US embassy cable - 03RANGOON846

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, Economy 
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