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Banking still on a growth path

Motorists drive past the head office of the National Bank of Cambodia in Phnom Penh this year.
Motorists drive past the head office of the National Bank of Cambodia in Phnom Penh this year. Heng Chivoan

Banking still on a growth path

Total deposits and loans in Cambodia’s banking sector increased last year, albeit at a slower pace than in 2014, as banks and microlenders continued to expand their activities, a report released yesterday by the central bank showed.

By the end of December, deposits at 36 commercial and 11 specialised banks reached $11.5 billion, a 16.7 per cent increase from about $10 billion at the end of 2014, according to the annual supervisory report of the National Bank of Cambodia.

The report showed that outstanding loans reached $12 billion by the end of last year, up 25.8 per cent from 2014.

It also found the loan-to-deposit (LTD) ratio average across the sector officially surpassed the symbolic 100 per cent mark, an indication that banks may not have enough deposits to cover their lending activities.

Sim Senacheert, CEO of Prasac Microfinance, said the LTD ratio had increased gradually on the Kingdom’s fast-rising credit demand and was a “cause for concern”.

However, he said the central bank’s recent moves to increase the liquidity coverage ratio (LCR) and minimum capital requirements should inevitably slow lending.

“Because the central bank issued a higher liquidity ratio, this should improve the loan-to-deposit ratio and reduce the credit risk while slowing lending,” he said.

For the fast-growing microfinance sector, where total lending grew by 47.1 per cent last year to $3.6 billion, from $2.4 billion in 2014, Senacheert said the minimum capital requirements placed on MFIs including deposit-taking institutions was a move in the right direction to shore up the sector.

At the end of 2015, nearly a third of the paid-up capital of MFIs was from local sources, up from just 23 per cent a year earlier. Senacheert said the increased proportion of local finance was largely the result of deposit-taking MFIs borrowing from commercial banks to reach the minimum capital threshold quickly.

“This helps protect the microfinance lenders because they don’t need to be as reliant on increasing individual deposits,” he said.

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners, said that the rate of overall deposit growth – while declining from 32 per cent in 2014 to 16.7 per cent last year – would be acceptable in most developing countries.

However, “the problem in Cambodia is that we are seeing excessive loan growth, and deposit growth is a bit light by comparison,” he said.

Nevertheless, he downplayed the over-100 per cent LTD ratio, saying that it was typical for a rapidly growing market.

“A loan-to-deposit ratio above 100 per cent isn’t necessarily a bad thing,” Higgins said. “It basically reflects that Cambodia is importing capital via the finance sector, which it needs to do to support the level of investment required.”

He added, however, that the high ratio was still something that needs to be carefully monitored.

While Higgins said that the banking sector’s newly instituted LCR was already being felt, forcing some banks to ease the growth of their lending books, the minimum capital requirements would take longer to yield results.

“It will take the smaller banks a period of time to work out what their strategic options are,” he said. “However, given they take effect in less than two years, the affected banks will need to move quickly.”

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