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New reserve requirements put banks under pressure

New reserve requirements put banks under pressure

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The National Bank hopes that raising the minimum amount of money institutions must have will strengthen sector 

Tracey Shelton

A teller counts money at an ANZ bank branch in Phnom Penh.

The National Bank of Cambodia this week announced two new measures to increase capital reserves amid a US financial meltdown.

In an official document entitled "New Requirements and Criteria for Licensing Approval of Banks", the NBC upped capital requirements for commercial and specialised banks to 150 billion riels (US$37.5 million).

The prakas would apply to locally incorporated commercial banks "with at least one influential shareholder".

In addition, rural specialised banks with single or multiple shareholders will require reserves of at least 10 billion riels and 30 billion riels, respectively.

"We have announced these measures in order to strengthen the financial status of banks in Cambodia," Tal Nay Im, director general of NBC, told the Post  Wednesday.

Rapid economic growth in the Kingdom has led to a banking boom, with local and foreign banks tapping both the commercial and retail market.

'Fewer startups'

One local financial expert said that the new rule is largely intended to cut the number of new startups in the overheating sector.

WE ANNOUNCED THESE MEASURES ...TO STRENGTHEN THE FINANCIAL STATUS OF BANKS IN CAMBODIA.

"The government is worried about the number of new bank applications. They don't want to say ‘no' to new investment," said the official who asked not to be named.

 "This government is saying,  ‘We welcome new banks, but you do have to be stronger financially'," the official said.

He added that the new rule could lead to consolidation in the industry with smaller banks merging or partnering with larger banks.

The new regulations will take effect immediately, according to the bank announcement, but institutions licensed prior to the changes will have a grace period to comply.

Banks licensed before the adoption of the new regulations "shall increase their capital equal to the minimum capital ... no later than the end of 2010," the document stated.

In Channy, CEO and president of Acleda Bank, said the new capital requirements would enhance liquidity and increase confidence in the banking sector.

He said Acleda already exceeds the minimum capital requirements but that weaker banks could be adversely affected.

Charles Vann, deputy general director of Canadia Bank, agreed that the new measures would protect and strengthen Cambodia's banking sector.

He said the rules were less a reaction to troubles in foreign markets than an effort to improve the economic climate at home.

"My bank will not be affected by the new requirements because we have plenty of capital to meet the new NBC regulations," he said.

Impact on small firms

Although large banks are expected to be unaffected by the rule, experts said small companies could be forced to close.

Pech Vannthoeun, general manager of the Peng Heng SME Specialised Bank, said his institution has no connections to prominent shareholders or outside investors.

"If we had to comply immediately with the new regulations, we would face problems," he said.

"But we have until 2010 to increase our reserves, and I intend to look for partnerships with foreign investors to help the bank."

He said in the short term the bank would try to increase capital on its own to avoid relying on outside shareholders.

"I still think the new regulations are an important step because higher capital reserves will allow banks to extend more credit and low-interest loans to local borrowers," he said.

A biannual report released by the central bank in August showed inflation spiked to 25 percent in the first half of 2008, driven by unprecedented lending and higher investment, as well as rising global commodity prices.

The bank had responded to inflationary concerns two months prior by bumping capital reserve requirements from eight to 16 percent.

"The NBC is well aware of the challenges that private sector growth and foreign investment could pose for the stability of the banking sector," NBC Director General Chea Chanto told the Post in June.

ADDITIONAL REPORTING BY GEORGE MCLEOD

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