cambodian banking regulation

Content

CAMBODIAN BANKING PRUDENTIAL REGULATION

National Bank of Cambodia (NBC) Vithyea You, Off-Site Supervision Department

Implement following the National Bank of Cambodia Law and Regulation

NBC, Off-Site Department, Vithyea YOU 1

Content

Module Outline 1. Net Worth Calculation 2. Minimum Capital 3. Solvency Ratio 4. Liquidity Ratio 5. Assets Classification 6. Fixed Assets Ratio 7. Related Parties Lending 8. Loans Large Exposure 9. Net Open Position 10.Overdraft Facilities 11.Prompt Corrective Action

NBC, Off-Site Department, Vithyea YOU 2

Content

1. Net Worth • Paid-in capital shall be equal or superior to the applying minimum capital requirement;

• All regulatory ratios and limits referring to “Net Worth” shall be calculated in full accordance with the calculation rules;

• Total Net Worth consists of two separate components • Tier 1 capital (Core capital) • Tier 2 capital (Supplementary capital)

• Tier 2 capital shall not exceed 100 % of Tier 1 capital or not more than 50 % of total net worth.

3 NBC, Off-Site Department, Vithyea YOU

Content

Tier 1 Capital Shall be calculated • Sub-total A : (Items to be added)

• Paid-in capital or endowment • Reserves, other than revaluation reserves • Premiums related to capital (share premiums) • Retained earnings, up to 20 % of Sub-Total A. Above 20 % of Sub-total A, banks shall consider making a decision about reserving the corresponding amount

• Audited net profit for the last financial year. • In addition, the NBC might approve other items to be included into Sub-total A.


Content

Tier 1 Capital Shall be calculated • Sub-total B : (Items to be subtracted)

• Own shares held by bank at their net book value • Accumulated losses • Intangible assets (such as goodwill, training expenses) • For shareholders, directors and any other related party according to

the definition established in the Law on Banking and Financial Institutions:

• Unpaid portion of capital; • Loans, overdrafts and other advances; • Debt instruments held by the bank and bearing the signature of the

persons concerned, at their net book value; • Losses determined on dates other than regular year-ends, including

all the provisions for non performing debts and securities . Tier 1 capital = Sub-total A - Sub-total B


Content

Tier 2 Capital Tier 2 Capital shall be calculated as following:

• Sub-total C : (Items to be added) • Reevaluation reserves with the prior approval, in writing, from the NBC;

• Provisions for general banking risks with the prior agreement of the NBC

• General provision of 1% foreseen in Prakas on Asset Classification and Provisioning in Banking and Financial Institutions

• Subordinated debt instruments, which shall not exceed 50% of Tier 1 Capital, provided that they fulfill all the conditions set forth in Article 7 below;

• Other items with the prior approval of the NBC in


Content

Tier 2 Capital • Sub-total D : (Items to be subtracted)

• Equity participation(s) in banking or financial institutions, including securities companies, at their net book value

• Other items, such as deferred charges.

Tier 2 Capital = Sub-total C - Sub-total D Net Worth = Tier 1 Capital + Tier 2 Capital


Content

2. Minimum Capital • The NBC will assess the applicant’s capacity to achieve its

development objectives in a manner that is compatible with the smooth working of the banking system and offers sufficient safety for its customers.

• Commercial Bank without influential shareholder has investment grade must increase capital from 50,000 million KHR to 150,000 million KHR

• Specialized Bank without influential shareholder has investment grade must increase capital from 10,000 million KHR to 30,000 million KHR

• For Banks that has influential shareholder has investment grade can maintain their capital at the present level but must fulfill the following conditions: • Influential shareholders shall obtain investment grade from at least one of

the three international rating agencies • Provide confirmation of rating to the National Bank of Cambodia timely and

regularly at the beginning of each semester • Guarantee letter to increase paid-up capital when its rating is downgraded

supported by some relevant documents such as board resolution concerning the commitments, notification letter to the home supervisory authority.


Content

3. Solvency Ratio • Solvency ratio the bank’s net worth to aggregate credit risk exposure shall not be less than 15%

• The numerator is the bank’s net worth • The denominator of the ratio shall comprise the aggregate of the assets and off-balance sheet items weighted to their degree of credit risk.

• Weighting of bank’s assets are classified as following: • Zero weighting • 20 percent weighting • 50 percent weighting • 100 percent weighting

• Off Balance Sheet items are classified into 4 categories


Content

4. Liquidity Ratio • Banks must maintain its liquidity ratio at all times at least 50% • Solvency should be calculated as following

• Numerator, Treasury balance is equal to the difference between the total debit items and the total credit items

• Debit items • Cash and gold • Deposit with NBC • Deposits with banks • Portion of lending to banks and financial institutions with

not more than one month to run • Credit items

• Credit balances on sight accounts maintained with NBC, banks or financial institutions

• Borrowing from NBC and banks with not more than one month to run


Content

4. Liquidity Ratio • Denominator of the liquidity ratio

• Current A/C => 60% • Saving A/C => 50% • Fixed Deposit (less than 1 month) => 80% • Fixed Deposit (more than 1 month) => 50%


Content

5. Assets Classification 1 • To ensure that all loans and assets of bank and financial institutions are regularly evaluated using an objective and prudential grading system and

• To ensure that timely and appropriate provisions and write offs are made to the reserve for loan loss account in order to accurately reflect the true condition and operating results of the institutions

• Applies to all loan and advances and similar assets

• All loans and assets shall be classified according to the repayment capacity of the counterparty


Content

5. Assets Classification 2 • Repayment capacity is assessed through the following criteria: • Past payment experience, • Financial condition of the borrower, current and expected,

• Business prospective and cash-flow projections, based on realistic and prudent assumptions,

• Ability and willingness to repay of the borrower, • Financial environment, • Quality of documentation.


Content

5. Assets Classification 3 • All assets shall be classified into five categories as follows

• Normal. Assets in this category are fully protected by the current sound worth and paying capacity of the counterparty, are performing in accordance with contractual terms, and are expected to continue doing so.

• Special mention. Assets in this category shall be currently protected and shall not be past due but exhibit potential weaknesses which shall, if not corrected, weaken the asset or inadequately protect the bank’s position at some future date.

• Substandard. Assets in this category are not adequately protected by the current sound worth and paying capacity of the counterparty. In essence, the primary source(s) of repayment is not sufficient to service the debt and the bank must look to secondary sources


Content

5. Assets Classification 4 • All assets shall be classified into five categories as follows

• Doubtful. Assets in this category have all the weaknesses inherent in a substandard asset plus the added characteristic that the asset is not well secured. The possibility of loss is high, but because of important and reasonably specific pending factors that shall mitigate, the actual amount of loss cannot be fully determined.

• Loss. Assets that are considered uncollectible or of such little value that their continuance as bankable asset is not warranted shall be classified Loss. Losses shall be taken in the period in which they are identified, or should have been identified, as uncollectible.


Content

Provision to be made Type Past due Type of provision % of provision required

Normal General 1% of gross loans

Special Mention >30 days but < 90 days

Specific 3% of gross loans

Substandard > 90 days but< 180 days

Specific

20%of gross loans

Doubtful > 180 days but < 360 days

Specific

50% of gross loans

Loss > 360 days

Specific

100% of gross loans


Content

• Fixed assets can be acquired by banks only in two cases:

• either they are directly used for operating the bank, • or, though not used for operating the bank, they become its property by legal enforcement of a guarantee and help reducing the exposure on bad loans.

• Fixed assets with no direct link to operating the bank shall be sold no later than one year after the date they become the property of the bank. • Fixed assets acquired by banks for operational purpose shall remain inferior to 30% of total net worth.

6. Fixed Assets Ratio 17 NBC, Off-Site Department, Vithyea YOU

Content

7. Loans to related parties

• Related parties to a covered entity are defined as follow:

• any person holding directly or indirectly at least 10% of the capital or voting rights, •any company of which the covered entity directly or indirectly holds at least 10% of the capital or voting rights, • any individual who participates in the administration, direction, management, or internal control • and the external auditors. • Loans to related parties cannot exceed 10% of NW


Content

8. Large Exposure 1

- Large exposure is defined as the overall gross exposure resulting from banking and financial institution’s operations with one single beneficiary, where such exposure exceeds 10% of the institution’s net worth. - Banking and financial institutions shall maintain at all times a ratio not exceeding 20% between their overall exposure resulting from their operation with each individual beneficiary and their net worth. - Banking and financial institutions shall be required to maintain at all times a maximum ratio of 300% between total of their large exposures and their net worth.


Content

8. Large Exposure 2 - Individuals or legal entities that are interconnected in such a way that financial problems experienced by one or more of them would necessarily entail serious financial problems for the other or all of them shall likewise be deemed to constitute a single beneficiary.


Content

8. Large Exposure 3 In particular, such connections exist between two or more individuals or legal entities where: a - one of them directly or indirectly exercises control over the other; b - they are subsidiaries of the same parent company; c - they come under the same de facto management; d - one of them has an equity interest in the other exceeding 10 percent and they are bound by reciprocal guarantee agreements or have a special business relationship which each other such as sub-contracting, franchise, etc.


Content

9. Net Open Position in Forex • To prevent Banks’ and Financial Institutions’ foreign exchange risks

• Banks and Financial Institutions shall maintain an effective system of internal control to identify, measure, monitor and control the extent and source of their foreign exchange risk and foreign exchange settlement risk during the trading day and at the close of business

• At all times maintain net open position in foreign currencies in either any foreign currency or overall net open position in all foreign currencies, whether long or short, shall not exceed twenty percent (20%) of FIs’ net worth.

• Every month, FIs shall produce reports of their net open position in foreign currency to the National Bank of Cambodia.


Content

10. Overdraft facilities • NBC shall consider granting overdraft facilities for FIs to

overcome temporary liquidity shortage under criteria and conditions sets forth in the Prakas.

• Fully solvent institution, profitable, fully compliant with the minimum capital requirements and solvency ratio

• Overdraft facilities are designed to manage exceptional circumstances and to help eligible institutions to overcome temporary or short-term liquidity shortages

• OD shall be granted either in US dollars or in Riels • OD facilities shall be considered initially for a short period of

time from one week to one month • Eligible collateral and haircut

• Besides collateral foreseen in Article 36 & 37 of the Central Bank Law, FI may propose loans as a collateral

• NBC shall apply a haircut of 40% to the value of total collateral pledged


Content

10. Overdraft facilities • Institutions are required to establish reporting

requirements to NBC after receiving an overdraft facility • Serious liquidity concerns and a progressively

deteriorating condition, the NBC shall consider requiring a daily report of the day’s inflows and outflows as well as on the liquidity gap forecasts related to the following days.


Content

11. Prompt Corrective Action 1

“Prompt corrective action” is a prescribed set of disciplinary sanctions and limitations applicable to financial institutions in accordance to the Law on banking and Financial Institutions. - “Capital Restoration Plan” is a formal plan signed by a financial institution’s Board of Directors and submitted to the National Bank of Cambodia. Such a plan details the actions, strategies and commitments the Board will undertake to attain capital adequacy as defined by the solvency ratio. Such a plan includes numerical financial goals and stipulates timetables and deadlines for attaining said benchmarks.


Content

11. Prompt Corrective Action 2 “Capital Call Meeting” is a formal meeting called by NBC, where financial institution directors are notified of a material capital deficiency at their financial institution and given a specified time period to provide a specific capital Injection amount.


Content

11. Prompt Corrective Action 3 - Under the prompt corrective action procedures, the financial institutions will be categorized based on their solvency ratio, as previously defined in the above slide. A financial institution is classified as: a. Well-Capitalized when its solvency ratio equals or exceeds 20 per cent. b. Adequately Capitalized when its solvency ratio equals or exceeds 15 percent, but is less than 20% c. Undercapitalized when its solvency ratio equals or exceeds 10 per cent, but is less than 15 percent d. Significantly Undercapitalized when its solvency ratio equals or exceeds 5%, but is less than 10%. e. Critically Undercapitalized when its solvency ratio is less than 5 per cent.


Content


-When a financial institution becomes undercapitalized, it must prepare and submit a Capital Restoration Plan (CRP) to the NBC within 30 days after it became undercapitalized. The NBC will notify the financial institution in writing of the CRP‘s acceptability within 30 days of receipt or any delay and the reason for the delay.

- In addition to the preparation and submission of the CRP to the NBC, the influential shareholders must submit a written guarantee that the financial institution will comply with the CRP. The guarantee must include the financial commitment of the influential shareholders in the implementation of the CRP.


Content


- The guarantee must include the assurances that the owner will: a. Take actions required by the CRP. b. Ensure the selection of new competent management. c. Restrict transactions between the financial institution and the owner. d. Discontinue any risky or inappropriate activities. Depending on the company involved, the guarantee may also include a promissory note, a pledge of assets, appropriate assurances from company counsel, a company board of directors’ resolution, and other supervisory actions deemed necessary to ensure performance.


Content


As soon as a financial institution is known to have become critically undercapitalized, a capital call meeting shall be called.

• The financial institution shall be ordered not to: a. Sell significant assets or waiver customers guarantees b. Extend new credits to customers c. Change accounting methods, unless existing ones break the law d. Pay compensation or bonuses. e. Pay interest on liabilities above prevailing market rates. A provisional administrator shall be appointed within 180 days of notifying capital call meeting.


Content

End

31 Content NBC, Off-Site Department, Vithyea YOU

cambodian banking regulation

Economy & Finance