NBC regulations offer frequent stress-test for commercial banks

NBC regulations offer frequent stress-test for commercial banks

A set of regulatory processes initiated by the National Bank of Cambodia (NBC) is proving out to be a stress-test for commercial banking institutions in the country, a white paper on the performance of Cambodia’s banking sector for the years up to 2024 has found.

The white paper produced by YCP in association with Confluences titled ‘The Declining Profitability Trend in Cambodia’s Banks: The Impact of Rising Costs and NPLs’, observed that the regulatory environment plays a crucial role in shaping the banking sector’s operations, risk management practices, and overall stability.

“As Cambodia’s banking industry evolves, so does its regulatory framework. Understanding these regulatory changes is essential for banks to maintain compliance, manage risks effectively, and identify new opportunities within the bounds of legal and supervisory requirements,” the white paper said.

It pointed out that the Cambodian banking sector is undergoing significant changes shaped by evolving regulatory policies. “The NBC has introduced several measures to stabilise the sector amidst rising NPLs and declining profitability.

“Key regulations, such as the moratorium on loan repayments and adjustments in reserve requirement ratios, were initially aimed at providing relief during the pandemic. However, as the economic landscape normalises, these policies are being recalibrated to balance risk management with growth.”

The white paper emphasised that one of the most impactful changes has been NBC’s tightening of reserve requirements, which increased from eight percent to 12 percent in recent years. “This policy aims to mitigate financial risks by ensuring banks maintain adequate capital buffers.

“However, it has also reduced the liquidity available for lending, affecting the sector’s profitability. In addition, NBC has imposed stricter guidelines on NPL classification, which has led to a surge in reported NPLs as banks adjust to these new standards.”

To further enhance financial stability, the white paper said, NBC is introducing additional stress-testing requirements for banks. “These measures compel institutions to evaluate their resilience against potential economic shocks, fostering a more robust risk management culture.

“The introduction of the Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) framework is another critical development, compelling banks to invest in compliance systems and procedures to align with international standards.”

The apex bank is expected to continue refining regulatory policies to balance growth with stability. The white paper asserted that this presents both challenges and opportunities for banks. “Adapting to a stricter regulatory environment will require enhanced risk management practices, greater transparency, and a focus on maintaining adequate capital reserves.

“As the regulatory landscape evolves, banks that are agile and proactive in complying with these changes will be better positioned to capitalise on new market opportunities while minimising risks.”

It added that the banks in the Kingdom are set to experience strong competition in the coming days. “With projected economic growth, banks will likely use consolidation tactics and increase exposure to personal loans to not only compete but also grow. However, to maintain profitability and competitiveness in a growing economy, banks will need to increase their risk appetite while also finding a way to operate more efficiently than their competitors.”

khmertimeskh