Cambodia Introduces Deposit Insurance: Targeting 8.3% Of Non-performing Loans

The recent financial actions of the Royal Bank of Cambodia have taken another step towards "system reinforcement". Previously, there were reports of drafting a new law proposal to establish a "deposit insurance" system. Now, more details have emerged. According to its latest report, this work has been clearly designated as a key focus for the second half of the year, and the new draft will finalize the investment procedures and policies for the "deposit insurance" fund, which is equivalent to adding the "fund operation" as a crucial link for the implementation of the system. To make the system more complete, the Royal Bank of Cambodia is also simultaneously studying and formulating the resolution mechanism for disputes between financial institutions and depositors, and even begins to strengthen the capacity building of officials of the Deposit Protection Bureau. This is clearly laying the groundwork for subsequent implementation. What is more notable is that this draft compilation was not carried out in isolation. The Royal Bank of Cambodia has already discussed with the Cambodia Banking Association, the Microfinance Institutions Association, and international institutions, collecting many practical opinions. However, the urgency of the Royal Bank of Cambodia to promote the deposit insurance system is hidden behind the real pressure of the country's banking industry. The report disclosed that as of the first half of this year, the non-performing loan rate of the Cambodian banking system has risen to 8.3%, an increase of nearly 1 percentage point compared to 7.4% in the same period last year. If not for allowing borrowers to restructure loans since 2021, this figure would be even higher. This also means that the bad debt pressure of banks and the fiscal burden of borrowers have become "risk points" hanging over the system. Therefore, the actions of the Royal Bank of Cambodia do not stop at the deposit insurance system. The report shows that it also plans to issue a new ministerial order, by re-examining the capital adequacy ratio, deposit reserve, and other indicators of banks and financial institutions, to further strengthen the stability of the system. These series of operations precisely echo the recent reminder from the International Monetary Fund: The Cambodian financial industry is being dragged down by "high non-performing loans" and "heavy household debts", and establishing a deposit insurance system is the key to avoiding bank failures and maintaining financial stability. The IMF not only repeatedly suggested that the Royal Bank of Cambodia should implement this system as soon as possible, but also specifically pointed out that the bank's plan for bad debt should "terminate the lenient policy" be implemented in an orderly manner, while ensuring that banks calculate reserves in accordance with international standards, and strengthening risk management and establishing a bank disposal framework are also indispensable steps. For Cambodia, the significance of the deposit insurance system goes far beyond "adding a safety lock for depositors" - it not only needs to address the urgent problem of the rising non-performing loans at present, but also respond to the concerns of the international community about its financial system. However, the specific effect will depend on the subsequent details: such as whether the investment policy of the fund is stable, whether the dispute resolution mechanism is efficient, and whether the adjustment of capital adequacy ratio can truly help banks "reduce burden". The implementation pace of the draft content in the coming months may become an important window to observe the direction of Cambodia's financial industry.