Private banks face many constraints The regulatory and supervisory treatment of state banks and private banks is uneven, while lending by private banks is heavily constrained. It is extremely difficult for the banks to determine the credit-worthiness of potential borrowers (other than the business conglomerates to which they are connected), as financial information and auditing is very weak and small enterprises are not required to produce financial statements. As a result, banks’ assets consist mostly of treasury bonds which are issued in maturities of two, three and five years and, as there is no secondary bond market, they are always held to maturity. Otherwise, lending takes place outside the formal sector in an unregulated shadow financial system at interest rates that are high in comparison with the banking sector (2.5-3% per month), but unconstrained by formal collateral requirements. Bank lending, however, is constrained by very strict liquidity and solvency requirements, which were introduced in the wake of the banking crisis. They include a 10% reserve requirement ratio, a 10% liquidity ratio, a 20% single borrower limit, and a 20% related-party borrower limit. In addition, banks have to hold 50% of their paid-in capital in liquid assets. All lending is collateral-based by law (since 2003) and the value of assets used as collateral is calculated with 40% of their market value as the for-sale value which is, in turn, used as the basis for determining the amount of the loan. The loan to value ratio is not regulated, but banks follow the practice of a maximum of 60-70% of the for-sale value. In addition, deposit and lending rates are fixed by the central bank in order to secure sufficient margins for banks to remain profitable. However, this leaves banks with little scope, or incentive, to engage in competition. The central bank is wary of encouraging competition for fear of seeing the small and medium-sized banks fail. Lending by Myanmar banks is limited to the short term and for a few purposes only, although long-term lending is envisaged in the near future with an interest rate of 15%. Banks cannot lend to home buyers unless they do so through hire purchase loans with a maximum maturity of 36months. Until recently, they had also been prohibited from lending to the rural sector, thus limiting their scope of activities and increasing their vulnerability to shocks. The rural sector is covered by the Myanmar Agricultural Development Bank that has a branch in nearly all townships. Income from non-lending activities such as investment in government bonds and remittance handling constitutes a large share of its total income. As a result of cautious lending policies and significant non-lending activities, the non-performing loan (NPL) rate of private banks is about 2%. State-owned banks have admittedly higher NPL ratios resulting from the lending boom in the 1990s, but their exact size is not disclosed. Those non-performing loans have not been handled as yet, partly because the underlying collateral values are not considered worthy of lawsuits. The Myanmar Agricultural Development Bank currently has a very low NPL ratio, but the ratio is expected to rise following the quintupling of the ceiling for loans per acre (from MMK20000 to MMK100000 [Myanmar kyat].
Posted on: Mon, 05 Jan 2015 06:44:32 +0000
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