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Central bank providing additional relief to banks

Updated: May 15, 2021

The banking sector is currently in a challenging situation, having faced significant disruption and a challenging economic situation.

In an attempt to shore up the banking system, the Central Bank of Myanmar (CBM), issued two new directives on 7 May 2021:

  • Directive 6/2021 – Temporary amendment and reduction of the minimum reserve requirement in Myanmar Kyats for banks (Reserve Requirement Directive)

  • Directive 7/2021 – Temporary amendment to the liquidity ratio calculation (Liquidity Ratio Directive)

These are the latest in a series of directives from the CBM aimed at limiting the fallout which banks currently face. The effectiveness of these steps will have to be seen.

What is the effect?

Reserve Requirement Directive

The reserve requirement (also known as the cash reserve ratio), prescribes the minimum percentage of customer deposits which banks need to deposit with the CBM. The purpose of having the reserve requirement is to allow the CBM to control the liquidity position of the banks and can allow it to absorb the excess liquidity in the system through holding deposit auctions or inject additional liquidity through credit auctions.

Historically the CBM set the reserve requirement at 5%, meaning that 5% of all customer deposits needed to be deposited with the CBM and banks were able to offload additional liquidity (from additional customer deposits) through the deposit auctions held twice a month, allowing banks to earn interest on these additional deposits.

With the onset of COVID-19 and the signs that the economy would be affected, the CBM anticipated that bank customer withdrawals would increase and in April 2020 issued a directive temporarily reducing the reserve requirement to 3.5%. The purpose of this reduction was to reduce the amount of customer deposits the banks needed to deposit with the CBM, giving them additional liquidity to meet the increase in demand from customers wishing to withdraw money. Deposit auctions were also put on hold.

With COVID-19 continuing to affect the economy, this temporary reduction in the reserve requirement was extended twice and was set to expire on 30 September 2021. The latest Reserve Requirement Directive on 7 May 2021, further reduces the reserve requirement during this temporary period to 3%, thus freeing up more funds for the banks to meet the demand of their customers wishing to withdraw funds.

Whether this will have a meaningful impact will depend on whether customers decide to continue withdrawing funds from their accounts.

Liquidity ratio calculation

A bank requires liquidity to ensure that it has sufficient cash to meet all the expected demands of its customers for printed money. This is different from the bank having adequate capital, expressed as a capital adequacy ratio, which is the bank having sufficient funds of its own to use to protect it against insolvency in challenging economic times.

The CBM issued notification 19 in 2017 requiring that all banks maintain a minimum liquidity ratio of 20%. This means that a bank has enough high quality liquid assets on hand to meet 20% of immediate outflows, for example to immediately pay out 20% of withdrawals of all accounts at the bank. Such high quality assets normally include cash, cash reserves kept at the CBM and marketable securities guaranteed by the state which are traded in a deep and active securities market.

Treasury bonds issued by the CBM are one of the securities which can be used when measuring compliance with the liquidity ratio calculation, however the bank could only calculate 50% of the value of the treasury bond. This would have been based on the fact that treasury bonds, unlike in some markets with well developed bond markets, do not fully meet the requirements to be considered high quality liquid assets and may not be sufficiently liquid to be able to cover the short term obligations of the bank.

The requirement for banks in Myanmar to comply with the prescribed liquidity ratio was originally August 2020 however, to provide banks with some relief from the impact of COVID-19 this has now been extended to 2023. In addition, CBM directives on 9 April 2020 and 16 February 2021 allowed banks to increase the weighting of these treasury bonds from 50% to 90%. The latest Liquidity Ratio Directive issued on 7 May 2021 temporarily further increased the weighting to 100% up until 30 September 2021.

The impact of the change is that banks are able improve their liquidity ratio as their weighting has been improved. This is possible without increasing the banks high quality liquid assets. With compliance with the liquidity ratio having been postponed until 2023 anyway, the practical effect of the Liquidity Ratio Directive on banks may not be significant. On paper though it will improve the position of the banks, even though the underlying risks have not improved.

In the context of current circumstances

Myanmar’s economy is going through hard times. The culmination of COVID-19 and recent political struggles have left the Myanmar economy in a precarious situation, with estimates of an economic contraction ranging between 10-20% for 2021. The banking sector has been especially hard hit with banks ceasing operation earlier in the year and still only providing limited services.

There are signs that the banks are facing growing liquidity difficulties, these latest directives issued by the CBM are in line with some previous steps taken, including:

  • the CBM having implemented withdrawal limits of MMK2 million per week for individuals and MMK20 million for corporate account holders. In addition, placing a limit of MMK500,000 on ATM withdrawals. Most banks have taken additional steps by reducing these withdrawal limits by half;

  • private banks are only providing limited services, requiring customers wishing to access branch services to obtain a token, with only a limited number of tokens being issued per day. Additionally, only a heavily reduced number of ATMs are currently in service leading to difficulties accessing cash;

  • the CBM has limited withdrawals from mobile financial service providers to MMK300,000 per day or MMK2 million per week; and

  • the CBM trying to encourage people to deposit money has announced that banks should open a new kind of bank account allowing for unrestricted withdrawals if money has been deposited into the account. An interesting move seemingly discriminating against other account holders who are limited in what they can withdraw.

Whether these latest steps taken by the CBM are sufficient to help the banking system get back to normal has yet to be seen. Otherwise, the CBM may need to consider what other steps it can take, although if trust in the banking system is lost, this may prove a challenge.

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