Unsecured Credit Not Permitted, NBC Says

Following the fanfare announcement of an unsecured loan by Advanced Bank of Asia in January, the nation’s central bank on Monday said such lending is prohibited.​​​

Development institutions said that even in developed financial systems, commercial banks only rarely tolerate the risk associated with unsecured lending.

The ABA Bank loan in question, worth about $300,000, was given to Choice Taxi Company, a South Korean venture that started operations in the capital in October.

Tal Nay Im, director-general of the National Bank of Cambodia, said she had asked ABA Bank about the status of the loan and had been informed by representatives at the institution that the loan was in fact secured.

“We do not allow them to provide loans without collateral,” Ms Nay Im said. “If they’re providing a loan without the collateral, it’s a risk for the bank.”

“The banks have to provide loans with security,” she said, adding that confidence in a company’s business venture by itself is not enough to justify allocating a loan.

In a statement released Jan 29, ABA Bank highlighted its loan deal as an innovative measure in a sector where other banks were described to be “conservative” and fearful of risk.

On the basis of Choice Taxi’s business plan, ABA Bank extended the loan “without requiring security,” the company announced in the statement.

However, the bank then seemed to play down its decision. In a letter published in The Daily on Feb 9, ABA Bank said it “does not provide loans without security as standard practice.”

Loans are given on an assessment of “the quality of a client’s business plan,” the ABA Bank letter said.

Juveris Tenisons, chief marketing officer at ABA Bank, declined to elaborate yesterday on the bank’s loan to Choice Taxi Company and said the bank had been asked by the NBC not to speak publicly on the matter.

According to John Nelmes, resident representative for the International Monetary Fund, unsecured loans are rare even in the developed world, where it is easier to assess a borrower’s creditworthiness.

“A clear business plan that demonstrates a borrower’s ability to service a loan is the key factor for sound lending decisions but globally collateral plays an important role in mitigating the risk that the business plan may run into unforeseen difficulties and that the borrower may not be able to repay the capital and interest owed,” he wrote in an e-mail.

Central banks are often hesitant to allow lax lending standards in order to prevent competition among banks from encouraging high-risk lending, he said.

Julia Brickell, resident representative for the International Finance Corporation, the private wing of the World Bank, said that only developed banking systems tend to engage in giving out loans on the back of what is deemed to be a successful would-be business plan.

Though such a practice is “not common,” she said.

“In a developed banking system, it would not be unheard of to give out an unsecured loan on a business plan,” Ms Brickell said. “In a perfect world that is where you want everyone else to get to.”


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