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Loan growth risks up for debate

A woman receives a loan from a customer service officer at a financial institution late last year in Phnom Penh.
A woman receives a loan from a customer service officer at a financial institution late last year in Phnom Penh. Hong Menea

Loan growth risks up for debate

Bank deposits and loans during the first half of this year grew significantly as compared with the same period in 2014, with loans alone increasing over 30 per cent, drawing mixed reactions from industry insiders on the risks of this rapid credit growth.

A report released last week by the National Bank of Cambodia shows that deposits rose to $11.93 billion, or 26 per cent over the same period last year, and the total loan portfolio was $13.03 billion, up 33.4 per cent, as reported by state-run media agency AKP.

In Channy, CEO of Acleda Bank, said this growth in loans was expected taking into account the performance of Cambodia’s garment and tourism sectors, which are driving this loan spurt.

He added that the more than 30 per cent growth in loans, which includes those given by microfinance institutions, was needed given that rice millers and other small and medium enterprises have complained of inadequate access to financing.

“They complain of limited access to finance. So we need [growth] to expand that access to these SMEs,” Channy said.

Given that loan to gross domestic product ratio was around 54 per cent last year, Channy said there was no need to take steps, like increasing the minimum capital requirement – the minimum amount a bank must hold as required by the regulator – as it could slow the inflow of new banks into the Kingdom.

Earlier this year, the World Bank advised “strengthened supervision” of the country’s credit and deposit growth, citing a National Bank of Cambodia (NBC) statistic showing industry-wide loan-to-deposit ratio at 95.9 per cent.

Similarly, the Asian Development Bank, in its Asian Development Outlook 2014, said a 54 per cent credit to GDP ratio warranted close monitoring, especially in the real estate sector, as it indicated the possible buildup of financial risks in the banking system.

Stephen Higgins, managing partner of Cambodia-based investment firm Mekong Strategic Partners, said the first half’s lending growth was “too fast” and, in his opinion, the NBC would like to see it slowdown.

“At current rates, system lending would be over $50 billion by 2020, and I don’t think anyone would regard that as being sensible,” Higgins said.

He said this growth should lead the NBC to look at increasing minimum capital requirements, currently around $36 million, suggesting it be raised to $75 million by 2020.

“If banks have at least one per cent market share, then they’ll just about need this amount of capital anyway,” Higgins said.

“For banks that don’t have one per cent market share, you really have to wonder how much value they are adding to the system.”

He said the positive signal from the report was that Cambodians were beginning to embrace the formal financial sector and that it was “unequivocally a good thing”.

Adding to this confidence in the banking sector was the emergence of other payment agencies, like Wing, which have increased the consumer’s confidence and access to the system, said Hong Leong’s CEO Joe Farrugia.

“We are seeing a steady growth of emerging middle class Cambodians showing confidence in the banking industry,” he said.

Maintaining this growth would also require providing an increasingly discerning consumer with quality services, Farrugia said, given that most banks currently have similar products and pricing.

“If you want to succeed, your service levels have to be world class,” he added.

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