BURMA'S BANKS: STILL AWAITING SENTENCING

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000846

SIPDIS

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

E.O. 12958: DECL: 07/15/2013
TAGS: EFIN ECON BM
SUBJECT: BURMA'S BANKS: STILL AWAITING SENTENCING

REF: RANGOON 560 AND PREVIOUS

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


1. (C) Summary: The situation for some of Burma's largest
private banks may have stabilized for the time being, though
it is still critical. The government, despite some tinkering
around the edges, has still not revealed its vision for the
future. We're sure of only two things: the economy will limp
along without causing political discontent, and there will be
some shell of a private banking sector at the end of the
tunnel. End summary.

Banking Situation: A Move out of ICU?


2. (C) The government has done little in the past several
months to definitively resolve the predicament of the
nation's private banking sector. Private bankers tell us
that they are still required to report nightly to the
government's Private Bank Management Committee detailed
information on that day's withdrawals, transfers, and loan
repayments. Despite this regular interaction between bankers
and regulators, there are apparently no discussions or
consultations on root problems or next steps. The government
has not moved beyond its March instructions to banks: collect
all outstanding loans, bad or good, to repay depositors.



3. (C) Despite this uncertain situation, two bankers with
whom we spoke said that their banks (both in the top six by
deposits) had stabilized, though their condition was still
critical. With the current restrictions in place, recovery
and normal operations were not possible. These two banks
were not extending new credit or taking new deposits,
allegedly on the instruction of the Bank Management
Committee. However, the two banks had paid out between 50-65
percent of their deposits and recovered around 50-60 percent
of outstanding loans. With this, each bank had about an
equal amount of remaining deposits and loans trickling in and
out. This tenuous balance was being padded by fees earned
from a recovering demand for intrabank transfers, now about
40 percent of pre-crisis levels at one large bank, and
savings from expanding layoffs and asset sales. The two
bankers said they thought this basic stability was the case
for the other major private banks as well. However, other
sources have told us that Yoma Bank, the country's second
largest private bank, was suffering more serious liquidity
problems because of difficulties getting loans repaid.

Government's Response: Bad Medicine?


4. (C) In early June the Central Bank took steps to tighten
practices supposedly being abused by private banks. First,
the Central Bank informed all private banks that as of
October 1 they would have to repay or transfer to another
type of account all call deposit accounts. These call
deposit accounts were popular with banks, and depositors, as
they offered an annual 4-10 percent interest rate, compounded
daily, with no restrictions on withdrawals. A banking source
said these accounts were used by banks to entice inflows of
"hot" money to mask poor liquidity ratios. A second move by
the Central Bank raised the interest rate for outstanding
Central Bank credit lines immediately from 11 percent to 13
percent, and demanded repayment of outstanding credit lines
ASAP. Again, regulators suspected banks were abusing their
lines of credit, with the lower interest rate, to paper over
structural problems and fuel irresponsible lending.


5. (C) Though both of these moves are sensible, their
promulgation at this sensitive time, and with no accompanying
assistance or reforms, may cause further hardship to the
larger private banks, which hold more call deposits and
Central Bank credit. According to statistics, Asia Wealth
Bank (the country's largest) has an outstanding 15 billion
kyat (about $15 million) line of credit with the Central
Bank. Yoma, Kanbawza Bank, and Myanmar Overseas Bank hold 5
billion, 5 billion, and 1.5 billion kyat respectively.


6. (C) Despite its latest marginal actions, the government
has yet to release a new set of guidelines explaining the
future of the private banking sector. There's been no major
new directive since March, when the government refused to
bail out the banks and demanded that borrowers immediately
repay their loans. For several months bankers and economists
have been predicting that these new guidelines will come
"next month." However, to date there's been nothing firm,
only rumors that the Bank Management Committee had given an
extra three to six months for banks to recover their
outstanding loans and rebuild their capital base with cash,
or other very liquid assets. After that, the rumor goes, the
government will issue clean bills of health to those banks
that have met the challenge, and dispose, somehow, of those
that haven't. The future is uncertain even for those that
make the cut, though, with additional rumors that the Central
Bank will merge these banks with government or
semi-government banks, or hang stringent new operating
requirements on survivors. There is speculation that all new
loans will have to get Central Bank approval, and that
paid-in capital requirements will be much higher.

Business Community Down, But Not Out


7. (C) The business community has found a way to get along
for five months without a reliable private banking sector.
Though bankers report that they are no longer helping out
employers with large withdrawals to meet payroll, business
community leaders say that most companies are getting by
through diversification, the sale of assets, laying off of
workers, or cutting salaries. The informal domestic
financial network is also helping by picking up some of the
slack for credit and fund transfers. The availability of
intrabank transfers is also keeping commerce from collapsing
entirely. Diversified companies, those with access to black
market money or lucrative government contracts (government
banks are still operating without difficulty) are also better
able to weather the economic storm.


8. (C) Also helping the sluggish economy is a relatively
stable inflation rate, brought to heel because of the
economic slowdown and reduction in both money supply and
circulation caused by the banking meltdown. The monthly
consumer price index declined three out of the last five
months, and held stable in the other two. The unintended
consequences of the crisis and the government's reaction have
also kept the kyat stable against the dollar, defying
pre-crash expectations that the kyat's depreciation would
continue unabated.

Throw Away the Crystal Ball


9. (C) Prognostication on the banking situation is often a
fool's errand. However, we draw two conclusions after five
months. First, the banking crisis has caused an economic
slowdown and layoffs, but there will be no resulting
political upheaval. The informal economy and people's
general tolerance for economic misfortune have softened the
blows. Second, when the situation is finally resolved, there
will be a private banking sector of some shape and size.
However, some important questions that remain are: How many
banks will be liquidated/merged? How independent will the
survivors be? and perhaps most importantly, Will a critical
mass of customers come back to the revived banks and risk
losing their money once again?
Martinez