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March 28, 2018

IMF published staff report and selected issues report in the context of the 2017 Article IV consultation with Myanmar. The Central Bank of Myanmar (CBM) released four key regulations in July 2017, to implement the Financial Institutions Law (FIL) and strengthen regulation and supervision. These regulations come into effect at varying times: the liquidity ratio requirement and large-exposure limit became effective on July 07, 2017; however, the minimum capital requirement and the asset classification and provisioning requirements, came into effect following a six-month transition period. Furthermore, banks were given three years from July 07, 2017 to phase in their provisioning needs.

Under the new FIL regulations, minimum capital adequacy ratio requirements are 4% for tier 1 capital and 8% for regulatory capital. Large exposures are limited to no more than 20% of core bank capital and all overdraft loans must be cleared each year for a period of two consecutive weeks. The Article IV consultation reveals that the banking system is undercapitalized, with shortfalls in some state-owned banks (SOBs) and systemic domestic private banks, even under current nonperforming loan recognition levels. CBM is working with several banks to bring capital levels up to the requirements of the FIL. Progress is being made toward strengthening on-site and off-site supervision but supervisory resources are stretched thin. A further directive allows for the restructuring of viable overdrafts to term loans of up to three years. The staff report highlights that a key challenge will be to restructure the viable overdrafts and wind down large exposures while avoiding a credit crunch and an excessive property price correction. Recapitalization needs will need to be assessed, as banks submit their overdraft and large exposure conversion plans and recognize losses as loans become overdue.

Additionally, a banking system action plan has been drawn up, to enhance the banking system’s resilience and strengthen the resolution framework. This will feed into the broader financial system development strategy that was developed with the IMF and World Bank Technical Assistance and adopted in 2013. The key priorities of the action plan include moving ahead with restructuring of SOBs, increasing bank capital, strengthening credit risk management in banks, and building supervisory capacity, including on recovery and resolution frameworks. Banks with capital shortfalls will need to be brought into compliance with the new regulations within realistic timeframes, or will 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. Work is underway to improve financial inclusion and address outstanding AML/CFT concerns. Building on the Financial Inclusion Road Map, several recent initiatives should support improved financial inclusion. The credit reporting system regulation issued in March 2017 has paved the way for the establishment of a credit bureau, to help banks better assess credit risks and broaden loan collateral. Furthermore, Myanmar was removed from the monitoring process of the Financial Action Task Force in June 2016 and will need to make good progress on outstanding AML/CFT issues.The ongoing overhaul of the prudential framework and financial sector reforms will strengthen the banking sector and its role in supporting the economy. 

The Article IV consultation highlights that the banking system in Myanmar remains relatively small and comprises state-owned banks (SOBs), domestic private banks, and foreign bank branches (FBBs). Myanmar has four SOBs, 24 private banks, and 13 FBBs, in addition to the five more private banks that are in the process of being licensed by CBM. Private banks account for more than half of banking system assets, with the six largest private banks holding nearly 80% 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 (for example: tourism, construction, and agriculture). Once-dominant SOBs remain systemically important, but have a smaller share of banking system assets and deposits. FBBs were licensed to operate in Myanmar in 2015 and 2016, subject to restrictions. Lending is a relatively small share of total assets; most private bank lending is to corporate borrowers. Domestic banks are largely deposit-funded, taking deposits and lending mainly in domestic currency.


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Keywords: Asia Pacific, Myanmar, Banking, Article IV, Financial Institutions Law, Capital Adequacy, Banking Supervision, Large Exposures, IMF

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