The National Bank of Cambodia has tripled the minimum capital requirement for commercial banks in Cambodia in an effort to tighten and strengthen the banking sector.
According to a copy of an NBC directive dated Friday, commercial banks in Cambodia are now required to have a minimum capital of 150 billion riel (about $36.5 million).
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,” according to the directive.
While the country’s four main banks—Acleda, ANZ Royal, Canadia and the Cambodian Public Bank—are likely to be unaffected by the change in conditions, it remains to be seen how many of the country’s 17 other commercial banks will measure up to the new rules.
The country’s six specialized banks, which only make loans and do not take deposits, must also increase their minimum capital to 30 billion riel (about $7.3 million) unless they have a bank or financial institution “influential shareholder” with an “investment grade” rating, according to the NBC directive.
All existing banks have until 2010 to meet the new requirements, the directive states.
National Bank of Cambodia Director-General Tal Nai Im said Monday morning that the new commercial bank requirements are aimed at making it more difficult for prospective banks to enter the sector in Cambodia.
“We will increase the minimum capital for commercial banks,” Tal Nai Im said by telephone. “The reason is to limit the number,” she said.
“Some banks that don’t have the minimum might have to withdraw,” she added.
The NBC’s 2007 Supervision Report measured the general health of the country’s banking sector by the increasing number of bank customers, which grew from 285,639 in 2006 to 456,026 in 2007, and the increase in deposits from $1.4 billion in 2006 to $2.5 billion in 2007.
Finance Ministry Secretary-General Hang Chuon Naron said that bank deposits had grown another $1 billion in the first half of 2008 and that he thought the banking sector was doing quite well in general, mainly due to increased customer confidence.
The new NBC protocol will go further to “make the banking system healthy,” he said by telephone Monday.
“We have 21 [commercial] banks, which is enough for the size of the market,” he said. “If we have too many banks, then existing ones won’t make any money.”
He declined to speculate as to whether smaller banks would fold or consolidate in the coming months, but said that “if they want to continue, they have to increase their minimum capital. If they don’t have it, they will have to voluntarily close down.”
Following the introduction of a 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-reducing the number of banks in Cambodia at that time from 31 to 17.
In the last few years, the number of banks has shot up again, which is something that International Monetary Fund’s Resident Representative John Nelmes warned puts undue strain on banking supervision.
“Banking supervision capacity has been improving, however there remains room for further improvement, and the increasing number of banks heightens demands on bank supervision,” Nelmes wrote by e-mail.
“I think what is perhaps more important than the number of banks in Cambodia, is the quality of banks…. Banks need to be well capitalized, well run and have solid banking knowledge and experience in providing banking services so that problems down the road are avoided,” he added.
ANZ Royal CEO Stephen Higgins expressed concern over the proliferation of banks at private equity firm Leopard Fund’s investor conference last week, and said by telephone Monday that the new measure announced by the NBC was probably good news for the country and the sector.
“For the big four [banks] that already qualify, it’s probably goods news. From the perspective of the country and risk of the banking sector, it’s good news,” he said.
“I would imagine some of the smaller banks are rather concerned,” he added.
Acleda CEO In Channy said Monday that the new restrictions were a positive development because they allow the sector an opportunity to fine tune sound banking principles and bolster its reputation among customers.
“We need banks with a strong capital base operating in Cambodia,” In Channy said, adding that at the end of 2007, the top four banks in Cambodia accounted for more than 80 percent of deposits.
Paul Freer, vice president of the Japanese-backed Maruhan Bank, which opened its doors earlier this year, said the new measure would not negatively impact his institution.
“It won’t affect us too much…. We have the funds available to inject,” he said, adding that they will simply add another $15 million to their existing capital of $25 million.
The minimum capital in Vietnam, he said, is about $100 million and is about to be raised another $60 million.
“If you put it into perspective, [Cambodia’s new terms are] not that high. But it will shrink the number of banks. Smaller banks will either consolidate or move out,” he said.
Vicente Contreras, operations manager at Cambodia Asia Bank, said he hadn’t yet received information on the new requirements, but was mildly concerned at the news.
“Yes, I am concerned, but I think we can meet this [new requirement],” he said, adding that their current capital is around $13 million.
Contreras said he believed that, realistically speaking, only one or two banks would be in trouble as a result of the NBC directive.