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Logo of Phnom Penh Post newspaper Phnom Penh Post - Central bank tightens money supply

Central bank tightens money supply

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4-money.jpg

Tracey Shelton

In late July, banks will have a little less money to count out for loans as mandatory reserve requirements are doubled from 8 to 16 percent.

An upcoming central bank move to impose higher capital reserves requirements on the Kingdom’s commercial banks is aimed at killing two birds with one stone: battling inflation by tightening credit and the money supply, and giving banks a greater hedge against risk.

In late July, the National Bank of Cambodia will raise the minimum level of capital reserves banks are required to hold, the bank’s deputy director general Phan Ho told the Post on June 19.

 

Doubling the reserves requirement from eight percent to 16 percent of a bank’s capital would comply with an International Monetary Fund (IMF) recommendation made after the recent US credit crisis, Ho said, noting that credit growth in Cambodia had been faster than expected.

“We want the growth to be sustainable,” he added. “We don’t want to see it shoot up 80 percent so that we can’t control the inflow and outflow of money.”

Too fast an inflow of money would cause excess liquidity and be inflationary, he said. The amount of money in circulation needed to be proportionate to the growth of the economy.

“If there’s a jump now, we can’t control it. Remittances from outside, from Cambodians overseas, are also growing and hard to measure,” he said.

“The depreciation of the US dollar has also had some effect on our economy,” he added.

An IMF team that visited Cambodia in early June urged a tightening of monetary policy as a complement to fiscal prudence, with increasing reserve requirements viewed as an appropriate step to help contain inflationary pressures, said a subsequent IMF report.

“This would help rein in very high credit growth and thus be able to reduce demand pressures that have contributed to inflation,” said the report.

Inflation had spiraled to more than 18 percent in January, the last month that the government issued updated rates.

In Channy, CEO of Acleda Bank Plc, said he was worried the policy would do little to curb inflation but would discourage general lending to businesses.

Most of Acleda’s $445 million loan portfolio, he said, was in commercial loans, with only two percent borrowed by consumers. Tightening credit would do little to slow consumer spending but could retard economic growth, he suggested.

“The more commercial loans there are, the more business and the more the economy grows,” Channy said.

Huot Vanthan, a shareholder with Maruhan Japan Bank, said he backed the central bank move to raise reserve requirements because it would avoid inflation and help depositors if commercial banks face a crisis.

Banks were lending too much for real estate speculation and construction, Vanthan said.

“Everyone spends money on land, but land doesn’t generate economic growth.”

Nov Mean Samnang, a business consulting officer at Cambodia Development Specialized Bank, said commercial banks were already anticipating the higher reserve requirements and had reduced new loan approvals.

Imposing higher capital reserve requirements was also a risk management tool, helping ensure that Cambodian banks don’t face insolvency if they see an increasing number of bad loans.

“In the past, we had the problem of many customers failing to repay loans on time,” said In Siphann, senior vice president and head of the credit division at Acleda.

“Bad loans are down to 0.08 percent this year, from two percent in 2001 and 2002.”

“We’ve seen the number fall because our staff has greater experience,” Siphann said.

“Both the authorities and the public also have a greater understanding of the banking system.”

Despite official policies to tighten credit growth, the market is seeing brisk competition among the large number of banks for new loan customers.

“With more banks competing, interest rates will be lower,” Siphann said.

(Additional reporting by Thet Sambath)

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