US embassy cable - 04RANGOON174

UNCLAS SECTION 01 OF 02 RANGOON 000174 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, BM, Economy 
SUBJECT: BURMA'S BANKS: THE YELLOW FLAG IS LIFTED 
 
REF: 03 RANGOON 1164 AND PREVIOUS 
 
1. (SBU) Summary: After months of speculation and rumor the 
government has allowed three of the country's six biggest 
private banks to resume operations -- albeit under strict new 
regs and a promise to roll heads if there are any foul ups. 
Though some of the new regulations are sound, others are 
overly rigid and punitive.  Likewise, the future of the 
country's two largest banks, not included in the 
liberalization, remains in limbo.  Thus we are skeptical that 
the government's move will prime the pump and get large 
amounts of money flowing into the economy through the private 
banks.  End summary. 
 
Don't Mess This Up 
 
2. (SBU) With a stern warning to fly right this time, or 
else, the GOB on February 3 allowed three private banks to 
resume operations.  The three banks, Kanbawza, Myanmar 
Universal, and Myanmar Oriental, were the third, fifth, and 
sixth of the "Big Six" banks (by deposit size).  They have 
been inactive since the government effectively shuttered them 
following a disastrous run on private banks in February 2003. 
 The three other large banks, two of which are under 
investigation for money laundering and ties to 
narcotrafficking, remain under wraps with no word as to their 
ultimate fate.  Fourteen other very small private banks have 
been operating relatively freely for several months now, 
though without official government sanction.  These small 
banks were not mentioned in the amnesty, though we expect 
them to continue their low level business. 
 
3. (SBU) The decision to release the three banks has been 
rumored to be in the works for nearly six months now (see 
reftel) and it is unclear why the Bank Supervisory Committee, 
responsible for "resolving" the banking crisis, took so long 
to fire the starter's gun.  The newly freed banks will be 
forced to abide by a long list of stringent new requirements, 
though, some of which were discussed previously (reftel) and 
some that are new. 
 
The New Law of the Land 
 
4. (SBU) The new regulations aim to keep a bank from getting 
too large and powerful and to limit a customer's ability to 
quickly move money in and out of the banks.  Some of the regs 
are quite responsible, but others may prove too rigid to 
allow profitable and customer-friendly banking.  We are also 
disappointed to see the government has apparently not 
reformed its own arcane banking regulations, which, in part, 
encouraged the type of profligate lending and dealings that 
led to the crash in the first place. 
 
5. (SBU) The regulations governing the three banks are as 
follows: 
 
-- (1) Deposits may not exceed seven times paid-up capital. 
If regulators find a violation of this, the bank must pay a 
fine equal to 2 percent of the excess amount; 
-- (2) Banks are no longer allowed to accept "hot money" call 
deposits (Note: these were very popular with banks, and 
depositors, as they offered an annual 4-10 percent interest 
rate, compounded daily, with no restrictions on withdrawals. 
End note.); 
-- (3) Savings account customers can make only one withdrawal 
and one deposit per week, though the amount is unlimited; 
-- (4) Fixed deposit terms are now three, six, nine, and 
twelve months.  Prior to the crash the terms were one, two, 
three, and four weeks; 
-- (5) Interbank borrowing is prohibited; 
-- (6) Lending must be based on "strong" collateral (not 
further defined except to prohibit the use of gold and 
jewelry); 
-- (7) Banks may not lend to their own directors or 
directors' spouses or these people's affiliated companies; 
-- (8) Banks must appoint loan inspectors and "arrange to 
prosecute" those who fail to repay loans (Note: the 
government's responsibility in these areas is not clarified. 
End note.); 
-- (9) Banks may not offer credit card services; 
-- (10) Banks must maintain a liquidity ratio of at least 20 
percent, a capital adequacy ratio of at least 10 percent, and 
a loan/deposit ratio of between 70 and 80 percent.  These 
last requirements existed prior to the 2003 crash, but were 
poorly enforced. 
 
Comment: Banks Just Happy to Be Alive 
 
6. (SBU) Bankers with whom we spoke were pleased to be 
allowed to resume their business no matter the new 
restrictions.  However, when pressed they admitted they were 
not very optimistic that the new, more restrictive, 
environment would allow them to attract back the customers 
who fled during the crash and subsequent mishandling of the 
crisis by the government.  In the first day after re-opening 
there were many customers -- to date prevented by government 
regulation from withdrawing more than 100,000 kyat per week 
($115) -- who rushed in to clean out their accounts.  On the 
macro level, we don't think the re-opening of these three 
banks will have much lubricating influence on the country's 
decrepit economy.  Though included in the "Big Six," these 
banks held only a tiny percentage of the deposits and loans 
compared to the country's two largest, still embattled, banks 
-- Asia Wealth and Yoma.  End comment. 
Martinez