IMF published its staff report under the 2018 Article IV Consultation with Cambodia. Directors welcomed the policy efforts to safeguard financial sector stability. However, noting the elevated vulnerabilities, they stressed the need for additional targeted macro-prudential measures. They recommend that priority should be given to raising risk-weights for real estate lending, introducing a crisis management framework with a deposit insurance scheme, and continued upgrading of regulation and supervision.
The staff report highlights that financial sector vulnerabilities are elevated. The bank credit-to-GDP gap is expected to remain close to the BIS threshold of 10 percentage points. While banks’ capital adequacy has increased, vulnerabilities remain. Financial institutions continue to draw on external funding, suggesting liquidity risks as global financial conditions tighten, with the average loan-to-deposit ratio at around 100% in June 2018. Bank profitability declined, as interest margins fell and non-performing loans (NPLs) edged up. The true level of NPLs may still be understated. Furthermore, risks to the banking system have also increased due to the increasing household and corporate leverage. Despite the interest rate cap, which has increased the average loan size and may have pushed some borrowers to the informal sector, micro-finance institution (MFI) credit growth remains high at above 30%, adding to easy credit conditions.
The report notes that the authorities are taking welcome steps to safeguard financial stability. These include phased implementation of a capital conservation buffer, introduction of a liquidity risk management framework, improvements in loan classification of banks, and revisions to provisioning rules, to be implemented by 2019, when all banks should comply with International Financial Reporting Standards. Nevertheless, given the still elevated risks, additional prompt macro-prudential action is needed.
- Moderating the credit cycle. Priority should be given to targeted measures, such as raising risk-weights for real-estate-related lending commensurate with the risk profiles of banks.
- Enhancing regulation and supervision. Supervisory capacity remains stretched and the National Bank of Cambodia should consider limiting new banking licenses until capacity is sufficiently scaled up. The authorities should finalize and implement regulations on related-party lending and large exposures to align them with international best practice and conduct regular validation exercises to ensure accurate reporting. Capital adequacy regulations for risk-weight calculations need to be upgraded to ensure adequate capital buffers. The MFI interest rate cap should be phased out and MFI sectoral loan classification aligned with that for banks.
- Introducing a comprehensive crisis management framework. To better coordinate policies across government agencies and improve information-sharing, the authorities need to finalize the establishment of the national Financial Stability Committee. To help mitigate liquidity risks and bolster confidence, progress on introducing a deposit insurance scheme and a bank resolution framework should be expedited.
Related Link: Staff Report
Keywords: Asia Pacific, Cambodia, Banking, NPLs, Financial Stability, Article IV, IMF
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