Cambodia's financial sector escaped relatively unscathed from the
immediate fallout from the global economic crisis, but shocks to the
real economy are now starting to make their presence felt in local
banks. National Bank of Cambodia Governor Chea Chanto tells the Post
about the hidden upsides to the downturn
Photo by: Vandy Rattana
National Bank of Cambodia Governor Chea Chanto.
What measures are being taken by the central bank to prevent damage to the local financial market from the global financial crisis?
The NBC has closely monitored developments in the international financial markets and reflected them in our own system so we can remain vigilant for what could be threats to our own market. We have seen that the real estate sector can be the source for banking sector failure, so to prevent over-involvement of banks in that sector, the NBC issued a guideline to limit their loan portfolio to the sector. This was removed only recently as banks have showed prudence in their lending behavior and as the real estate market became subdued.
Meanwhile, liquidity monitoring and management has also been enhanced to ensure appropriate levels of bank reserves in response to customers' cash withdrawals. Furthermore, as lender of last resort, NBC has opened an overdraft facility for banks who may eventually be in need of liquidity. To enhance the soundness of banks, minimum capital has also been raised.
Prudential regulation has been strengthened through strengthening enforcement and compliance with the existing norms. In addition, various new regulations have been introduced to enhance bank soundness.
Does the dollarisation of the Cambodian economy limit the tools at the NBC's disposal to combat the effects of the global economic crisis?
We are fully aware of the constraints the use of US dollars pose to monetary policy implementation. But this does not mean the existing regime binds our two hands tightly and completely.
We still have several other tools, such as: the reserve requirement ratio, intervention in the foreign exchange market, our standing facility (overdraft) and our deposit facility for banks. Recently, we have reduced the statutory reserve requirement rate from 16 percent to 12 percent in order to lower the costs of banking operations and encourage liquidity support to boost the economy. Our international reserves now reach a level that is equal to 3.9 months of import coverage. This can also provide a cushion in times of financial stress. Prudential measures are also used to complement monetary tools, as mentioned above.
What are the driving forces behind the higher denomination riel notes the central bank is printing?
The last printing of a high denomination riel note was done in 1993 with the highest one valued at 100,000 riel (US$25). The reason was to encourage the use of local currency for large transactions. However, the general nominal income of our population is still relatively low. Therefore, we are now working on ensuring the quality of the notes under current denominations as demand for higher denomination notes is still limited.
Will Cambodia's capital savings for 2009 be affected by the dire economic conditions that are shrinking the savings of governments around the world?
In 2008, the government continued to build up savings at the central bank. International reserves also continued to accumulate. Although the pace of increase moderated compared to 2007, it still remained high at more than 30 percent year on year.
Lower capital inflows and expected slower economic growth in 2009 would likely reduce the growth rate of savings in the economy, but we are confident that we will not slip into recession and macroeconomic stability will continue to be maintained.
There have been significant capital outflows from Cambodia in recent months. Is the central bank considering legislation to limit this, and if it did, what do you expect will be the impact on foreign investment?
A regulation was issued in the aftermath of the 97-98 Asian crisis requiring banks to use deposits collected locally only within the country. This regulation is still effective. Businesses and investors are more concerned about investment opportunity, volatile market development, etc, rather than being concerned about the effect of such regulation.
Even as Cambodia's property market has experienced a strong downturn, we have not yet seen many foreclosures. Do you feel banks are resisting foreclosing on bad loans?
The mortgage market is particularly young in Cambodia. Unlike many other countries, the government and central bank do not encourage mortgage lending through guarantee programs or similar incentives. Therefore, banks have been relatively careful in selecting their clients and issuing credit. As of the end of 2008, mortgage credit represents only four percent of bank's total credit portfolios. In addition, the level of NPLs so far at about three percent has remained manageable by international standards.
On the whole, we do not think that bank foreclosure will be an issue threatening banking system stability in Cambodia, though NPLs could increase somewhat this year. But the global recovery that is expected to occur later this year or beginning 2010 would contribute to release pressure on local banking operations.
What was the volume of deposits received at commercial banks and loans distributed in 2008? How does it compare to 2007, and what are projections for 2009?
By the end of 2008, deposits and loans accounted for around 22.7 percent and 23.4 percent of GDP, respectively. This represents an increase of around three percent on levels recorded in 2007 for deposits and a rise of 55 percent year-on-year for credit.
Looking back to the 1997-98 Asian crisis, growth in GDP, credit and deposits was around two to three percent and recovered quickly the year after to double-digit growth of around 20 to 30 percent.
This time, although we face greater challenges than before, success in maintaining macroeconomic and financial stability during such a difficult period will contribute to strengthening public confidence in the economy and banking system. Therefore, deposits are expected to pick up 15 percent to 20 percent in 2009, bearing in mind the downside risk of slower capital inflow. On the credit side, given the existing financial excess and the capacity of the economy, credit growth could stabilise at 20 to 30 percent.
Does the central bank hold any interest in any commercial banks?
We believe that banks should be private-sector driven so that they can perform efficiently and professionally. Therefore, to avoid conflicts of interest, we have pursued the transformation from a mono-banking system to a two-tiered banking system in the early 1990s, which was completed when we last disinvested from the Foreign Trade Bank of Cambodia a few years ago. The NBC now has no interest in any commercial banks. Our role is purely in implementation of monetary policy and supervision.
There are serious concerns about the solvency of some banks in Cambodia. Can you comment on this? In there a danger that any of the banks will go under?
Liquidity and solvency positions are the two main indicators of NBC's prudential supervision, which we closely and regularly monitor. Especially during this critical period, prudential monitoring and examination has been particularly enhanced.
The latest indicators on bank performance showed that the average solvency ratio as of December 2008 is 28 percent compared to the minimum regulatory requirement of 15 percent. All banks have observed the benchmark.
Despite this encouraging result, we are now making further efforts to enhance public confidence and customers protection through establishing a transparent and effective exit policy, which will be reflected in our proposed amendment of the LBFI [Law on Banking and Financial Institutions].
There has been a drastic rise in the number of banks in Cambodia over the few years. Does this present any problems?
First, I should restate that one of the objectives set out in the long-term Financial Sector Development Strategy is to improve customer services and enhance efficiency of bank operations through competition. At the moment, despite the rapid growth of the banking system, financial outreach remains comparatively low with limited diversification in products and services available to potential customers. Therefore, to serve the above objective, the entry of new institutions in the system is welcome.
On the other hand, we want competition to coincide with quality and stability. Therefore, competition policy has to be accommodated by appropriate regulatory standards and supervision. The fight for quality has encouraged the NBC to improve licensing requirements effective September 2008, setting a higher capital base for banks and stricter criterion for management.
Besides improving regulatory norms, another challenge for us is to strengthen our own supervisory capacity. Building up our staff capacity in offsite and onsite examinations is an ongoing effort for the NBC, for which we are seeking technical assistance from various international institutions and friends such as the IMF, the ADB, and from some advanced central banks in the region.
There is also a rapid expansion in banking services offered, from delivery services such as ATM and mobile banking to new financial products, such as mortgages and insurance. What opportunity is there in these new services for the sector, and what challenges do these new services pose for the banking regulator and for the banks themselves?
The rapid expansion of the banking sector and the complexity of banking operations represents an enlarged portal for further development of our economy and is a welcome occurrence.
But as mentioned before, as a supervisory authority, we need to understand the nature of the new products, the benefits and the risks involved. We need to not only deepen the present field of supervision but to also expand it to cover new supervisory areas, to formulate appropriate codes of conduct and establish other business frameworks supportive of private sector growth. We also have to create incentives and encourage banks to enhance their risk management practices so that service providers, consumers and regulators can all maximise the benefits of the new products.