The fragile state of Myanmar's banking industry remains a problem for the government as it strives to liberalise the financial sector and create a genuine market-based economy. A mini-run on local banks earlier this month underscored how shaky public confidence is.
The trouble began with a comment to parliament by a deputy governor of the Central Bank of Myanmar, who said businesses should settle their outstanding loans or the central bank would be forced to take regulatory action. Some depositors started to withdraw funds, and speculators jumped into the fray. That caused the local currency to fall dramatically against the US dollar and sent local gold prices soaring.
The run lasted less than a week and the financial market soon stabilised, with the exchange rate returning to normal within a fortnight. But financial analysts say the underlying cause of the panic -- high non-performing loans at private banks in Myanmar -- needs to be solved to prevent more volatility.
"Myanmar's banks certainly have many problems, largely inherited from the past, but are working through them with the help of the central bank," Sean Turnell, the government's chief economic adviser, told Asia Focus in an email.
"Meanwhile, in the short term, the system is highly liquid: Myanmar's banks are highly 'cashed up' by international standards; and, since outstanding loans are all in local currency, Myanmar's monetary authorities have all the necessary tools to keep the system safe."
According to central bank data to the end of June, total deposits at the country's 31 local banks were 40 trillion kyats, or around US$30 billion.
The government has "managed to stabilise our financial sector to some extent, by making our monetary and fiscal policy interventions effective -- as much as possible -- with the limited financial instruments to hand", Finance Minister Soe Win told Asia Focus on the sidelines of an international investment forum in the capital Nay Pyi Taw last week.
As soon as the first signs of stress emerged, a "council of war" made up of top political and banking leaders was called together. They agreed on the key message they wanted to deliver to the public: there was no need to panic, and the government had acted to protect the banks and their depositors, said Ye Min Oo, the vice-chairman of the Myanmar Bankers' Association.
The central bank went on the offensive, saying the priority was to stabilise the kyat, which had depreciated from 1,524 to 1,543 per dollar between Sept 2 and 6. Vice-chairman Soe Min assured parliamentarians that the CBM was working on a framework that would allow it to intervene during periods of short-term volatility.
The CBM sets a daily rate for interbank transactions, which it adopted in February as part of the move away from the floating exchange-rate regime introduced in April 2012.
"This kind of volatility in the kyat is not good for trade and foreign direct investments, which require a stable exchange rate," said Soe Min. A stable exchange rate strikes a balance between managing inflationary pressures on imports as well as ensuring exports are competitively priced, he said.
In the end, the run "proved to be a storm in a teacup", Ye Min Oo of the bankers' association told Asia Focus. The government's swift action quickly quelled the problems, he added.
The spark that ignited the crisis was a reply by Soe Thein, another central bank vice-chairman, to an MP's question about whether the central bank should help with negotiations in cases where businesses were struggling to pay back loans. "It is unreasonable that businesses are not repaying the loans that they took," the central banker replied. Banks must strengthen their capital base, he added.
"Business owners and banks can negotiate to restructure the loans over a six-month period, but if interest and principal are unpaid for two or three years, there can be no more negotiations and the bank must take action."
Unscrupulous speculators and political opportunists seized on these comments to foment a mini-crisis, according to government insiders, who asked not to be identified. Some businessmen withdrew cash to buy gold and sold for handsome profits a few days later when the local price rose to a record 1.3 million kyats per tical (16.4 grammes). Not so lucky were poorer depositors who had converted their cash to gold but lost out when prices fell back again.
"General nervousness -- domestic and international -- was an initial trigger into gold, casing the kyat to decline, but after that speculators were characteristically present," said Mr Turnell.
The fears were exacerbated by anti-government activists urging the public to withdraw their deposits and buy gold, said a government official, on condition of anonymity. A massive social media campaign, including fake Facebook accounts, was set up to manipulate the public and force a run on the banks, he said.
"Under the previous military government these speculators would have ended up in jail," said William Maung, a local financial expert. But times have changed. "What is happening now is a 'negotiated transition' to a liberal, market economy, one in which government intervention is at a minimum, and the forces of demand and supply set the prices."
Financial analysts fear that a currency crisis or a bank crash cannot be ruled out until the banks come to grips with the crushing weight of their non-performing loans (NPLs).
They say NPLs at some Myanmar banks are more than 50% of credit outstanding, and even at the big three -- KBZ, CB Bank and AYA -- the figure is around 40%. The CBM last year set a target for banks to reduce this figure to 5%, with limited progress made so far.
"The biggest problem is the banks' outstanding loans -- 99% are overdrafts -- which are rolled mover ever year, so only the interest is paid and the outstanding capital remains a liability," said Vijay Dhayal, senior consultant at New Cross Roads Asia, a boutique financial advisory and research firm in Yangon.
There could be more than $20 billion in outstanding loans, according to some financial analysts. And no one has a clue whether these banks would get their money back if their debtors defaulted.
In November 2017, the CBM announced that banks can allow those with overdraft loans to turn them into three-year term loans. This was a step toward bringing regulations in line with international standards.
Mr Dhayal strongly agrees with the deputy CBM governor that businesses must repay these loans in order to restore their liquidity. "The banks need to bite the bullet and start getting this done. Name and shame the culprits, if necessary," he said.
He believes that as a lender of last resort, the CBM would have to recapitalise those banks that manage to cut their losses. It could also mean the central bank taking an equity interest and board seats at these banks.
Banks will be forced to become more professional and adopt more stringent lending policies, he said. This would include divesting themselves of non-essential businesses. The banks are inefficient, with poor internal structures, overstaffed, and with too many branches, he observed, pointing out that KBZ has over 100 branches in Yangon alone.
Mr Turnell agrees that NPLs are at the heart of the longer-term challenge for the banks. "They need to change the business model they grew up with under the years of military rule, and become proper banks, making genuinely economic decisions about lending and not punts on politics or connections," he said.
"But the transformation is already under way, as part of a mandatory and supervised programme under the authority of the central bank.
"There will be bumps, but they can be surmounted. Many countries have been through what Myanmar is facing now. We have the lessons of these experiences, and the right people in place to achieve this."