owned banks are Myanma Economic Bank (MEB), Myanma Foreign Trade Bank (MFTB), Myanma Agricultural and Development Bank (MADB), and Myanmar Investment and Commercial Bank (MICB).

The Financial Institutions of Myanmar Law (FIML) 1990 allowed for the creation of private banks, for the first time since all private banks were nationalized as ‘Peoples’ Banks’ in 1963. The People’s Banks were merged into a single bank in 1970. This single bank was divided into four separate banks by the Bank Law of 1975: the forerunners of today’s CBM, MEB, MADB and MFTB. See Turnell, 2009.

Agriculture accounted for around 50 percent of employment in 2015. See Ministry of Labor, Immigration and Population, Myanmar, 2016.

As noted in World Bank (2016).

Dabla-Norris, et. al. (2015).

Dell’Arriccia et.al. (2012) also define a credit boom to occur when credit to GDP ratio is at least 1.5 standard deviations above trend, and annual growth of credit to GDP is greater 10 percent.

Extensive controls on the banks are not new—a series of controls and restrictions, including on interest rates and deposits, were imposed following the nationalization of private banks in 1963 (Turnell, 2009).

The call deposit floor is set by the Myanmar Bankers’ Association.

As noted in the 2017 Article IV Staff Report, FSI indicators have been published for the first time, but the system-wide measures mask significant differences among banking groups and the NPL data does not conform to international standards.

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