Search

Search form

Logo of Phnom Penh Post newspaper Phnom Penh Post - Talking Finance: Understanding bank lending

Talking Finance: Understanding bank lending

Talking Finance: Understanding bank lending

Firms around the world depend on several sources of capital to finance their businesses. The stock market provides long-term equity financing, the bond markets provides debt financing, and the bank market provides loans. Cambodia will soon have an equity and bond market, but historically, businesses have been financed through owner’s equity and bank borrowing.  

Thus banks play an extremely vital role given the absence of alternatives. Understanding how banks evaluate loans and their decision-making process is extremely helpful for potential borrowers. Banks strongly prefer companies with an operating history and with several years of profitability. Therefore obtaining financing as a start-up company may be difficult. The bank will have lending policies based on the local market regulations and the bank’s own rules and procedures.   

Lending to certain industries may be restricted for reasons such as the impact to the environment or for moral reasons. Banks will also diversify their lending portfolio by applying lending limits per industry. Local regulations must be adhered to. For example, a bank may only lend 20 percent of its capital to a single borrower, this being known as the single borrower lending limit.  

Cambodia’s lending rates have improved over the last decade, yet interest rates are still perceived as higher than international market rates. How a bank prices a loan is based on several factors. The “cost of funds” is generally what a bank has to pay its depositors. This is greatly influenced by supply and demand. If the market is flush with deposits, interest rates on deposits will be lower. They will also be lower if banks restrict lending as there is less need for deposits.

If banks are actively lending and require deposits, then rates on deposits will be higher. Lending costs are also influenced by the banks’ own operating costs and the risk on the borrower. Longer tenors are priced higher as the risk on long-term loans is greater than short-term loans.

An unprepared borrower is normally its greatest enemy. There must be a clear purpose for the loan, and the uses of the requested borrowing amount must be coherently explained and verified if possible.  

How the loan will be repaid and in what timeframe must be substantiated. The character of the borrower is a very important aspect of the lending decision. The history of the owners and management will weigh heavily. The competitive position of the borrower in its industry is another key determinant.

Cambodian banks, almost without exception, lend on a secured basis. Thus the value and quality of collateral pledged influences the amount the bank will lend.

Policies of banks vary. Occupied land may be given a collateral value of 50 percent of its market, building 40 percent, and vacant land less. Land and building are immovable collateral and strongly preferred.

The loan documents will include covenants. Affirmative covenants require the borrower to take certain actions, such as filing of financial statements and maintaining insurance. Negative covenants restrict the borrower from doing certain things such as taking on additional debt. These should be reviewed with scrutiny as they can lead to events of default which allow lenders to demand repayment in advance of the due date of the loan.

The complexities of obtaining a loan and satisfying the bank’s requirements are demanding. A well prepared borrower will be in a much better position.

Anthony Galliano is Chief Executive Officer at Cambodian Investment Management.
[email protected]

RECOMMENDED STORIES

  • Breaking: PM says prominent human rights NGO ‘must close’

    Prime Minister Hun Sen has instructed the Interior Ministry to investigate the Cambodian Center for Human Rights (CCHR) and potentially close it “because they follow foreigners”, appearing to link the rights group to the opposition Cambodia National Rescue Party's purported “revolution”. The CNRP - the

  • Rainsy and Sokha ‘would already be dead’: PM

    Prime Minister Hun Sen on Sunday appeared to suggest he would have assassinated opposition leaders Sam Rainsy and Kem Sokha had he known they were promising to “organise a new government” in the aftermath of the disputed 2013 national elections. In a clip from his speech

  • Massive ceremony at Angkor Wat will show ‘Cambodia not in anarchy’: PM

    Government officials, thousands of monks and Prime Minister Hun Sen himself will hold a massive prayer ceremony at Angkor Wat in early December to highlight the Kingdom’s continuing “peace, independence and political stability”, a spectacle observers said was designed to disguise the deterioration of

  • PM tells workers CNRP is to blame for any sanctions

    In a speech to workers yesterday, Prime Minister Hun Sen pinned the blame for any damage inflicted on Cambodia’s garment industry by potential economic sanctions squarely on the opposition party. “You must remember clearly that if the purchase orders are reduced, it is all