BURMA'S PRIVATE BANKS FACE FINAL ORDEAL TO RESUME

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 001164

SIPDIS

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 09/18/2013
TAGS: EFIN ECON BM
SUBJECT: BURMA'S PRIVATE BANKS FACE FINAL ORDEAL TO RESUME
OPERATIONS

REF: RANGOON 846 AND PREVIOUS

Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)


1. (C) Summary: The Burmese government seems poised to allow
private banks to resume operations if they meet seven
financial conditions. The government has severely limited
private banking operations since a run and subsequent crash
in February. Even without the authorities' blessing, many
smaller private banks have already re-opened for business.
Sadly, we don't see the government's "resolution" of this
eight-month-old crisis including the reforms necessary to
rebuild a discredited, eviscerated private banking system.
End summary.

Rule of Sevens


2. (C) According to banking sources, the GOB has made a
decision to "resolve" the banking crisis in October. Though
nothing has been released formally, apparently the Finance
Ministry has informed private bankers via the Bank Management
Committee -- the committee formed to ride herd on disgraced
private bankers following the private banking system's
collapse in February.


3. (C) Details are still sketchy, but according to the
"resolution" plan, as of October 1 private banks will be
expected to meet seven conditions. Banks that do not meet
all seven will not be allowed to re-open, though there is no
mention of how the government intends to dispose of these
delinquents.

-- (1) Deposits cannot exceed seven times paid-in capital.
-- (2) Total loans can be no more than 70 percent of total
deposits.
-- (3) As announced in June, all "call deposit" accounts
(popular "hot money" accounts that offered an annual 4-10
percent interest rate, compounded daily, with no restrictions
on withdrawals) must be closed.
-- (4) All Central Bank of Myanmar credit lines must be
repaid. According to one banker, most of the banks, which
took only minimal credit when the crisis broke, have paid off
their debt. However, banks with larger outstanding debt --
such as Asia Wealth Bank (the country's largest),which
borrowed 15 billion kyat (about $15 million) -- are in more
difficult straits.
-- (5) All Central Bank loans made against banks' government
bonds must be repaid.
-- (6) Only government bonds will be considered as paid-in
capital. Currently government bonds pay 8.5 percent for 3
years or 9 percent for 5 years while inflation is running
30-40 percent thus far in 2003.
-- (7) Private banks must bring all their accounts into line
with pre-existing, but largely ignored, bank management
requirements. These include IMF-recommended 5-10 percent
reserve requirement (depending on the type of deposit),20
percent liquidity requirement, and 10 percent capital
adequacy ratio.


4. (C) At this time, banking sector pundits are predicting
that among the largest (by deposits) pre-crash banks, KBZ
Bank (run by a close associate of Vice Senior General Maung
Aye),Myanmar Mayflower Bank (capitalized largely by ethnic
Wa businessmen),and Myanmar Overseas Bank will clear the
hurdle -- or be allowed over the hurdle for political
reasons. Asia Wealth Bank and Yoma Bank, by far the two
largest banks, and the two banks accused of the worst banking
practices, are not expected to make the cut and will
supposedly be reassessed at year's end.

Throw Back the Little Ones


5. (C) On a positive note, officials from some of the
fourteen smaller private banks tell us that most of their
institutions have already passed the seven tests, and have
not been stopped from resuming normal operations -- though
they have not received official clearance to do so. However,
this will do little to assist the economy or return money to
the private banking system. These banks have very small
capital bases and loan portfolios, few depositors, few
branches, and are generally in place to serve niche markets.
Also, bankers concur with our assumption that most average
Burmese will eschew the private banks, large and small, for
years to come regardless of the government's certifications.

Haven't We Learned Anything?


6. (C) We had hoped that the government would learn some
lessons from this eight-month-old crisis and address
fundamental flaws that helped spark and fuel the debacle.
The needs were clear: punish rogue bankers, rebuild consumer
confidence, create an independent Central Bank and task it to
improve oversight of lending practices, apply and enforce
reasonable financial standards, and relax some of the
burdensome regulations -- such as capping deposit and lending
rates well below inflation -- that encouraged cowboy banking
in order to turn a profit. Though some of the GOB's new
conditions are sound, none of these crucial issues was
adequately addressed. The GOB has kept its onerous pre-crash
policies intact and imposed broad new standards. Adding a
low deposit ceiling and lending limitations to interest rate
caps will make turning a profit nearly impossible. The
government has also made no specific commitment to
independent oversight of lending -- other than threats of
more frequent visits by military intelligence to suspect
borrowers.


7. (C) Certainly some businesspeople will bring their
deposits and other business back to private banks when and if
they emerge "rehabilitated." However, it is unclear how the
government expects private banks to win back the majority of
their suspicious customers and otherwise operate in this new,
more restrictive environment. Perhaps it does not. There
have long been rumors that the GOB's top leadership disliked
the private banks because they were "disruptive forces" and
controlled significant cash reserves. True or not, in this
atmosphere we don't see the private banking sector being able
to return even to its relatively small pre-crash role in the
Burmese economy.
Martinez