By the end of 2010 all of Cambodia’s 27 commercial banks must comply with new rules that place minimum capital requirements at $37.5 million, triple the previous amount of $12 million.
The decision taken by the National Bank of Cambodia in 2008 is designed to tighten and strengthen the banking sector by filling it with more heavyweight financial institutions that can meet the stringent capital requirements.
Although Cambodia’s top four banks – Acleda, ANZ Royal, Canadia and the Cambodian Public Bank – already far exceed the new capital demand, some of the banking sector’s smaller members could face an uphill struggle to raise the capital, experts say.
“For some of the smaller banks they might have to quit the game,” said Teng Cheong Hooi, senior executive at Hwang DBS, a Malaysian bank, which set up in Phnom Penh last year.
“They might not be able to survive,” he said.
The new capital requirement is not the first time banks here have had to adapt to a revised set of conditions laid out by the central bank.
Following the introduction of the banking law in 1999, which raised minimum capital requirements for commercial banks from $5 million to $12 million, 14 banks were forced to close their doors, culling the number of banks in Cambodia at that time from 31 to just 17.
Hwang DBS’s capital currently stands at $20 million. But Mr Teng said the bank has adopted a strategic plan to up its capital to the newly required levels by October this year. He added that the new legislation would ensure the sector remains robust in times of crisis, as many banks with low capital levels will be forced to consolidate their finances.
The legislation will also, in theory, eliminate smaller banks from what many in the industry see as an oversaturated sector.
“We have too many banks here and it is not so healthy to have too many banks in the country,” Mr Teng said. “The market is not so huge and we have not so many customers here,” he said. “[Some] banks are actually struggling to survive,” he added.
Despite more stringent requirements on capital the NBC ruling does contain some exemptions for banks.
Commercial banks will be allowed to maintain the current capital requirement of 50 billion riel (about $12 million) if they have an influential shareholder that is a bank or financial institution with an investment grade rating from a reputable rating agency.
The Bank of India, which set up a branch in Phnom Penh mid-way through last year, is a classic example of one of those banks that will take advantage of this.
“I don’t think many banks after doing all their homework will leave now,” said Ramesh Baliarsingh, chief executive of the Bank of India branch in Phnom Penh.
The local Bank of India branch, he said, does not have the capital requirement stipulated by the NBC. But that does not matter, as the branch is owned by one of India’s largest state-owned financial institutions, which has more than enough capital.
The Cambodian Commercial Bank is another institution that will fall under this bracket.
One official at the bank, who wished to remain anonymous, said although the bank has just $13 million in capital, it would be protected under the NBC exemptions as it has influential shareholders in Thailand.
Tal Nay Im, director general of the National Bank of Cambodia, said the sector as a whole was set to meet the new capital requirements.
“Now there are some banks that have already passed the limit. And some banks have almost reached it,” she said.
“They have a plan to top up the capital by the end of 2010,” she said, adding that only a small group of banks would find it difficult to meet the new requirements.
Han Peng Kwang, senior vice president at Hwang DBS, agreed.
“I believe most of [the banks] will not have difficulties to raise the capital,” he said, adding that many new entrants in the local market have deep-pocketed investors and shareholders oversees.
Nonetheless, what will happen to smaller banks is still an unknown factor, he said.
“There will be times when large international banks come in and if they have to start off with capital levels that are that high it would be difficult for them to justify setting up here,” said Steven Higgins, CEO of ANZ Royal Bank.
Mr Higgins said that under the new rules a number of smaller banks would probably be forced to merge in order to survive.
“A smaller number of larger banks will be good for Cambodia rather than a multitude of smaller banks,” he said.
Several members of the banking community interviewed yesterday predicted that about half of the countries 27 commercial banks would not have the minimum capital requirements by the time the new law is implemented on Dec 31, 2010.
Their ability to stay in the game, they say, depends on the quality of their shareholders oversees, or their ability to agree on a merger with other affected institutions.
Bun Socheat, an administrative official in the financial department of South Korea’s Booyoung Khmer Bank, said his bank currently had a capital base of about $18 million.
But plans are in place to increase that to exceed the minimum capital requirements by the end of the second quarter of this year, he said. Booyoung Khmer Bank is acquiring its additional capital from shareholders in South Korea, he said.
Still analysts predict the sector is in for a rough ride in the coming months and some banks might struggle to raise the necessary funds.
In December last year, the International Monetary Fund warned Cambodia’s banking sector that credit risks had risen sharply further weakening balance sheets.
“Nonperforming loans are rising, but the figures officially reported by banks likely fail to capture the true extent of the problem,” the IMF said last month.
The IMF also said low demand for credit was squeezing profits and making it difficult for banks to grow
For In Channy, CEO of Acleda Bank, smaller banks here will have two choices: somehow raise the necessary capital or merge with other smaller banks.
Once the weaker members of the sector have succumbed due to the capital requirement, he said, the presence of a more substantial group of commercial banks in the country would help bolster the sector’s reliability and confidence among investors and account holders.
Despite the number of banks in the country, “lending is still low and financing is limited…We need fewer banks and more branches,” Mr Channy said.