The National Bank of Cambodia’s (NBC) recent two-pronged prakas on capital buffers and the capital adequacy ratio (CAR) of banking and other deposit-taking institutions, which aims to provide a clearer classification system for assets, is poised to strengthen the industry and enhance risk resilience, local pundits have said.
The June 29 prakas, part of the Capital Adequacy Framework, establishes criteria for designating assets as “tier 1” or “tier 2” capital, and is intended to improve risk management across the board and more broadly influence development in financial markets, according to the central bank.
Generally speaking, “tier 1” capital is a financial institution’s core capital that it uses to conduct daily business and that is freely and always available to absorb losses without the bank having to halt trading, whereas “tier-two” capital is supplemental capital held in reserve that is typically harder to calculate precisely and more difficult to liquidate.
“These two prakas were drafted to international standards, considering the context, development and future vision of Cambodia’s banking and financial systems, along with pertinent legal and regulatory elements in force,” the NBC said.
The adherence to international norms outlined in this prakas will enhance the standing of the Cambodian banking system, and foster confidence among investors and lenders, particularly those based overseas, it said.
In an interview with The Post on July 2, Cambodia Post Bank Plc (CPBank) CEO Toch Chaochek stressed that the new prakas sets more precise benchmarks and standards for calculating risk-weighted assets, and claimed that the instrument will bolster security as well as capital adequacy and resilience among the Kingdom’s financial institutions.
Providing an example using the document’s guidelines, Chaochek stressed that sovereign bonds are recognised as being less risky than other securities.
In another example, Chaochek underscored that small- and medium-sized enterprises (SME) which are properly registered and seek loans with assistance from state-owned enterprise Credit Guarantee Corporation of Cambodia Plc are less risky than their counterparts that do neither.
Similarly, Royal Academy of Cambodia economist Ky Sereyvath remarked that the prakas is designed to improve and inform implementation in the banking and financial sector, which he underlined is key to the nation’s economic growth.
The NBC expressed support for lending to smaller businesses, noting that the benchmark risk weight was reduced to 75 per cent for properly registered SMEs that can produce appropriate financial statements.
The central bank also made a point of demonstrating its support for agriculture, education, public welfare and home purchases, highlighting an easing in risk-weighting for reasonably-sized loans provided to individuals.