The Central Bank of Myanmar (CBM) a directive (7/2017) directive on the implementation of the Asset Classification and Provisioning Regulation, including the following terms: “cash flow pattern of the borrower”, “credit risk analysis” and “term loans with up to a maximum maturity of three years.”
These technical terms are essential ingredients for effective financing of business establishments, especially small and medium enterprises (SMEs). By issuing the directive, the monetary authority is allowing local banks to make medium-term loans based on the business cycle and cash flow patterns of the SME. This represents a shift from a collateral-based to risk-based lending system, which is a significant development in the banking sector.
Under the old collateral-based system, banks accepted land and landed property as collateral and loan tenures were restricted to one year. After assessing the market value of the collateral, the bank estimates the forced-sale value of the collateral. To keep themselves on the safe side, banks usually grant credit of up to just 50 percent of the forced-sale value of the collateral.
Now, medium to long-term credit can be extended from the more stable portion or core amount of a bank’s deposits. Over the longer term though, banks should also develop new savings products that enable them to reduce risks associated with mismatches in the maturity terms of loans and deposits. When banks are more familiar with risk-based lending, longer term loans could be allowed to more effectively support the country’s SMEs.