PROPUESTA PARA LA EVALUACIÓN DE LOS PROYECTOS DE INVERSIÓN

3.1.1 Funding Liquidity Figure 9

Ratio of liquid Assets in Relation to Short-term Liabilities

Figure 9

Ratio of Liquid Assets in Relation to Short-term Liabilities

*Liquidity Asset can be defined by its component Figure 10

Figure 11

Concentration in Assets or Liabilities (15 Private Banks)

Figure 12

Capital-to-Deposit Ratio and Capital-to-Assets Ratio (15 Private Banks)

3.1.2 Maturity of Future Cash Flows of Assets and Liabilities or Maturity Gap between Assets and Liabilities Banks are subject to a reserve requirement of 10% of deposits and further liquid asset requirements of 20% of deposits, which must be satisfied in cash, balances with the CBM or treasury securities eligible

as collateral for borrowing from the CBM2_{. There is, therefore, a buffer}

of liquid assets, which in an emergency, can be drawn down to fund unexpected withdrawals of deposits.

The maturity gap can be clearly identified. This is because although

most loans3 _{are short term, or at least renewable annually, deposits are}

predominately on current account, can be withdrawn on demand, or in savings accounts which also withdraw on demand, albeit subject to some restrictions on the rate and frequency of withdrawal. Time deposits and fixed-term deposits are negligible very small.

Experience in 2003 has shown that the private banks were indeed subject to very severe liquidity pressures and had to reduce balance sheets by as much as a half or even more in order to meet withdrawals. As memories of that experience fade, banks may become less conscious of the need to maintain liquidity, which is costly, especially given the low yields available on treasury securities. Here, the state banks are not permitted to invest in 3- or 5-year treasury bonds with a yield of 11.0 and 11.5% previously and now they can invest in it.

3.1.3 Other Liquidity Ratios Used

In Myanmar, the banks and other parts of the financial sector are heavy regulated. Law determines bank interest rates, both borrowing and lending, and strict liquidity requirements are in place. Lending is restricted to short-term collateralised loans.

On the liabilities side, the private banks are subject to a deposit- to-capital requirement which limits deposit-taking from the general public to 10 times the paid-up capital. In this regards, this ratio limits banks’ ability to raise liabilities and therefore limit their ability to lend. Banks, in

2. Government treasury bond is the only and single collateral criteria for borrowing from the Central Bank.

3. Bank lending is limited to one year, which does restrict the extent of possible matu-

rity transformation. But loans may be renewed for a further two years. It is normal practice for a borrower to repay loans from other sources before a new agreement is concluded.

turn, become very selective in advancing loans, and therefore lending is

restricted to very creditworthy borrowers able to provide good collateral.4

As a consequence, coupled with the bank’s legal inability to lend long, there have allegedly been few non-performing new loans in recent years, with some private banks reporting having zero NPL. The ratio of NPL to total loans of 15 private banks is shown in Figure 13.

Figure 13

Ratio of NPL to Total Loans of 15 Private Banks and SOB

Figure 14

Borrowing from the Central Bank’s Lending Facility

(Kyat in million)

4. In any case, banks are now required to lend only on the basis of cash or real-estate

3.1.4 Qualitative Measures Figure 15

Overall Financial Position of 15 Private Banks

Figure 16

Ratio of Excess Liquidity to Required Reserve (in Percent)

In accordance with the captioned indicators post-crisis, the private banks have adjusted in some remarkable ways, with many of them being able to add significantly to their paid-in capital. With strong emphasis on liquidity, the bank’s liquidity ratios have also strengthened. As a result, the data on liquidity and capital ratios are very high (see Figure 15). From the financial year 2005-2006, public confidence in the banking sector has strengthened with growth in deposits. At the same time, based on the data, the level of non-performing loans for the private banks stands at not more than 3%, while that of the state banks is round 25% because of their credit operation is directed-lending based on non-commercial criteria. When over time, such loans to state-owned enterprises became non-performing loans.

More to the point, at issue here is one concerning the safety and soundness of the banking system, which is essential for the healthy development of economies. Capital-deposit ratio and capital-assets ratio (Figure 12) are the simplest and oldest measures employed to ascertain capital adequacy, meaning whether the bank has enough capital to absorb losses stemming from making loans and investments. In this respect, the regulatory authorities in most countries have in place minimum capital

requirements for banks as measured by capital adequacy ratio (CAR)5_.

The minimum capital adequacy ratio or capital requirement for private bank as prescribed by CBM is 10 % of risk-weighted assets. Furthermore, in calculating the said ratio, bank capital is defined to include issued and paid-up capital, paid-up share premium, reserves, and retained profits. This is standard international practice (BIS)6_{. The definition of capital}

in the banking industry is somewhat different from that in other lines of business, and with good reasons since reserves, retained profits, etc., are not only owned by the bank, they but could also be used to absorb losses.

Capital, Liquidity and Reserve Requirement are the main indicators analysed in this chapter and they reflect the liquidity situation in Myanmar.

4. Liquidity Risk Management in Banking