A forecast increase in microfinance non-performing loans (NPL) ratios in Cambodia is set to remove a key prop of the industry case for the defense.
Explosive growth means that as of March 2023, Cambodia’s microloan portfolio had risen to more than $16 billion, nearly half of the country’s GDP. The tendency of microfinance NPLs to increase amid fast growth in lending is well known to economists. Back in the 1990s, the late World Bank economist J. D. Von Pischke argued that low NPL rates are often based on earlier, smaller portfolio sizes with less risky borrowers. As lending increases, the cumulative proportion of risky loans and NPLs mechanically increases as a proportion of the portfolio.
Microfinance lenders everywhere have an in-built incentive to obscure or under-report NPLs. Such problem loans make new investment harder to attract, and public knowledge of write-offs creates an incentive to refuse to pay. ACLEDA, one of Cambodia’s largest microfinance lenders, reported an NPL ratio of 2.9 percent in 2022. A separate category before a loan is classed as an NPL is called “special mention.” Such loans at ACLEDA more than doubled to $60 million in 2022. The bank doesn’t break down the “cohorts” or “tranches” showing when the NPLs were made which, as Von Pischke argued back in the 1990s, would give more clarity.