By Heng Dyna
A Khmer version of this article was published in the Phnom Penh Post on January 13, 2012
In general, the concern on a financial sector is at least two-fold: the concern on the health of banks, and the concern on the effect of financial sector on business expansion and growth. So far, the media and the bankers report the high profitability and very low non-performing loan (NPL) which reflect the health (i.e viability and sustainability) of the bank/MFI. With these indicators, they also jump to the conclusion that their customers’ business expansion must be good too; otherwise we should not have growth in customer base, profitability, and low NPL.
Arguably, they can be right, but the conclusion is still crude as they lack other important indicators such as the number of borrowers’ asset sale to pay back the loans , and the number of SMEs that have high returns yet remain chronicle or stagnant. Indicator of borrowers’ asset liquidation would attack directly on the NPL/profitability-based argument. As much of the loans in Cambodia is collateral-based, the banks are able to recover its loan and thus secure safe returns despite borrowers’ bankrupt business. In such cases, we would expect low NPL/high profitability and high rate of bankruptcy. Unfortunately, bankers might want to report only the low NPL and high profitability.
On the other hand, the number of SMEs which have high returns yet remain chronicle or stagnant would attack directly on the argument that the high rate is totally fine as the return rate of small business is high too. Indeed, the banks and MIFs can be right, but we need to delve deeper. First, the profit of many small businesses may be high enough to pay back the interest, but the profit usually does not take into account the wage of the small entrepreneur. Second, some business might have returns high enough to pay back the high interest rates and thus can survive for some years. But the high interest rate can gradually rip off their potential and resource to expand further, and leave them stagnant. Of course, sustaining the survival period of SME might be still argued to be the positive side of the bank. But the number of SMEs which have high returns yet remain chronicle or stagnant would help us understand more the “sustainability of the borrowers” in high-interest rate environment.
In addition, I believe that the current borrower base is still a small share of the potential borrowers. Thus, even the current borrowers are not doing well, the bank can still roll on to increase its borrowers by attracting new customers. Then, the increase in current borrower base could be a misleading indicator for the borrowers’ business expansion.
In short, the existing indicators are not enough and can even be misleading. National Bank of Cambodia should fund survey or require financial institutions to report (1) the number of borrowers’ asset fire sale to pay back the loan, (2) the survival rates and period of borrowers’ business, and (3). The component of bank’s borrower base (i.e old versus new borrowers, and their survival period)