New Rules on Sanitizing Bank Overdrafts in Effects

In July 2017 the Central Bank of Myanmar (“CBM”) introduced a fresh set of four regulations (Notifications 16-19/2017 pertaining to capital adequacy, asset classification and provisioning, large exposures and liquidity ratio requirement respectively). Issued under the Financial Institutions Law 2016 (“Financial Institutions Law 2016”), for the most part these were reinforcements of the existing regulations issued under the erstwhile Financial Institutions Law 1990 (“Financial Institutions Law 1990”), which were not being strictly enforced. There was, therefore, seemingly no cause for concern or raised eyebrows, as it appeared that these new regulations were issued in order to ensure continued implementation and enforcement of prudential norms under the Financial Institutions Law 2016.

Similarly, in line with the existing regulation under the Old Act, the new Asset Classification and Provisioning Regulations (Notification 17/2017) (“Regulation”) stated at section 11 that a bank shall ensure that all overdraft loans (such term not being defined) in its books are cleared / paid off in full for a period of two weeks annually. Section 12 went on to state that if an overdraft loan is not cleared / paid in full, such loan must be immediately classified and made specific provision for per the manner mentioned at section 5 in the Regulation. As mentioned, provisions to this effect already existed in the earlier regulation issued under the Financial Institutions Law 1990 but were not enforced.

Section 5 Classification of loans and advances and specific provisions. A bank shall classify and make specific provisions in the following manner:

Sr. No.	Classification Of Loans/ Advances	Days Past Due	Provisions On Shortfall In Security Value
a.	Standard	30 days past due	0%
b.	Watch	31 to 60 days past due	5%
c.	Substandard	61 to 90 days past due	25%
d.	Doubtful	91 to 180 days past due	50%
e.	Loss	Over 180 days past due	100%

The present Regulation came into effect in January 2018 and the implication was that by July, all overdraft loans not complying with the regulation would be declared non-performing. Since an estimated 70% of all lending is presently in the form of overdraft loans, this naturally created quite a stir amongst investors and banks alike. They united in appealing to the CBM to reconsider the stringent timeline. In response (and after much negotiation), the CBM allayed fears in November by issuing Directive 7/2017 (“Directive”), easing the timeline for implementation of the provisions relating to overdraft loans.

Section 7 of the Directive provides a schedule whereby the total volume of overdraft loans shall be reduced to 20% of a bank’s total outstanding portfolio, over a phased period of 3 years till July 2020. Banks also must ensure that overdraft loans and term loans are subject to a maximum maturity of one year and three years respectively, with interest payments at least on a quarterly basis and subject to reasonable amortizations (for term loans) payable at least every three months (Section 2). The CBM also provides a way out for banks saddled with too many overdraft loans under Section 3 of the Directive, whereby banks are allowed to convert their outstanding overdraft loans into term loans (each with a maximum tenor of 3 years), subject to certain conditions.

Importantly, it may be noted that all overdraft loans to the bank’s related parties (as defined under the Financial Institutions Law 2016[2]) may be converted to term loans but shall continue to be deducted from capital in accordance with the Capital Adequacy Ratio Regulation (Notification 16/2017), which states at Section 3 that Capital Adequacy Ratio (being a measure of a bank’s capital expressed as a percentage of its risk weighted assets) shall be maintained at 8% (this is a relaxation from the earlier 12% as per the regulation issued under the Financial Institutions Law 1990).

Interestingly, the actual wording of the Regulation differs somewhat from the intention attributed to it by CBM officials and the perception of the industry at large. The Regulation required overdraft loans to be cleared for two weeks annually, starting January 2018, so technically this could have been done for two weeks at any time starting January 2018 till January 2019. This in no way implies that the banks needed to clear most of their loans by January 2018, as widely reported.

Section 7 That total volume of overdraft facilities (including temporary overdraft and any kinds of overdraft) as percent of bank’s total outstanding loan portfolio shall be reduced in accordance with the schedule below:

Sr. No.	Deadline	As % Of Total Outstanding Loan Portfolio
a.	as of July 6, 2018	50%
b.	as of July 6, 2019	30%
c.	as of July 6, 2020	20%

Section 2 (ii) Related party in relation to a financial institution means-

1. a person who has substantial interest in the financial institution or the financial institution has significant interest in the person;
2. a director or officer of the financial institution or of a body corporate that controls the financial institution;
3. a relative of a natural person covered in paragraphs (1) and (2);
4. an entity that is controlled by a person described in paragraphs (1), (2) and (3);
5. a person or class of persons who has been designated by the Central Bank as a related party because of its past or present interest in or relationship with the financial institution.