MICROCAPITAL STORY: Cambodian Microfinance Lenders See Number of Non-Performing Loans Rising Above 1 Percent in 2009

According to a report in the Phnom Penh Post, Cambodian microfinance institutions predict that as the economic crisis spreads, their level of non-performing loans (NPLs) will grow. “Our major concern now is that nonperforming loans will go up,” said Bun Mony, a member of the board of the Cambodian Microfinance Association (CMA) and chairman of Sathapana Limited, a Cambodian MFI with 37,000 clients. “We forecast that NPLs will increase to 1 percent or higher this year due to the economic downturn that is affecting our clients’ incomes.” According to Bun Mony, the NPL rate at his institution was only 0.16 percent at the same time last year. Even as the global economy slows, Bun Mony still expects his overall loan portfolio to grow. Sathapana lent USD 37.5 million last year and expects that to rise to USD 44.5 million in 2009.

Chea Phallarin, general manager of Amret, a Cambodian MFI in operation since 1991, has also seen NPLs rise. “Last year, NPLs were only 0.06 percent out of the USD 54 million in total lending – but since the start of the year, the NPL rate has increased sharply to around 1 percent,” he said. “For the whole year, it is forecast at 1.2 percent.” He believes that the rise in NPLs is also due to the lack of a Cambodian credit bureau, which allows clients to obtain loans by misstating their finances.

Prasac MFI Ltd., a Cambodia MFI with 97,000 clients, has seen NPLs rise from 0.28 percent last year to 0.5 percent in the first quarter of 2009. However Sim Senacheat, general manager, commented, “Bad loans are still controllable and we hope that they will stabilize this year,” Prasac also expects to see total loans increase, from USD 60 million to USD 75 million in 2009.

Bun Mony said MFIs typically lend up to 50 percent of appraised collateral. An increase in bad loans is likely to lead to more asset seizures, as MFIs try to recover unpaid loans, but according to Chea Phallarin of Amret, seizures of assets only take place after court approval. “Some of our clients have the ability to repay their debts, but they refuse to do so; we will sue them in court to seize collateral to clear debts” he said. “We only take clients to court if they fail to pay for between three and six months. This is a last resort,”

As recently reported by MicroCapital, the CMA expects the growth in the Cambodian microfinance sector to slow to 10 to 20 percent this year from almost 61 percent last year, and as a result employment growth in the Cambodian microfinance sector is expected to be around 5 to 10 percent this year versus nearly 30 percent in the past few years. The slowdown is mainly attributable to foreign investors trimming back their emerging market exposure, resulting in less available funding for local MFIs. In a report on Microfinance Gateway, Bun Mony stated that prior to the global economic crisis there were 50 foreign banks lined up to lend to local MFIs, but that number has since fallen to zero.

PRASAC, Amret, and Sathapana have all received a rating of five-diamonds, or a level 5, for their level of disclosure, according to the MIX Market. The MIX Market rates MFIs on their level of disclosure through a diamond system: the higher the number of diamonds the better an MFI’s disclosure. A five diamond rating indicates that an MFI has disclosed general information, two consecutive years of outreach and impact data, two consecutive years of financial data, two consecutive years of audited financial statements, as well as adjusted data such as ratings, evaluations, due diligence and other studies. A five diamond rating is the highest rating.

In a 2006 worldwide competition encompassing 175 entries for microfinance transparency hosted by the Consultative Group to Assist the Poor (CGAP), a division of the World Bank, PRASAC was ranked in the top five. Amret was awarded a certificate of merit. Overall, three of the top five spots were awarded to Cambodian MFIs, and four more Cambodian MFI’s were awarded certificates of merit, demonstrating the high standards Cambodian MFIs have achieved. In order to win transparency awards or earn certificates of merit, MFIs had to achieve very high standards in providing financial information that is both reliable and comparable. Ten top finance professionals from across the world carefully reviewed all 175 applications to judge how well they complied with international standards on financial disclosure.

Sathapana Ltd. was established in 1995. As reported by the MIX Market, the information clearinghouse, as of December 2008 Sathapana had over 37,000 borrowers, 21,000 savers and a gross loan portfolio of USD 37.6 million. As of December 2007, Sathapana’s total assets were USD 23.9 million, debt-to-equity was 4.5, ROE was 31 percent and ROA was 6.26 percent.

Prasac MFI Ltd was established in 1995 and as of December 2008 served over 95,000 borrowers and 3,000 savers. As of December 2007 gross loans were USD 33.9 million, total assets were USD 37.5 million, debt-to-equity was 1.5, ROE was 15.5 percent and ROA was 6.0 percent.

Amret was established in 1991 and as of December 2007 serviced over 187,000 borrowers and 700 savers. As of the same date Amret’s gross loan portfolio totaled approximately USD 30.7 million, total assets were USD 38.7 million, debt-to-equity was 4.26, ROE was 37.7 percent and ROA was 8.1 percent.