Monday, 18 May 2009

Microfinance NPL rate rises again as lenders suffer high-risk status

Cambodia's high-risk rating means that international lenders have increased interest rates to the Kingdom's MFIs, which are in turn being passed on to the borrower, fuelling bad loans.

THE rate of microfinance nonperforming loans (NPLs) has increased to 2.5 percent in the first four months of 2009, compared with less than 1 percent for the same period last year, Huot Ieng Thong, president of the Cambodia Microfinance Institution, told the Post Sunday.

The sector said that the NPL rate went above 1 percent in the first quarter, but that level of bad loans has since increased.

"Things are still in good shape ... it is a yellow light as a sign of serious risk," said Huot Ieng Thong, referring to the possibility that things could worsen.

We won't give up until markets are in place and interest rates are lowered.


He added that since the financial crisis, MFIs had charged farmers interest rates of 2 to 3 percent per month, an increase since the liquidity crisis hit global markets.

International lenders have charged Cambodian MFIs 10.5 to 12 percent interest per year since risk increased in the Kingdom following the crisis, up from 8 to 9 percent per year beforehand. The London-based Economist Intelligence Unit increased Cambodia's credit-risk rating from 68 to 69 out of 100 in January then to 70 out of 100 last month - the higher the score, the greater the risk.

"I think [a] 3 percent [interest rate] is the lowest rate for farmers [per month]. As you're aware, microfinance incurs a high rate of interest from international lenders," said Huot Ieng Thong. "The recovery of MFI businesses likely depends on measures by the Cambodian government, and the world economy growing as a whole.

"MFIs have made no progress, while also not suffering from the recession.

"If our government proves to be good at preventing risk, microfinance institutions will face a short high-risk period. If not, MFIs will experience a longer period of zero development," he said, adding that repayment depended on the performance of the agricultural sector.

Kuch Setha, general manager of Micro Finance Institution Seilanithih, a well-known MFI that offers loans mainly to farmers on the Thai border, said Sunday that his institution lends at between a 2.5-percent to 3-percent interest. He confirmed that a rise in NPL rates had been caused by the rise in interest rates offered by foreign lenders to MFIs.

"Lenders from outside [offered interest rates] that were very low before, but now ... they have increased interest rates - if we can borrow more cheaply ... we will lower rates as well," he said. "We can't lose business, so we want lenders and borrowers to be profitable.

"Our country is considered high risk, so that is why they [international lenders] charge rates that are that bit higher," he added.

He said that MFIs understood that farmers were earning less profit this year compared with 2007 or early 2008. That is why the sector had been reluctant to over-lend to borrowers that would be unable to make repayments.

"Our borrowers are likely earning only half the level of profits compard with previous years, so they are paying later," he said, adding that cassava farmers had expected to sell their produce for 3 baht (9 US cents) a kilogram, but due to falling demand, prices after harvest had fallen to just 1 baht per kilogram.

"I saw the pile up of cassava and hundreds of containers [of the crop] on the border which were selling for a low price," he said.

Call for lower interest
Tep Kunnal, governor of Malai district in Battambang province, called on lenders to reduce interest rates by 2 percent. Otherwise, farmers would be unable to make repayments, he added.

"We won't give up until markets are in place and interest rates are lowered," said Tep Kunnal. "If our farmers return a good yield and market demand is strong, then a 9percent rate of interest would not be a problem, but if farmers face a crisis then this rate seems high." Son Koun Thor, CEO and chairman of Rural Development Bank (RDB), predicted that Malai checkpoint would become the most active border in trading agricultural produce.

He encouraged farmers to borrow and said that in the future RDB would lower rates to 2 percent per month.

"It's step by step - RDB is lending at only 7 to 8 percent per year as a wholesaler," he said.

The bank typically borrows from international organisations via the National Bank of Cambodia, and in turn lends to MFIs.

"It [the interest rate] was 5 percent per month a few years a go, but now it's 2.5 percent ... if things go well then RDB will lower the rate again down to 2 percent," he said.

RDB plans to lend $20 million this year, it said, a small percentage of which will go to border-area agriculture.
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