US embassy cable - 04RANGOON542

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000542 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 04/29/2014 
TAGS: EFIN, ECON, PGOV, BM, Economy 
SUBJECT: FREED PRIVATE BANKS WARM UP 
 
REF: RANGOON 174 AND PREVIOUS 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.4 (B,D) 
 
1. (C) Summary: Three of Burma's private banks, re-opened 
under tight new regulations in February, seem to be surviving 
nicely in the new environment.  With deposits reaching 
pre-crash levels, the banks are set to start issuing loans 
for the first time since February 2003.  However, this bright 
spot is a mere candle in Burma's long economic night, as the 
largest private banks (holding 65 percent of pre-crash 
deposits) remain closed indefinitely.  End summary. 
 
If You Open, It Will Come 
 
2. (SBU) Much to the relief of the three newly re-opened 
private banks, some customers have returned bringing with 
them significant deposits.  On the other side of the ledger, 
withdrawals have stabilized.  The authorities allowed these 
three banks, Kanbawza (KBZ), Myanmar Universal (MUB), and 
Myanmar Oriental (MOB), to re-open on February 3 almost 
12-months after the private banking sector collapsed 
following a massive run.  As a condition of their re-opening, 
the government imposed several new and quite restrictive 
regulations (reftel), including a ban on credit cards and a 
"temporary" cap on deposits at seven-times paid-in capital. 
Two other private banks, the largest by deposits and assets 
pre-crash, Asia Wealth (AWB) and Yoma, remain shuttered with 
no sign of an imminent change.  The last of the "big six," 
Myanmar Mayflower, the fourth largest pre-crash, also remains 
under wraps (and ostensibly under investigation, alongside 
AWB, for money laundering). 
 
3. (C) Since being freed to operate, KBZ and MOB have been 
receiving more deposits than expected.  Two KBZ officials 
told us that they were nearly up against the deposit ceiling 
-- a predicament they hadn't expected for another several 
months.  Other banking sources estimated that MOB would hit 
its cap sometime in June.  There is no word on the status of 
MUB's deposit inflows.  The new deposits are likely from 
traders who had been forced during the period of banking 
shutdown to send and receive domestic remittances via the 
informal hundi network.  This is a widespread and oft-used 
system, though it is rather risky and has trouble handling 
extremely large transactions. 
 
4. (C) To address this potential deposit cap problem, the 
banks have two choices: increase their capital or, in 
traditional Burmese fashion, ignore the new rule.  According 
to banking sources, the re-opened banks have not yet been 
audited by GOB authorities to ensure compliance with the new 
restrictions, though an oversight committee remains in place. 
 Another factor that will encourage scoffing the law is the 
reluctance of owners to pony up more cash.  Because of a 
stagnant business environment, few in Burma are flush with 
capital these days.  Also, the banks are still in precarious 
situations and are thus not yet low-risk investments. 
 
Let the Lending Begin 
 
5. (SBU) Another positive sign is the GOB's approval of new 
lending by the three re-opened banks.  Though this right was 
ostensibly given back in February, banking officials told us 
it was not until April 6th that authorities actually gave the 
green light.  Per the new regulations, loans may not exceed 
80 percent of deposits. 
 
Comment: A Drop in the Bucket 
 
6. (C) When new loans make it into the economy, it will help 
lubricate a machine that's been cash-starved for more than a 
year.  Likewise, increasing deposits will help keep domestic 
commerce above water.  However, we remain skeptical that this 
"soft" re-opening of the private banking sector will energize 
the economy much.  The reason is the relatively small 
contribution KBZ, MUB, and MOB make to the country's 
financial condition.  Look at the numbers: KBZ, the largest 
by far of the three liberated banks, has only 6.2 billion 
kyat (about US$7.5 million) in paid-up capital.  This means 
its maximum deposits are $52.5 million and maximum new loans 
are US$42 million.  For comparison sake, at the end of 2002 
(just before the crisis) Burma's private banks reported about 
US$625 million (at the current 820 kyat/$ rate) in deposits 
and outstanding loans of about US$430 million.  End comment. 
Martinez