Central Bank In Talks to Up Reserve Rate

The National Bank of Cam­bodia is considering raising the reserve requirement on banking de­posits in order to curb inflation and reduce the chance of the eco­nomy overheating, an official at the bank said yesterday.

Ngoun Sokha, director general of the NBC, said that officials at the central bank were looking to tackle rising inflation, which reached 6.5 percent in May compared to the same month last year.

Increasing the reserve requirement will require banks to hold a higher percentage of their depo­sits at the central bank, which in return will reduce liquidity in the system, squeeze credit growth and curb inflation.

“We are monitoring the price development in the market,” Ms Sokha said. “We notice that inflation is on the rise, and given the signs of liquidity overhangs and signs of overheating in the economy we might increase the reserve requirement.”

Ms Sokha said the new reserve requirement would be decided upon during a monetary policy committee meeting next month and that it could be as high as 16 percent, up from 12 percent currently. “It is still being discussed,” she said.

The NBC last changed the re­serve requirement in January 2009, from 16 percent to 12 percent, as a response to the global financial crisis. The idea was to try to free up liquidity in the market and encourage lending. At that time, the NBC also offered millions of dollars worth of overdraft protection for banks.

Since then, Cambodia’s economy has recovered—the government estimates GDP growth this year will reach 6.7 percent—business profits are up and inflation concerns are mounting.

In the first five months of this year, total loan portfolios in the banking system have increased by 10 percent to $3.59 billion compared to the beginning of the year, according to central bank data. That comes after loans in the system grew by 29 percent in 2010 to $3.26 billion

Deposits currently in the banking system amount to about $4 billion, while the loan-to-deposit ratio stands at 75 percent.

Banks here are enjoying a period of sustained growth in lending as well as high levels of deposits. Increased lending after the crisis, which first came about in the second half of last year, materialized after banks struggled to make profits as they lost money on spending high levels of interest on deposits.

Dieter Billmeier, vice president of Canadia Bank, said that a hike to the reserve rate would not hurt bigger banks much, but could hit smaller ones hard, especially those that are already struggling with liquidity issues.

However, when new minimum capital requirements of $37.5 million came into force at the beginning of this year, only two commercial banks downscaled to specialized banks in a sector of nearly 30 commercial banks, a development that surprised many.

“As far as big banks are concerned it won’t hurt us too much because our liquidity position is very good,” Mr Billmeier said.

For smaller banks, he said, “that would be another ball game.”

Baburam Zyawali, chief financial officer for Advanced Bank of Asia, said that raising the reserve rate was not a good move for the banking sector as taking liquidity out of the sector would slow economic growth.

“I think it is not necessary in the market where the importance is liquidity,” he said, adding that a bank could be forced to raise interest rates on deposits to increase liquidity as a result of such a move.

He said that at ABA, deposits had grown by 107 percent to $162 million in the first six months of the year. The bank’s loan portfolio also grew by 101 percent to $96 million.


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