The Cambodian banking industry is facing increasing systemic risks due to the looming economic uncertainty and rising non-performing loans (NPLs).
Key indicators, such as Total Credit (percentage of gross domestic product - GDP), Credit Non-financial (percentage of GDP), and Domestic Credit to Private Sector (percentage of GDP) are recorded at 195 per cent, 188 per cent, and 177 per cent, respectively, as of the end of 2022.
These figures are often used to argue that Cambodia’s private sector is over-indebted, leading to concerns about the local banking industry being highly oversaturated, according to a report by a Yuanta Securities firm.
The report shared with The Post, titled “Cambodia’s Banking Industry Update” August 2023 authorised by Sim Dara, director of Yuanta Securities, used the ratios to assess the overall indebtedness of an economy’s private sector.
It said direct comparisons with other countries require a few important adjustments to both the numerator (credit amounts to the private sector) and the denominator (GDP figures).
He explained that the ratios mentioned do not effectively serve the purpose of assessing the private sector’s level of indebtedness.
“For example, the ‘Total credit (percentage of GDP)’ includes financial institutions (banks and microfinance institutions) as borrowers, while both ‘Credit to Non-financial (percentage of GDP)’ and ‘Domestic Credit to Private Sector (percentage of GDP)’ do not account for borrowings from overseas lenders, non-financial institutions, general governments, households, and others,” he said.
Although the factors may not be significant in Cambodia, they can have a substantial impact in other countries to which Cambodia is usually compared.
In that matter, the MFI’s “private debt, loans, and debt securities percentage of GDP” seems more suitable for comparing the overall indebtedness of private sector across countries with different level of economic and financial development.
“We believe that the private sector’s debt level relative to GDP, particularly for countries like Cambodia, tends to be overestimated due to the country’s substantially larger informal economy and significantly smaller government final consumption expenditure.
“These can make the country’s GDP appear much smaller than that of other countries, thereby making Cambodia’ ratio look much greater compared to that of other countries,” Dara said in the report.
Speaking to The Post on August 7, Cambodia Post Bank Plc (CPBank) CEO Toch Chaochek said while the report reflects the industry performance, the current loan to GDP ratio has not indicated any “bad sign”, leading to over-indebtedness.
However, he did not deny that the industry could face “bad issues” if the rate of loan growth to GDP is not managed well.
He explained that if the current loan growth in the banking sector is more than 10 percent while the GDP grows at six percent, and if the growth rate of loans and GDP continue at that pace, there could be a sign of over-indebtedness.
“I think that as a developing country, people and businesses need funds to sustain or open new businesses. But from what I see, financial institutions are managing their level of loan growth,” Chaochek said.
Last June, the National Bank of Cambodia called for an increase of capital buffer by 1.25 percent to the current buffer of 15 percent with an additional 1.25 per cent at the end of this year to avoid any shock into the industry.
“Although the capital buffer rate is a bit high, it shows that our banking sector remains firm and safe,” he asserted.
In Yuanta’s report, Dara said after adjusting for government final consumption expenditure and informal economy, Cambodia’s level of private sector debt remains relatively lower compared to more advanced economies in Asia, such as Thailand, Malaysia, Singapore and South Korea.
Although the adjusted ratio itself suggests that Cambodia remains lower in the overall private sector debt, the rapid growth rate of private sector debt raises concerns about potential over-indebtedness, highlighting the financial sector’s susceptibility to external shocks.
Therefore, he said, it is more important for Cambodia’s banking sector, as the major domestic lender, to be mindful of the growth rate and maintain a sustainable ratio moving forward.
For example, the local private sector still has room for a double-digit growth of 10 per cent for the next five years, then continues to grow at an expected rate of nominal GDP growth of approximately seven per cent, while maintaining the adjusted ratio at around 140 per cent.
“Sustaining future credit growth rates similar to the past five-year average of 20 per cent may no longer be feasible or advisable. The current situation calls for a long-term oriented approach, shifting focus towards qualitative rather than purely quantitative growth.
“By adopting a responsible and cautious approach, relevant stakeholders may mitigate potential risks and ensure the stability and health of Cambodia’s banking industry and overall economy,” Dara wrote.