Industry banks add to sector’s risk

With each new approval of an industry-focused bank, Myanmar’s banking sector becomes riskier.

Instead of creating more banks, Myanmar should streamline its existing institutions to minimise the chance of a banking sector crisis, according to international advisers, who have warned the government against the systemic risks created by sector-specific banks.

However, despite an already crowded sector – the country has 27 licenced banks – new lenders continue to open. In 2013, the Central Bank approved the Construction and Housing Development Bank (CHDB) and the Myanmar Microfinance Bank. In 2014, it approved the Shwe Rural and Development Bank owned by Shwe Than Lwin Group.

More sector-specific banks are pending approval, including the Tourism Bank Public Company under the Myanmar Tourism Federation and a gems bank under the Myanmar Gems and Jewellery Entrepreneurs Association.

This is worrying, said Sean Turnell, an expert on Myanmar’s economy at Macquarie University in Australia.

“Such banks have rarely been successful anywhere. They have also been tried before in Myanmar, with predictable results,” he said.

Banks that only lend to a single sector are high-risk, said Vikram Kumar, Myanmar representative at the International Finance Corporation (IFC).

“Banks need a diversified asset base, otherwise it’s a recipe for disaster. For example, one bad year for Myanmar tourism could significantly impact a bank focused on tourism,” he said, adding that he has advised the Ministry of Tourism to reconsider forming such a bank.

The CHDB has been open for more than a year, yet is only exposed to a handful of projects – all in the real estate sector, he said. “The rules apply from day one – a bank should minimise concentration risk. It’s not a policy bank, it’s a private bank and it has a responsibility because it takes depositors’ money.”

The risk is likely to be exacerbated because such banks are often not commercially viable, said Mr Turnell.

“Too often they lend for political purposes, or at least on non-commercial terms. Repayment of loans is often not a top priority, and so these banks all too soon end up being bailed out by the state,” he said.

“More broadly, they distort the allocation of capital, undermine the genuine and productive banks, and undermine good policy-making. In short, they are bad news.”

However, U Win Zaw, managing director of CHDB, said his bank understands and is managing the risks. “When prices fall in the property market we are very cautious about extending new loans,” he said.

CHDB carries out due diligence on individual projects and monitors the market, he said. “Mostly we extend loans to projects that are 80pc finished and need a little bit of extra capital, and to projects that are likely to sell well,” he said.

He added that there is a genuine need to build affordable housing in many cities across Myanmar.

“They will need loans for that and at that time we need to be ready to give,” he said. CHDB is currently the only bank offering anything close to mortgage-style financing for buyers of low-cost housing units.

The bank would be much safer if it lent only to housing buyers, rather than to contractors, said Mr Kumar.

“While a construction bank is high-risk, the risk of a housing bank is incredibly diversified, as it’s based on the incomes of a huge range of people,” he said.

U Myint Han, chair of the Myanmar Gems and Jewellery Entrepreneurs Association (Mandalay), said that his new gems bank will also be protected against risk, because its loans will be secured by precious stones, though Mr Kumar pointed out that gems are very hard to value accurately.

More importantly, a rise in the number of sector-specific banks presents a risk to the entire banking system, said Mr Kumar.

The failure of one bank could trigger a loss of depositor confidence in the whole banking sector, said another Myanmar representative at an international financial institution.

“The policy banks are still small but it’s a matter of confidence. There is no guarantee that a small bank failure won’t cause a confidence crisis across the whole industry. This could lead to uncertainty and people may decide to withdraw their money as a precaution, which in itself can trigger a bank run,” they said.

The government has made clear that it understands the risks, according to an International Monetary Fund (IMF) report published last October.

Officials at the Central Bank – which is responsible for licencing and regulating policy banks – did not respond to requests for comment by deadline.

Mr Kumar believes it would make more sense to strengthen existing banks and reform the regulatory and legal framework to allow more credit to flow to the underserved segments of the economy rather than issuing new banking licenses.

“There is already a shortage of qualified staff to run existing banks and new banks are likely to drain the already-thin resources,” he said.

Source: Myanmar Times

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