it describes the cambodian banking prudential regulation to all new in banking in cambodia. But the new one in banking system can use it to compare with your country.

1. 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

2. 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

3. 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.
3NBC, Off-Site Department, Vithyea YOU

4. 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.
4NBC, Off-Site Department, Vithyea YOU

5. 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
5NBC, Off-Site Department, Vithyea YOU

6. 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;
6NBC, Off-Site Department, Vithyea YOU

7. 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
7NBC, Off-Site Department, Vithyea YOU

8. 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.
8NBC, Off-Site Department, Vithyea YOU

9. 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
9NBC, Off-Site Department, Vithyea YOU

10. 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
10NBC, Off-Site Department, Vithyea YOU

11. 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%
11NBC, Off-Site Department, Vithyea YOU

12. 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
12NBC, Off-Site Department, Vithyea YOU

13. 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.
13NBC, Off-Site Department, Vithyea YOU

14. 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
14NBC, Off-Site Department, Vithyea YOU

15. 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.
15NBC, Off-Site Department, Vithyea YOU

16. 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
16NBC, Off-Site Department, Vithyea YOU

17. 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
17NBC, Off-Site Department, Vithyea YOU

18. 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
18NBC, Off-Site Department, Vithyea YOU

19. 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.
19NBC, Off-Site Department, Vithyea YOU

20. 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.
20NBC, Off-Site Department, Vithyea YOU

21. 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.
21NBC, Off-Site Department, Vithyea YOU

22. 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.
22NBC, Off-Site Department, Vithyea YOU

23. 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
23NBC, Off-Site Department, Vithyea YOU

24. 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.
24NBC, Off-Site Department, Vithyea YOU

25. 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.
25NBC, Off-Site Department, Vithyea YOU

26. 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.
26NBC, Off-Site Department, Vithyea YOU

27. 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.
27NBC, Off-Site Department, Vithyea YOU

28. Content
11. Prompt Corrective Action 4
-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.
28NBC, Off-Site Department, Vithyea YOU

29. Content
11. Prompt Corrective Action 5
- 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.
29NBC, Off-Site Department, Vithyea YOU

30. Content
11. Prompt Corrective Action 6
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.
30NBC, Off-Site Department, Vithyea YOU

31. Content
End
31 ContentNBC, Off-Site Department, Vithyea YOU