The Central Bank of Myanmar (“CBM”) issued Notification bearing Number 18/2017 dated 7 July 2017 (“Notification 18”), limiting the total amount of exposure that a CBM licensed banking company or a branch (“Bank/s”) can undertake. As per Notification 18, the Banks can now only use a total of 20% of their core capital as financial exposure/leverage when financing any person, single counter party or a group of connected counter parties.
The Financial Institutions Law (“FIL”) defines core capital as:
“permanent shareholders’ equity in the form of issued and fully paid ordinary shares, perpetual non-cumulative preference shares, capital grants and disclosed reserves minus year to date losses, goodwill, pre-operating expenses, prepaid expenses, deferred charges, leasehold rights and any other intangible assets”.
Notification 18 defines counter parties as individuals or legal entities that are interconnected in a manner that financial problems experienced by one or more of them would inevitably present financial problems for another or all of them. Notification 18 further defines a connected counterparty as: a connection between two or more individuals or legal entities where:
- one of them directly or indirectly exercises control over the other;
- they are subsidiaries of the same parent company;
- they are under same de facto management; and
- one of them has equity interest in the other exceeding 10% and are bound by reciprocal guarantee agreements or have relationships such as sub-contracts, franchises, etc.
- Transactions between the banks are subject to the following large financial exposure/leverage limits:
- a secured transaction can be unlimited, where secured transaction refers to loans backed by government securities or deposits in US dollars; and
- unsecured transactions are limited to 100% of the core capital of the bank.
Notification 18, while exempting the state owned banks from large exposure limits made at the direction of government policies, has brought branches of foreign banks within the purview of large exposure limits.
Any large exposure transactions must be reported to the Banking Supervision Department at the CBM on a quarterly basis, in the form prescribed by Notification 18. Any Bank that currently has exposure limits must report to the CBM within 90 days from the date of Notification 18. Failure to comply with Notification 18 will result in the imposition of corrective actions and administrative penalties as prescribed by the FIL.
Simultaneously, repealing the previous notification (Instruction 4/19915), the CBM issued another notification bearing Number 19/2017 dated 7 July 2017 (“Notification 19”), prescribing the liquidity ratio requirements for the Banks at 20% at all times. Notification 19 required the Banks to calculate their daily liquidity ratio and report their weekly average at the start of each succeeding week. The format of the reporting is also provided in Notification 19. Failure to comply with Notification 19 will also result in the imposition of corrective sanctions and administrative penalties as prescribed by the FIL.
William D. Greenlee Jr, Partner
Nishant Choudhary, Senior Legal Adviser