Banks mull taking shares as collateral

Investors in Yangon Stock Exchange-listed firms could soon be able to use their shares to access bank loans. The YSX is in discussions with listed companies and lenders about a system for posting stock as collateral, which shareholders are eager to see put in place.

Tycoon Serge Pun – owner of listed firm First Myanmar Investment – is among those pushing for the move. Before FMI launched its shares on the YSX, investors were able to use their holdings as collateral when borrowing from FMI’s majority-owned subsidiary Yoma Bank.

The paper shares were traded over-the-counter at FMI Centre in downtown Yangon, which provided an ownership certificate that investors could take to Yoma Bank. That lender offered loans equal to 50 percent of the share value.

Yoma is not the only Myanmar bank to have accepted over-the-counter share ownership certificates as collateral. An official at one of the largest Myanmar lenders, who asked to remain anonymous, said his bank had accepted such certificates in the past, but did not say what company the shares were from.

The electronic system used by the YSX offers no such certification. At FMI’s general meeting on August 7, shareholders told The Myanmar Times they had asked Mr Pun to help them to use shares as collateral again – not just at Yoma Bank but at any local lender.

Mr Pun said the solution will require support from the YSX and securities firms.

“It’s an administrative issue due to the fact that there are no more script shares in use,” he told The Myanmar Times. “The logistical problem of using electronically registered shares as collateral will require some time to sort out.”

The YSX is already working on a system that would allow shareholders to put up their shares as a pledge in dealing with a second party, which would include pledging shares as collateral for a bank loan, said Kensuke Yazu, an adviser at the YSX.

The stock exchange has shown its proposals to the two listed firms – FMI and Myanmar Thilawa SEZ Holdings Limited – but began work on the system as a general obligation to investors and not at the behest of either of the listed firms, Mr Yazu said.

Pledging shares as collateral is common in other countries, and the YSX is simply looking at how to provide the computer system to make this possible in Myanmar, he said.

Under the YSX proposal a shareholder would make a contract with a bank, and then transfer the shares from their account at a securities company to the bank’s account. The transfer of shareholder rights – such as voting rights and dividend payments – would be detailed in the contract.

The YSX is now taking its proposals to banks to see whether they think the system is workable, Mr Yazu said.

“We need to get information from the banks and their impressions,” he said, adding that if the banks are happy with the system it could go live very quickly.

Not all banks have been consulted, but those that have say it “could be workable”, he added.

The Central Bank has restrictions on the kinds of collateral banks can accept. Shares are a grey area and the regulations around their use as collateral are unclear, said U Phyo Aung, managing director of AYA Bank. But he thought it unlikely the Central Bank would prevent the use of YSX-listed shares as collateral.

An official from the Central Bank of Myanmar’s monetary policy department said that shares were not on the official list of acceptable collateral, which includes land, buildings, government treasury bills, deposits and gold.

But whether banks would be allowed to accept YSX shares is a matter for the financial institutions department, which could not be reached by press time.

Mr Pun also said the issue was logistical not regulatory.

U Thaung Han, director of CB Securities and a member of CB Bank’s management committee, agreed there were no regulatory restrictions to prevent banks from accepting share ownership as collateral. But there are also no obligations on banks to accept shares either.

“It depends on the bank,” he said. “It could be that the bank doesn’t want to lend [with shares as collateral].”

Banks in Myanmar are required by law to lend only with collateral, and are typically very cautious about what kinds of collateral they accept.

Indian warehouse services firm Sohan Lal Commodity Management, for example, worked hard last year to get Myanmar banks to accept agricultural commodities.

U Phyo Aung said his firm would be able to accept shares in YSX-listed firms as collateral to provide an uncommitted line of credit – a short-term loan facility that the bank has no obligation to extend or renew.

AYA Bank will enforce stricter credit checks on the borrower using shares as collateral, monitor share volatility and will not allow loans for the purpose of buying more shares, U Phyo Aung added.

But the system would be positive for the banks, the YSX and the financial system, he said.

Mr Yazu said allowing listed shares as collateral would help increase the flow of money around the financial system by allowing investors to use their holdings for working capital.

For the YSX, the ability to use shares as collateral could lead to an increase in share value and more trading, he said.

But the possibility of investors using the bank loans to buy yet more shares represented a risk for the new exchange, he said, adding that there should be clear procedures and regulations to prevent a speculative bubble as a result of such behaviour.

 

Source: The Myanmar Times

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