Cambodian Banks Pose Risk, Agency Says

Standard & Poor’s report cites lack of transparency, poor regulatory environment

The Cambodian banking sector is less likely to experience sustained growth than most other countries in Southeast Asia as it grapples with poor levels of financial transparency and because of inadequate enforcement of regulations by the central bank, a leading international credit rating agency said in a report on Thursday.

The report by US-based Stand­ard & Poor’s said that while most banking systems in Southeast Asia are in “a better position to manage growth,” Cambodia and Vietnam are not.

“In our view, banks in Vietnam and Cambodia pose higher risks, compared to their regional peers, due to several years of high loan growth in a nascent banking environment where transparency and other supporting infrastructures are poor,” the agency said in a statement.

“Standard & Poor’s considers these two banking systems to be more vulnerable when economic stimulus measures are withdrawn; a cyclical downturn can also cause asset quality to rapidly deteriorate.”

Ivan Tan, a credit analyst at Standard & Poor’s in Singapore, said in an email yesterday that the National Bank of Cambodia was too lax with banks in their compliance with regulations, a factor which could lead to high credit risk in the banking industry.

“Enforcement is an issue with the regulator taking a gradualist approach with banks, preferring to give extensions or waivers rather than imposing penalties for failure to meet requirements,” he said, raising questions over the central bank’s ability to enforce new capital requirements of $37.5 million by the end of the year.

Tal Nay Im, director general of the National Bank of Cambodia, said she had not seen the report but disagreed with the premise that the central bank is not strict enough in imposing regulations.

“I think that we are strict to implement and enforce regulation,” she said, declining to comment any further.

Mr Tan also said that Cambodian banks often do not produce audited financial reports on time or at all. He did not name any one institution specifically. Still, some banks here – big and small – have taken out advertisements in the print media highlighting their annual results.

“Reports are not available in [a] timely manner,” Mr Tan said. “Additionally, the true state of asset impairment in some banks is suspicious.”

While a credit information system is now in place, it is still not effective and a proper legal framework for secure transactions remains untested, he added.

Still, economists say that loan growth is expected to continue at a faster pace this year than last. But Mr Tan said that any growth would have to contend with poor security for transactions and a weak legal framework.

“This is exacerbated by generally weak supervision by the central bank. All this we believe could lead to high credit risk in the Cambodian banking industry,” said Mr Tan.

Economists say, however, that with banks lending less than 25 percent of gross domestic product, there is ample space for them to bolster the economy.

“The banking sector has made good progress over the past years both in terms of depth and coverage, and in terms of governance,” said Peter Brimble, chief country economist for the Asian Development Bank in Cambodia.

John Brinsden, vice chairman of Acleda Bank, said that Standard & Poor’s evaluation of Cambodia’s banking sector was overly critical.

“It is surprisingly negative and seems to go against what most observers have commented on recently,” he said.

“We are seeing steady but sustainable loan growth and quality loan growth,” he added, paying reference to efforts by the central bank to get to grips with corporate governance in making sure that people with the right qualifications and experience are working in the sector. “From what I hear from other banks we are not alone.”

Shining a more positive light on the banking sector, the International Monetary Fund last month said that credit growth in Cambodia could run beyond 20 percent in the second half of the year during an annual assessment of the Cambodian economy.

“The mission commended the National Bank of Cambodia for taking actions to safeguard the health of the banking system,” the IMF said in a statement at the time.

Mr Brinsden added that increased loan growth since the beginning of the year alongside high deposit levels were signs of a secure banking sector, despite high levels of interest being paid on those deposits.


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