Banking sector calls for cut in reserve rate to bolster liquidity

Photo by: Sovann Philong
The National Bank of Cambodia says it has no plans to cut the reserve rate.

The Phnom Penh Post
http://www.phnompenhpost.com/

Written by Nguon Sovan and Steve Finch
Monday, 25 May 2009

ANZ, UCB and Canadia Bank call for rates cut with NBC responding that it will stay at 12pc.

SOME of the country's largest banks have called for a cut in the reserve requirement in a bid to free up capital and boost lending, a move that the NBC appeared to reject on Sunday in saying that the rate would stay at 12 percent.

The reserve requirement forces banks to deposit a percentage of capital in the National Bank of Cambodia (NBC), partly to control lending and stem inflation.

"The central bank needs to slash the reserve requirement to 8 percent or 10 percent," Yum Sui Sang, president and CEO of Union Commercial Bank, said Thursday. "If the NBC reduces the reserve, it will be easier for the bank to lend funds. Every bank will benefit and we will get more liquidity."

The NBC increased the rate from 8 percent to 16 percent in July as money supply began to overheat last year before cutting the rate back to 12 percent in January when the wider economic crisis began to hit the financial system.

Because Cambodia is a dollar-based economy, the NBC cannot adjust interest rates, leaving the reserve requirement as one of the few regulatory tools at its disposal.

With inflation and economic growth continuing to slow, many bankers say a lower reserve requirement will give them flexibility while pumping liquidity into a cash-starved economy.

"I think the central bank should do it now to lighten pressure on the banks. Business is not good and people are just trying to survive," said Yum Sui Sang, whose clients are mostly garment manufacturers from Hong Kong and Macau.

"I have not heard anything about the central bank getting ready to lower the reserve rate, but if it lowers [the rate] ... it will be great for us," he said, adding that maintaining liquidity should be the top priority for policymakers.

"Our bank's liquidity is still high - 40 to 45 percent of liquidity against deposits - because our lending is about 65 percent of current total deposits of around US$90 million," he said.

Charles Vann, executive vice president at Canadia Bank, said at the end of last week that the banking industry is looking for the reserve rate to be cut "to at least 8 percent, the old [rate]".

"I think the National Bank of Cambodia is looking at this question [of lowering the reserve rate] at the moment," he said, without offering additional details. "We cannot release information about this at the moment.

In response, the NBC said Sunday it had no plans to alter the reserve requirement.

"We have not received any formal request from the banks, and the NBC is still maintaining the reserve requirement at 12 percent," said NBC Director General Tal Nay Im.

An ANZ spokesman said his bank is in line with other members of the private banking sector.

"We would welcome a rate reduction to the original 8 percent as this would release liquidity into the Banking system," James Lowrey, head of Corporate and Institutional Banking, wrote in an email Thursday. "This has been a common instrument used in many countries around the world to counter the impact of the economic crisis."

He said that the NBC is constantly reviewing the market situation.

"We understand the system of liquidity, whilst under pressure in the first quarter of 2009, the situation may have improved slightly in the past two months. However, we also believe the remainder of 2009 will be challenging for businesses in Cambodia," he said.

Vattanac Bank declined to respond to questions Thursday on the NBC's reserve rate.

John Brinsden, vice chairman of ACLEDA Bank, said that he would welcome a reduction in the reserve requirement, but added that the bank already had sufficient liquidity.

"In principal, a lower reserve requirement means more flexibility, but in practice, we are awash with liquidity.... [The reserve requirement] is something we are in ongoing discussions about, but it is not our top priority right now," he said.

ADDITIONAL REPORTING BY GEORGE MCLEOD AND CHUN SOPHAL