Modernisation Fuels New Lending in Myanmar’s Banking Sector

At the end of February the Central Bank of My­anmar (CBM) announced it was considering ­panding the range of ser­vices that foreign lenders in the country can offer by allowing them to provide trade-only accounts to importers and exporters, which local banks are un­able to do.

Of the 24 domestic banks, nine are involved in trade financing; howev­er, the level of credit they can extend is often inad­equate to meet demand due to a lack of capital.

International banks are currently restricted to providing financial servic­es to foreign corporations and domestic lenders but giving them a mandate to support Myanmar trad­ers could help facilitate higher levels of trade and therefore tax revenue.

The CBM is committed to opening up Myanmar’s financial sector further through a “staggered pro­cess”, U Win Thaw, direc­tor general of its foreign exchange management department, told media in February, while giving local lenders the chance to develop and keep pace with reforms.

Last year the government granted new licences to four overseas banks: Vi­etnam’s Bank for Invest­ment and Development, E Sun Commercial Bank of Taiwan, Korea’s Shinhan Bank and State Bank of India. This took the total number of foreign lenders authorised to operate in Myanmar to 13.

The entrance of these foreign institutions in­creased the number of banks in the market by one-third and added around K1.6trn ($1.2bn) in combined regulatory capital to the system, tri­pling the previous total.

U Kyaw Kyaw Maung, governor of the CBM, spoke of the possibility of opening up the sector further, as foreign lend­ers have helped advance modernisation efforts.

“The entry of foreign banks provides an un­precedented opportu­nity to develop a modern banking sector through the introduction of new financial products and risk management tech­niques,” he told OBG last year. “Lending by foreign banks could become an important source of fund­ing for the private sector.”

According to Daniel Tan, general manager of the Yangon branch of Oversea-Chinese Bank­ing Corporation, it is important for the bank­ing sector to broaden the range of financial services it offers, especially with regard to lending, as cur­rently most companies looking to borrow from local banks need to pro­vide collateral.

“Unlike in other coun­tries, unsecured lending is difficult, as is lending against most forms of moveable property such as stock or receivables,” he told OBG. “This greatly limits the amount of mon­ey that Myanmar compa­nies can borrow.”

However, as Myanmar’s banking sector expands to meet increased demand from local businesses, lenders could be exposed to higher levels of risk.

In its latest review of the country’s economy, con­ducted in February, the IMF warned that accelerat­ing levels of credit growth, which reached 32.3% in the 2015/16 fiscal year, could leave the banking sector vulnerable.

Forecasting private credit to rise by 27.7% in FY 2016/17 and by 23.6% in 2017/18, the fund sup­ports a cautious approach to fiscal policy to cope with these rapid increases.

The World Bank also sounded a note of cau­tion about bank lending in its “Myanmar Econom­ic Monitor, December 2016” report, emphasis­ing a high concentration of credit across a narrow band of sectors.

According to the bank’s calculations, over the past three years, the whole­sale and retail trade has soaked up 43% of all credit extended. Over the same period, lending to the agriculture, manu­facturing and construc­tion sectors accounted for 30% of the total.

The World Bank also observed a sharp rise in non-performing loans (NPLs) on the books of domestic banks. Using CBM data, the report said NPLs had more than dou­bled over 2016 to repre­sent 3.6% of total loans. It added that the actual ratio might be higher still, as the current criteria for assessment are outdated and inconsistent with best practices in more de­veloped nations.

In the face of these head­winds, the government has stepped up efforts to continue bringing domes­tic institutions in line with international standards of transparency and corpo­rate governance.

Earlier last month, for example, the state started an audit of Myanmar’s four state-owned banks – the first in decades. One of the primary aims of the endeavour, which is being undertaken in partner­ship with the World Bank, is to identify options for the restructuring of the sector as part of the drive towards modernisation.

In another move for­ward, an 18-member body known as the Pri­vate Sector Development Committee was formed in October 2016 with a remit to guide and coordinate policies to improve trans­parency and regulation in the financial sector.

 

Source: Myanmar Business Today

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