The National Bank of Cambodia (NBC) is set to hold its 134th liquidity-provided collateralised operation (LPCO) on July 25, making 90 billion riel ($22 million) available to local financial institutions in need of liquidity, through an auction to buy US dollars.

Introduced in October 2016, LPCOs provide the NBC – the Kingdom’s central bank – indirect control of Cambodia’s money supply by offering riel-denominated credit to commercial banks and microfinance institutions (MFI) via Dutch auction, in a bid to prop up domestic liquidity of the local currency.

Bid winners are required to put up negotiable certificate of deposits (NCD) as collateral.

The auction is to offer three options for repurchase agreements, or repos, 15 billion riel with tenors of either 91 days (three months) or 364 days (one year), or 60 billion riel with a 182-day (six-month) maturity.

In March 2020, the NBC reduced its LPCO interest rates by 0.5 percentage points, bringing them to 2.5 per cent for one-year, 2.3 per cent for six-month, and 2.1 per cent for three-month maturities.

The central bank reported that 24 LPCOs were held in 2022, making 1.5 trillion riel available, which marked a nearly one-half decline compared to 2021.

In the days before the October 18, 2016 inaugural LPCO, Chea Serey – who is currently deputy governor of NBC – outlined a number of objectives for the operations, such as keeping riel interest rates low and encouraging use of the local currency.

Others included establishing benchmark rates to guide monetary policy, promoting NCDs and their use as collateral in inter-bank market transactions, and even bolstering agricultural sector development.

She remarked that the success of LPCOs would make managing the banking industry simpler.

Cambodia Post Bank (CPBank) CEO Toch Chaochek told The Post on July 19 that his bank has taken part in many LPCO auctions due to a lack of local currency liquidity, praising them as “very helpful”.

The NBC requires banks – as well as MFIs – to hold a minimum 10 per cent of their loan portfolio in Cambodian riel, he noted. “Due to the fact that the deposits we receive from consumers are largely in US dollars, LPCOs are a necessary financial instrument for us,” he said.

The majority of financial institutions’ capital is denominated in US dollars, which necessitates the use of NCDs or term-deposits as collateral with the NBC to bid on local currency for their operations, according to Chaochek.