Myanmar starts first audit of state-owned banks in decades

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 Ms Aung San Suu Kyi's government on the project and the results will help to clarify options for restructuring the sector, according to Ms Nagavalli Annamalai, a lead counsel at the multilateral lender who has specialised in banking sector development for almost two decades.

"These banks are under-capitalised," she 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 (S$89.5 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 to one day wake up and (hear them) say, among other things, (that) there's a large shortfall in capital," Ms 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 licences since 2014. There are some 24 domestic private-sector banks.

The largest government-run lender is Myanma Agriculture and Development Bank. It traces its roots back to the 1950s and provides credit to more than two million farmers in the largely agrarian nation.

The other three are Myanma Economic Bank, Myanma Foreign Trade Bank and Myanma Investment and Commercial Bank.

Assets at private-sector banks climbed 27 per cent to 23.3 trillion kyat (S$24.3 billion) at the end of June last year 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 non-performing loan ratio of about 3.6 per cent and a claimed capital adequacy ratio of 19 per cent in June last year. Indicators of the industry's soundness as currently reported do not accurately reflect systemic risks, the World Bank said in its Myanmar Economic Monitor in December.

The Ministry of Planning and Finance did not immediately respond following e-mails inquiring about the quality of banking data and plans for state-run lenders.

Challenges at state-owned banks include poor information-technology infrastructure, outdated accounting practices and lack of clarity in such things as classification of assets and provisioning for bad loans, according to Ms Annamalai.

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A version of this article appeared in the print edition of The Straits Times on March 10, 2017, with the headline 'Myanmar starts first audit of state-owned banks in decades'. Print Edition | Subscribe