Thursday, February 19, 2015

Unclear regulations may delay foreign loans, expert says

Lack of clarity in the regulatory framework may lead to delays in the process of obtaining a foreign loan for local and foreign enterprises operating in Myanmar, said an expert.

Edwin Vanderbruggen, partner of VDB Loi Myanmar - a leading legal and tax advisory firm, said in an interview that according to the existing rules and regulations, it is not very clear about the criteria that will be used to approve or reject a foreign loan.

"There is no doubt that the loans from overseas are possible as a principle. But in practice, clients often receive conflicting information from bankers and advisers with respect to the approvals and process concerned," he said.

Currently, all foreign loans, extended for commercial or development purposes as well as to banks' shareholders, need the Central Bank of Myanmar's approval. Operating with a permit under the Foreign Investment Law, they need the Myanmar Investment Commission's approval for loan and collateral arrangements.

"In cases where the borrower has an MIC permit, the process may become more complicated and longer as more approvals may be required," said Vanderbruggen.

In the past six months, the central bank has strengthened its grip over remittances which particularly affect foreign loans into Myanmar. The process started with a circular to local banks dated July 3, 2014, in which the CBM clarified approval requirements and increased their accountability for foreign loans. That was followed by amended regulations under the Foreign Exchange Management Act (2012) on September 30, which addresses all types of remittances.

Under these rules, to obtain all types of foreign loans, a number of information and documents - including the purpose of the loan, the interest rate and all relevant agreements - is needed.

While there is no formal requirement to translate transaction documents into Myanmar language, that must be done in reality.

"That is just the theory. In reality, you will still need to convince various regulators that the documents are in compliance with the law and regulations. Translating complex legal documents from English into Myanmar may take several weeks," he said.

Micro-finance companies are now allowed to borrow foreign loans up to 5 times their capital. However, each batch must not exceed $3 million. The expert noted that many applications are ready to go, though none has been approved by the central bank's micro-finance supervisory board.

Then, the waiting time varies.

According to Vanderbruggen, some approvals were as fast as a few days while other cases may take weeks or months.

"We understand that the central bank will watch out for onshore remittances that are disguised as offshore transactions. For example, the CBM may be on the lookout for the reintroduction of undeclared foreign funds belonging to Myanmar citizens," he said.

In this environment, the expert advised that lenders and borrowers should try to familiarise themselves with the actual practice of the authorities and other stakeholders to get through a financing deal.

"Legal definitions hardly seem to matter. In reality, most local banks do not want to release funds for any inward loans unless with specific CBM approval. This means that they need an actual schedule of drawdown, reimbursement and payment of interest which are all approved by the central bank," he added.

Myanmar is amending the Banking and Financial Institutions Law.

Vanderbruggen noted that one of the changes is leasing companies will need licences from the central bank. Under the law, finance companies may be allowed. Banks will no longer be allowed to give loans to their shareholders.

"Banks need to increase corporate governance standards. These are all positive developments," he noted.

"I have a lot of respect for the central bank because they tried to do a difficult job with not enough resources. It is the regulatory framework in transition. This is difficult for everybody to manage - for companies and also for the central bank. I think they are doing a fantastic job with the [limited] resources they have," Vanderbruggen concluded.