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Myanmar to vet state banks to protect Asia's top-growing economy
[BANGKOK] Myanmar is embarking on the first comprehensive audit of state-owned banks in decades, part of a push to modernise the financial system and tackle risks to the nation's rapid economic growth.
The World Bank is working with Aung San Suu Kyi's government on the project and the results will help to clarify options for restructuring the sector, according to Nagavalli Annamalai, a lead counsel at the multilateral lender who's specialised in banking sector development for almost two decades.
"These banks are under-capitalised," Washington, DC-based Annamalai said in an interview on March 1. "So we need to come up with a realistic plan for restructuring, which may include recapitalisation that doesn't put too much strain on the fiscal side of the government."
Overhauling Myanmar's four state banks, which have assets equivalent to about a fifth of the country's US$63 billion gross domestic product, is a key task for Ms Suu Kyi as she seeks to expand the financial sector.
Without reforms, the government lenders could spiral into a "dire" state as rapidly growing private-sector banks snare a bigger share of deposits and lending, the World Bank said in a recent report."What we don't want is one day we wake up and they say, amongst other things, there's a large shortfall in capital," Mr Annamalai said. "We don't want to face a situation where the stability of the entire financial system is affected by these state-owned banks."
State lenders dominated the banking system for half a century until Myanmar began democratic reforms in 2011 and started opening up the economy. Australia & New Zealand Banking Group and Industrial & Commercial Bank of China are among 13 foreign banks to have won licenses since 2014. There are some two dozen domestic private-sector banks.
The largest government-run lender is the Myanma Agriculture and Development Bank, which traces its roots back to the 1950s and provides credit to more than 2 million farmers in the largely agrarian Southeast Asian nation. The other three are the Myanma Economic Bank, the Myanma Foreign Trade Bank and the Myanma Investment and Commercial Bank.
Assets at private-sector banks climbed 27 per cent to 23.3 trillion kyat (S$24.4 billion) at the end of June 2016 from the same month a year earlier, according to data collated by the World Bank. In contrast, they slid 14 per cent to 16.5 trillion kyat at state-owned lenders in the same period.
One caveat for analysing the nation's banking sector is the quality of government figures, including a nonperforming loan ratio of about 3.6 per cent and a claimed capital adequacy ratio of 19 per cent in June 2016. Indicators of the industry's soundness as currently reported don't accurately reflect systemic risks, the World Bank said in its Myanmar Economic Monitor in December.
The Ministry of Planning and Finance didn't immediately respond with comment following emails inquiring about the quality of banking data and plans for state-run lenders.
Challenges at state-owned banks include poor information-technology infrastructure and outdated accounting practices, as well as a lack of clarity in such things as classification of assets and provisioning for bad loans, according to Annamalai. Non-existent risk-management systems and weak boards are other difficulties, she said.
Ms Suu Kyi's National League for Democracy party in November 2015 won the country's first open elections since 1990. She's trying to widen financial inclusion and spur investment in the still cash-based emerging economy.
More on Myanmar's investment push as a refugee crisis makes firms wary That entails boosting trust in the financial sector, in a nation where memories of a damaging crisis in 2003 linger. A repeat meltdown would imperil Myanmar's fast GDP expansion, which at 8.1 per cent last year was Asia's quickest, based on International Monetary Fund estimates.
The restructuring of state banks, possibly by eventually offering stakes in them to international investors, is one of the biggest immediate issues for Myanmar's economic-reform agenda, said Sean Turnell, an associate professor in the economics department at Macquarie University and a special adviser to state counsellor Suu Kyi's government. "We're not quite sure what state they're in at the moment," said Mr Turnell. "So the first task is to do a good, proper audit of them, which basically hasn't been done for decades. Up until now there's been a complete lack of transparency."
The assessment of the state lenders may be completed by mid-year, Mr Annamalai said. The entire restructuring process could take at least three to five years to complete but is a crucial task that has to be undertaken, she added."The banking system is the key driver for development," Mr Annamalai said.