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Logo of Phnom Penh Post newspaper Phnom Penh Post - Proposed changes to reserve requirement meets controversy

Proposed changes to reserve requirement meets controversy

A proposed increase in the reserve requirement would decrease lending and slow Cambodia’s economic growth, according to some bankers and experts.

The National Bank of Cambodia is set to hold a meeting later this month discussing a possible raise of the reserve requirement from 12 percent at present to 16 percent, seeking to rein in inflation which NBC officials have said could hit 9 percent this year.

The reserve requirement sets the amount of capital commercial banks must hold rather than lend out, and raising the rate would lower the amount banks are able to lend to customers.

HwangDBS Commercial Bank Plc General Manager Han Peng Kwang said an increase to the reserve requirement could make it more difficult to obtain a loan in Cambodia.

“If NBC decides to increase the reserve requirement rate, then the bank will have less funds for lending and thus will reduce the amount of borrowing in the banking industry,” he said.

Economist Kang Chandararot at the Cambodia Institute for Development Study said the NBC should find another solution to curb rising prices, rather than using the reserve requirement rate.

Rising inflation particularly in food prices was not coming from the internal economy, he said.

“The inflation we have here is not derived from the increase in purchasing power as in China. It is imported inflation,” he said. “If the NBC uses this policy, it will just place a larger burden on us.”

He advocated increased development of the agro-industry as a means to combat increases in food prices. The policy change could also hamper loan growth and cause an increase in interest rates at Microfinance Institutions, said Cambodia Microfinance Association President Chea Phalarin. However, the decision could help in protecting the industry and stabilising the economy, he said.

Larger banks say the impact of a raised reserve requirement would mostly impact Cambodia’s smaller banks.

Cambodia’s largest banks are sitting on an ample liquidity cushion and would not be too affected, but some smaller banks may have to tighten their “loan-belt”, wrote Canadia Bank Vice President Dieter Billmeier.

“[An increase] could slow down the flow of new loans into the Cambodian economy, because there will be less funds available for fresh loans,” he said.

“However I believe that the market will understand and accept the need of the NBC to have tools in place to deal with inflation threats.”

Some experts defended a possible raise to the reserve requirement, saying it was important to rein in inflation.

Given the highly dollarised domestic economy, the NBC has constrained options available to deal with inflation, as it cannot set interest rates, wrote Kookmin Bank Cambodia President Jang Ki-Sung. “I think the only effective way is to control banking reserve requirements and it is inevitable to fight inflation,” he said.

“Kookmin Bank Cambodia will be very cooperative with NBC to control inflation and ready to follow its monetary tightening policy.”

On Monday, Nguon Sokha said the National Bank of Cambodia was to hold a meeting on the issue, adding nothing had yet been decided.

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