Over-optimistic assumptions about the transformative impact of microfinance loans on the incomes of borrowers have been a consistent feature of the industry for years. Over-valuation of the assets used as collateral for the loans is more unusual, as a realistic appraisal of asset values of the borrowers helps to keep repayment projections real.
Yet in Cambodia, the rate of non-performing loans (NPLs) at microfinance lenders is higher than publicly disclosed, with many loans having been based on expectations of rising land prices which proved to be well off target, sources say.
A survey of loan officers which has yet to be published shows that the NPL rate is continuing to increase, with many microfinance loans being taken to refinance existing borrowings and based on future land price appreciation, according to a person familiar with the survey. Distressed sales of land mean that prices are falling rather than rising, the person said. The speculative nature of many existing loans, which assumed that land prices would continue to increase, was confirmed by a separate person working at a major Western bank in Cambodia.
