Most banks appear on track, but experts say others should be‘weeded out’
There are now less than three months before commercial banks in Cambodia must prove to the National Bank of Cambodia that they have raised a minimum capital base of 150 billion riel, or about $37.5 million.
The requirement, part of a law that came into effect in 2008 based on recommendations by the NBC, was adopted to make sure banks have collateral against shocks to the industry.
Experts and bankers say it is imperative the central bank enforces the new capital requirements in order to weed out weaker banks in what is generally considered to be an oversaturated sector, one that now supports 27 commercial banks.
But there are still doubts over whether the central bank will ensure that the capital requirements are met. And it has not yet been made clear to the public what will happen to those banks that are not compliant after the deadline, or whether banks with a substantial foreign partner are exempt from reaching the $37.5 million in capital.
The National Bank of Cambodia “has a tough task on hand. That is, balancing [and] enforcing prudential norms without causing distress in the banking system,” said Deepali Seth-Chhabria, an associate at credit rating agency Standard & Poor’s in Singapore.
“So far, we have noticed that the NBC has been a bit lenient in enforcing capital norms. We feel that at some point in time—end of 2010 or a revised deadline—noncompliance should be taken seriously by NBC and noncompliant banks be weeded out,” he added.
Standard & Poor’s said last week that poor enforcement of regulation in Cambodia’s banking sector would likely result in lower levels of growth compared to other countries in the region.
Nevertheless, the last time the national bank upped capital requirement in 1999, raising the minimum capital requirements for commercial banks from $5 million to $12 million, 14 out of 31 banks in Cambodia were forced to close their doors.
According to the bank’s latest ruling, signed on Sept 19, 2008, all commercial banks in Cambodia must have attained a minimum capital requirement of 150 billion riel, or about $37.5 million by the end of 2010.
Failing that, they can acquire a recognized investment grade from a “reputable rating agency,” allowing them to lower their capital requirement to 50 billion riel (about $12.5 million).
So far, very few banks here have acquired an investment grade.
Acleda Bank is currently the only bank in Cambodia to have been given a stable rating by Standard & Poor’s. Moody’s rates both Acleda and Cambodia Public Bank, both of which received a stable rating. And FitchRatings doesn’t cover any of Cambodia’s banks.
What’s more, as of the beginning of the year only six banks had the required level of capitalization needed under the new regulations, according to central bank data.
So far, the NBC has revealed very few details on how many banks will meet the new requirement and what will happen to those who finish the year noncompliant.
Bankers say foreign banks with a parent company that has capital of more than $37.5 million would in fact be compliant, as would a subsidiary of a foreign bank with a recognized credit rating. All but four banks in Cambodia are subsidiaries of foreign banks or have foreign shareholders.
Tal Nay Im, director-general of the NBC, said most banks in the country had already complied with the regulation, though she failed to give an exact number.
Asked how many banks in the country have not complied with the regulations, Ms Nay Im said, “There are some, but not many.”
For banks that don’t comply, the central bank “will continue to take actions,” Ms Nay Im added, though she declined to discuss what those actions would be.
Many banks do seem to be making strides toward compliance.
A manager at Cambodia Mekong Bank, who spoke on the condition of anonymity due to company policy, said the bank had fulfilled the new capital requirement earlier in the year.
Han Peng Kwang, senior vice president at Hwang DBS, said his bank had met the new capital requirement last week and that the national bank had already classified the bank as compliant
“My parent company [in Malaysia] injected the balance into the subsidiary in Cambodia,” he said.
Lim Loong Seng, chief operating officer for OSK Indochina Bank, also said his bank had also already met the minimum capital requirement, in May.
“The way the NBC has been monitoring the financial institutions’ loan book…and the way they interpret nonperforming loans have been very stringent,” he said.
Baburam Gyawali, chief financial officer at Advanced Bank of Asia, said $23 million had already been raised toward the new capital requirement and that the remaining amount would be raised by the end of November.
Asked whether he thought the central bank would be strict in enforcing the minimum requirement, he said: “In our opinion, NBC would be strict to enforce…regulation in regards of minimum capital requirement as per their correspondence with all banks.”
All of these banks were still not compliant with the new capital requirement at the beginning of the year, central bank data show.
Stephen Higgins, CEO of ANZ Royal Bank, said banks that don’t comply would have “fairly limited” options to continue operating.
“The NBC have a pretty good track record in enforcing their rules, and I’d be very surprised if it didn’t happen in this case,” he said. “I think transparency here is actually pretty good given the banks aren’t listed, and it’s better than quite a few other countries in Asia.”
(Additional reporting by Phann Ana)