Cambodian financial institutions have until the end of the day to submit their plan to the central bank on how they intend to meet its revised capital requirements, and experts predict that some may decide it is better to downsize or close shop.
In March, the National Bank of Cambodia (NBC) issued a prakas that doubled the minimum capital requirement for most banks and sharply increased the threshold for microfinance institutions (MFIs).
A circular issued on June 16 mandated that lenders must complete at least half of the capital increase by the end of March 2017, with the remainder to be fulfilled by March 2018. It also gave lenders six months to submit documentation to the NBC outlining how they intended to raise the additional capital.
Banks and MFIs unable to accomplish this with their own resources were given four choices: take on new investors, merge with other institutions, downgrade their operating status, or voluntary liquidation.At least one financial institution that Post Supplement spoke to indicated that it was considering dissolution, though a decision had not been finalised at press time.
This was the third time in 20 years that the central bank raised the minimum capital requirements, with the two earlier increases announced in 1999 and 2008. Cambodia’s GDP has grown almost five fold during that period, while its financial sector has expanded eight-fold since the last increase.
NBC officials have said the decision to increase capital buffers was prompted by the growth and maturation of Cambodia’s financial sector, aimed at increasing the resilience of banks and MFIs, and ensuring their ability to withstand shocks.
Investment firm Mekong Strategic Partners said in a March investor note that it expected more than a third of commercial banks and a quarter of MFIs to struggle to meet the new requirements within two years. It projected that at least 15 commercial banks and dozens of MFIs could be weighing their options.
Banking and insurance prakas
A prakas issued by the National Bank of Cambodia on March 22 gives banks and microfinance institutions (MFIs) operating in Cambodia two years to meet its revised minimum capital requirements.
The prakas requires commercial banks, including subsidiaries of foreign banks, to hold a minimum of $75 million in registered capital, up from $37.5 million. The requirement for commercial banks that are subsidiaries of investment-grade foreign banks was adjusted to $50 million, up from $12.5 million, while specialised banks are required to raise their minimum capital to $15 million, from $7.5 million.
The bar is raised even higher for the Kingdom’s microlenders. Deposit-taking MFIs are required to increase their minimum capital to $30 million, up from $2.5 million, while MFIs not licensed to receive deposits must raise their capital to $1.5 million, from the previous level of just $62,500.
“We expect to see some consolidation at the smaller end of the MFI market, although given the very small size of these MFIs, the overall impact on the sector will not be material,” it said.
The NBC’s minimum capital requirements make no distinction between financial institutions with a chain of branches, and those operating a solitary branch – encouraging banks and MFIs to gravitate toward economies of scale.
Corporate heads of Indian state-owned Bank of India, which has operated a single branch in Phnom Penh since 2009, met this week in Mumbai to discuss their options.Viveka Nand Dubey, chairman of Bank of India Phnom Penh branch, said the bank would need about $20 million to meet the capital adequacy requirement, but its board would have to determine whether the small Cambodian operation could generate an adequate return on equity to justify the additional investment.
“Whatever capital we bring in we will have to deploy it, but where?” he said. “We’ll have to increase our loan portfolio, but if you deploy money and it is not returned you’ll not even earn a single penny.”
Meanwhile, deposit-taking MFI Amret, which last year posted $2.8 million in share capital, will need to raise an additional $27 million to reach the new capital threshold. Its management, however, is confident it has sufficient funds to support the increase by diverting retained earnings and share premium.
“Amret currently has total equity of around $100 million, with $540 million in outstanding loans, which is strong enough for the new capital requirement, as well as our operation as microfinance deposit-taking MFI,” said Amret CEO Chea Phalarin.
While Amret has over 140 branches nationwide from which to tap earnings, Farmer Finance has just a solitary branch in Phnom Penh with a modest $400,000 loan portfolio.
However, Farmer Finance director Yon Leenam said he had already submitted documents to the NBC outlining the MFI’s plan to increase its capital from $200,000 to the required $1.5 million. He said the additional capital would be supplied next year by the MFI’s existing shareholders.
The NBC’s revised minimum capital requirements appear to have catalysed Farmer Finance’s expansion plans.“With this larger capital injection, we will probably open one branch in the province,” Leenam said. “There is no time limit targeted for building the loan portfolio to cover the additional capital. We will do it slowly and carefully.”