The Association of Banks in Cambodia president Dr In Channy says the Kingdom’s maturing banking sector has remained resilient through this year’s turbulence as it marches firmly into 2021.

How is the Kingdom’s financial sector performing as the Covid-19 outbreak disrupted economies this year?

In the first three quarters of this year, outstanding credit increased by 8.21 per cent on the 17.78 per cent over the same period last year. This indicates a dramatic slowdown of the market this year as credit growth appears to have decreased by more than 50 per cent.

In reality, we know that the real credit crunch happened during March to June. For example, from January to April, new loan disbursement per month decreased by around 60 per cent, while from April to September, the end of the third quarter, loan disbursement rebounded by more than 90 per cent.

Currently, monthly loan issuance is higher than at the same time last year.

Overall, Cambodia’s financial market and banking system have held up very well in light of the Covid-19 pandemic and the related economic fallout.

The rate of non-performing loans – NPLs – has not increased to a worrisome level and is currently less than 2.5 per cent.

What are the major challenges facing the banking sector and how is it navigating them?

Most Cambodian banks are very well funded and on average have a loan-to-deposit ratio of less than 100 per cent. Hence, banks currently have no issues with financing and disbursing new loans in order to support an economic recovery.

This is a rare advantage that Cambodia has in the current situation. Many other countries will face more severe economic consequences as a dry-up in their credit markets will worsen even more the economic impact of the pandemic.

That said, Cambodia’s banks have also faced challenges this year.

Given the early stages of the Kingdom’s market, compared to more advanced and larger markets, Cambodians still largely rely on cash and traditional forms of banking.

This has made it difficult to provide safe environments for customers, and also bank staff, during this outbreak.

However, given the pressures of social distancing, Cambodian banks have leapfrogged to become more digital throughout 2020.

Digital transactions have dramatically increased, with the usage of online banking solutions becoming normal in most households in Cambodia now.

This is a change that under normal circumstances would have taken us several years.

Which direction is the banking sector expected to move in 2021 as uncertainties grip the global economy?

Even though a vaccine is likely to be rolled out next year, we know that the pandemic, and especially its social as well as economic consequences, will persist.

Hence, banks will continue to digitalise their operations, financial institutions – FIs – will deepen relationships with each other and third party players like payment providers will become more relevant and essential to the Cambodian economy.

Banks will also increase efforts to improve their internal risk measures. Over the years, Cambodian banks have enjoyed tremendous growth and many new banks have entered this profitable market.

Because of such consistency of growth and profitability, many FIs did not see the need to invest in sophisticated risk tools.

Given the more complicated world we are now looking at, I think many FIs will rethink that approach and start building stronger internal structures to protect what has been built in the past.

Do you foresee a drop in deposit and credit growth next year?

Compared to previous years’ deposit and credit growth, we have already seen a decline.

Realistically, growth will decline everywhere in the world over the next few years, and Cambodia will be no exception – although in the Kingdom we are not going to not see a decline in deposits or outstanding credit.

The market will still grow, but not at those very high rates of the previous years.

The economic growth of Cambodia was pretty consistent at around seven per cent over the past decade – following estimates by the World Bank and ADB – and we are likely to see growth settle at around four per cent in the near future.

Similarly the Ministry of Economy and Finance is estimating growth of 3.5 per cent in 2021, consistently growing to 6.5 per cent in 2023.

We can assume that deposit and credit growth will change in proportion to that, and hence estimate credit and deposit growth to still be more than 10 per cent compared to the more than 20 per cent in previous years.

Will the weakening construction and real estate sectors impact banks?

Yes and no. According to the National Bank of Cambodia’s Annual Supervision Report 2019, credit to construction and real estate, as well as housing, stood at around 30 per cent of all credit.

A slowdown in those sectors will also decrease demand for credit. Besides that though, there will also be other effects, which we will need to observe.

A slowdown in construction and real estate transactions could for example cause a drop in land prices in some areas of the country.

Given that a majority of credit in Cambodia is collateralised with land titles, we will have to see as this may have an impact on overall loan quality.

With slow business growth and rising unemployment, will NPLs increase next year?

While we expect NPLs to increase, we do not think that Cambodia’s financial sector will enter any dangerous territory. By far, the majority of FIs are well funded and not overly leveraged in Cambodia.

Even with a considerable increase in NPLs, depositors’ funds will be safe and no FI will have to file for bankruptcy or require a bailout, as is often observed in “developed” markets, in which FIs are tremendously leveraged and therefore react to any recession much more strongly.

Nonetheless, the extent of the increase in NPLs is difficult to estimate.

In all of Asean, the extension of schemes to support borrowers amid the coronavirus pandemic has obscured the extent of corrosion in regional banks’ asset quality.

Only the gradual narrowing of those support programmes will provide more clarity on the extent to which NPLs will rise.

In Cambodia, banks and MFIs have restructured more than $3.5 billion of loans.

While this was and still is the right to do in order to give borrowers and businesses time to recover from the economic shock, the restructuring process may mask the actual amount of credit that may not be collectable at some point.

While we expect that most restructured loans will recover and be collectable, certainly some businesses will not recover from the pandemic’s economic shock.

The extent, though, depends heavily on the duration of this Covid-caused crisis and the time at which all borders will open again in order for Cambodia to bounce back.

This will be crucial for some of Cambodia’s biggest sectors, such as tourism, exports-driven agriculture and garments.

The ADB predicts that Cambodia’s economy could contract by 5.5 per cent this year and return to positive growth next year. How is the banking sector braced for this?

While certainly the global economy and also Cambodia’s came to near stop in the first half of this year, we are slowly returning to a more “normal” level of economic activity again.

As stated, with anticipated growth of around four per cent in the coming year, Cambodia will not need long to recoup all the economic damage from this pandemic.

Sometime in 2022 – some two years after the pandemic’s economic impact would have hit Cambodia – income levels and employment rates will have returned to pre-Covid levels.

We are hopeful that FIs and their borrowers will get through this difficult time.

On the bright side, we should also state that the pandemic, the closed borders and this economic shift has pushed so many businesses – including FIs – to adapt so that the Cambodian economy will emerge more resilient, more diversified and more digitalised from this global health crisis.