Will COVID-19 cause banks in Cambodia to go bankrupt?

• 11 July 2020
• Local News
• 6211 Views

The National Bank of Cambodia (NBC), the Cambodia Microfinance Association (CMA), and other relevant institutions have rejected the claim that the COVID-19 crisis will cause the banking system in Cambodia to collapse. The authorities point out that although COVID-19 has caused tremendous negative economic impacts, the likelihood that banks would go bankrupt remains very low. This is because the financial sector in Cambodia is still strong, the number of affected borrowers is still small, and the value of the collateral – which is real estate in most cases – remains robust.

Recently, there have been rumours in social media claiming that the economic crisis caused by the COVID-19 pandemic will cause the majority of banks in Cambodia to go bankrupt. They also claim that over 3 million small debtors are unable to pay their debts, and those who are depositing money with banks are panicking as they cannot withdraw money due to a shortage of cash. The same source also claimed that those who have borrowed money from banks to invest in property are currently in crisis and defaulting on their debts.

In response, NBC’s governor H.E. Chea Chanto said that although the COVID-19 pandemic is severely threatening economic growth, the banking sector remains strong and actively contributes to the economy.

According to the NBC biannual report, banking system assets in Cambodia rose by 17.4% to US$54.1 billion during the first half of 2020. Lending increased by 19.6% to US$34.4 billion, while deposits also grew by 12.3% to US$30.5 billion, and capital also increased by 10.8% to US$ 6billion. (Read More)

For instance, Advanced Bank of Asia, Ltd. or ABA, performed well in the first quarter, with a 5.7% q-o-q asset growth, according to the Phnom Penh Post. The same source reported that the deposit portfolio of ABA rose to US$3.5 billion, while the gross loan portfolio increased to US$3 billion. Despite the pandemic, ABA still earned a net profit of US$33.5 million in the first quarter, illustrating the company’s strong performance in the Cambodia market.

Canadia Bank is another example demonstrating that the banking sector in Cambodia remains strong. According to Canadia Bank CEO Raymond Sia Say Guan, Canadia Bank is functioning well despite COVID-19. The latest yearly balance sheet shows that the loan and deposit portfolio was at US$3.9 billion and $5.3 billion respectively, which makes Canadia Bank the largest bank by balance sheet in 2019. Meanwhile, the net profit of this firm was also recorded at US$122 million.

Mr Guan also denied the rumor regarding a shortage of cash. He clarified that Canadia Bank is actively managing the situation to ensure that there are sufficient capital and strong liquidity despite the pandemic.

Regarding the same matter, Chairman of the Cambodia Microfinance Association (CMA) Kea Borann also said that it’s undeniable that COVID-19 has affected all sectors, including the banking system. However, the effect is not severe, and the banking system in Cambodia is still functioning normally.

“The banking sector in Cambodia is robust because firstly, every bank is working very prudently; secondly, the banks in Cambodia have significant liquidity; and lastly client confidence in the banking sector remains strong. Thus, the chance of collapse is very low,” Mr Boraan told Construction & Property Magazine.

In addition, Mr Boranm also denied that the figure of over 3 million borrowers defaulting on their debts, instead claiming that the total number of all borrowers within the microfinance and banking system in Cambodia is only 3 million, hence it is not possible for all of them to default.

“There are only over 3 million borrowers in Cambodia, and saying that 3 million people are unable to pay their debt is very far from the truth. As of today, the number of borrowers affected by the COVID-19 pandemic is only about 10% of the total borrowers,” said Mr Boraan.

“This 10% does not mean that they have defaulted on their debt. Rather, they [borrowers] have just requested restructuring their loan, meaning they pay only interest, and delay paying the principle. I think this is normal, and there is nothing to be concerned about,” he explained.

In addition, Mr Borann said that the Cambodian economy is slowly recovering and especially the domestic economy, which is a positive sign for all sectors such as the banking and microfinance industry.

“Generally, microfinance institutions are lending to the local population, such as Tuk-Tuk drivers and local vendors. When the local economy is recovering, they will also recover too. So, I think the locals won’t be in trouble for long, the same as the microfinance sector,” said Mr Boraan.

Besides, Cambodia’s monetary policy is quite strong; therefore, the possibility that the banking system will collapse is very low. The National Bank of Cambodia has so far enforced strict and prudent guidelines regarding deposits and loans for all commercial banks. Thus, the chance of a money shortage where people are unable to withdraw money is almost impossible.

The Prakas of Banking and Financial Institutions on February 22, 2018, states an obvious percentage ratio between the Capital Conservation Buffer as well as the Countercyclical Capital Buffer against the total risk-weighted assets. In other words, by learning from the 2008 crisis, NBC has set strong guidelines requiring banks to have sufficient capital to ensure that they can absorb losses when the NBC records excessive levels of credit which could possibly lead to systemic risks.

Besides the existing preemptive guidelines, the Cambodian government has also introduced new policies to stimulate the economy, such as the US$2 billion stimulus package, the delay of the Conservation Capital, as well as the reduction of interest rates.

Another reason that the banking system is not likely to collapse is that the collateral price has yet to drop. In the worst-case scenario, if the debtor is unable to repay, the bank will seize the collateral (which is real estate in most cases) to sell for cash. If the rumour is true that three million people defaulted on their debt, there will be a lot of property on sale for under the market price (as the bank gives loans of only 70% of the actual price). However, at this stage, there are yet to be any.

Chrek Soknim, President of Cambodian Valuers and Estate Agents Association (CVEA), said that COVID-19 has definitely affected the real estate sector in Cambodia, especially foreign investment. However, for local developers, the impact is not that strong. Therefore, there is no massive drop in property prices yet, as the demand and supply remain balanced.

Meanwhile, Prime Minister Hun Sen also recently confirmed that the construction and real estate market (housing demand) remains strong amid the COVID-19 pandemic. (Read more)

“For big companies like Peng Houth and Chip Mong, they are building their projects just like they did before COVID-19…the sales of those firms are still growing, but less than before. It demonstrates that Cambodian people can still afford to buy houses during COVID-19,” said Samdech Hun Sen.

In conclusion, although the COVID-19 pandemic has had a tremendous impact on the economy, the possibility that banks will go bankrupt is low. This is due to three main factors including the NBC’s policy of placing strict and prudent controls on commercial banks; the number of restructured loans to date accounting for only about 10% of the total number of MFIs; and the value of most property collateral remaining largely unaffected.

• Analysis