The National Bank of Cambodia (NBC) has doubled the minimum capital requirements for commercial banks and significantly raised the requirements for microfinance institutions in a move experts say will protect and consolidate the country’s banking sector.
Capital requirements are used by central banks worldwide to ensure financial entities have sufficient cash in reserve to act as a cushion against potential losses such as non-performing loans.
According to a directive signed by NBC governor Chea Chanto on Tuesday and released Wednesday, the new, higher requirements will serve to “strengthen the capital base of banking and financial institutions.”
“All banks and financial institutions shall increase their capital to the amount of the minimum registered capital…within two years,” it said.
Commercial and specialized banks are required to double the minimum capital they have in reserve, to $75 million and $15 million, respectively.
Changes to regulations for microfinance institutions (MFIs) are proportionally more significant. Deposit-taking MFIs are required to increase capital buffers from $2.5 million to $30 million, while other MFIs must increase their cushions from $62,500 to $1.5 million, local consultancy Mekong Strategic Partners said in a statement comparing new regulations to the old.
In Channy, president and group managing director of Acleda Bank, said the new requirements were a critical step toward mitigating risk in the banking sector, including the rapid expansion of credit.
“The reason is clear: The NBC needs banks and MFIs to strengthen their capital base so that they are more resilient to potential risks while they are growing,” Mr. Channy said. “Financial institutions are producing more sophisticated financial services and products.”
“Increasing the minimum capital requirements is the right thing to achieve sustainable growth,” he said, noting that loan portfolios at Cambodian banks grew by about 28 percent in 2015, compared to 19 percent for deposits.
At a conference in Phnom Penh last month, officials from the Ministry of Economy and Finance expressed particular concern about credit growth in the real estate and construction sectors, exposing the banking sector to any potential downturn in the property market.
Stephen Higgins, managing partner of Mekong Strategic Partners, also applauded the NBC’s directive, which he said signaled a sea change toward consolidation in the expanding banking sector.
“This is an unquestionably good move,” Mr. Higgins said. “The higher requirements means it would be difficult for any potential bank entrant to become profitable setting up from scratch, so we are likely to see more acquisitions.”
“Consolidation would be good for the sector,” he continued. “Larger banks are better able to…invest in the risk management systems that strengthen the overall banking sector.”
In its statement, Mekong Strategic Partners estimated that at least 15 banks would be unable to meet the $75 million requirement unless they pursue capital injections, mergers or even sales.
But while the requirements are proportionally more stringent in the microfinance sector, Yun Sovanna, secretary-general of the Cambodia Microfinance Association, said less than 10 percent of its 52 member institutions—including eight deposit-taking MFIs, which account for about 90 percent of loans in the sector—would be affected.
“I believe most of our members already meet the new requirements. But we would have to meet with them to fully understand the consequences of this,” he said. “I think some institutions with small capital would need to find funds from loans, investments or maybe even merge.”
Chea Serey, director-general of the NBC, said now was the ideal time to introduce new requirements across the banking sector, which has matured dramatically in recent years.
“This is like payment insurance. You don’t start an insurance policy when you are already sick. No one will insure you,” Ms. Serey said in an email.
“We feel that the banking system is healthy enough now to introduce new measure to further strengthen it,” she said.