Cambodia’s financial sector faces headwinds amid increasing NPLs

Cambodia’s financial sector faces headwinds amid increasing NPLs

With the slowdown of loan growth and rise in non-performing loans (NPLs), Cambodia’s financial sector is facing significant challenges impacting the overall profitability, said a recent report from the International Finance Corporation (IFC).

However, industry insiders are of the opinion that the sector has remained resilient, continuing to serve as a key pillar of economic stability despite both global uncertainties and domestic challenges.

According to IFC, the sector experienced exceptional loan growth before and during the Covid-19 pandemic, with an average year-on-year growth of 20.9 percent from 2018 to 2022. However, loan growth has since slowed to single-digit figures, with 6.9 percent in 2023 and 4.4 percent in 2024.

Deposit growth has shown resilience, fluctuating but maintaining a rate of 18.1 percent in 2024, slightly higher than the pre-Covid-19 level of 17.3 percent in 2019. Despite this, the sector is grappling with rising NPLs in both banking and microfinance institutions (BFIs), which have significantly impacted profitability. Total NPLs in the banking and financial sector surged from $551 million in 2019 to $4.7 billion in 2024, representing approximately 30 percent of the estimated equity level for 2024.

The NPL coverage ratio stood at 55.1 percent as of December 2024, but the trend is concerning: NPLs doubled in 2023 and increased by 51 percent in 2024. Problem exposures, including PAR 30+ (portfolios at risk above 30 days) and restructured loan portfolios, reached $10.5 billion in January 2025, representing approximately 17.8 percent of the outstanding portfolio balance recorded by Credit Bureau Cambodia (CBC).

Estimates suggest that if all PAR 30+ and restructured loans become NPLs, potential NPLs could rise to $9.1 billion, accounting for 15.5 percent of total loans, or 60 percent of sector equity. The current NPL coverage of 55.1 percent may only cover 29 percent of this potential exposure.

The CBC Monitoring Dashboard highlights growing concern, with an increase in enquiry applications, restructured loans, and new loan facilities. The active restructured loan balance reached $5.61 billion in January 2025, with significant variances observed across different sectors.

As the financial sector navigates these challenges, stakeholders are urged to closely monitor the evolving situation and implement strategies to mitigate risks and strengthen stability.

Speaking to Khmer Times, Sok Chan, Head of Financial Inclusion and Public Relations at the Association of Banks in Cambodia (ABC) said indeed, as the data mentioned, the amount of credit or loans from banking and financial institutions licensed by the National Bank of Cambodia (NBC) was approximately $60 billion as of the end of 2024, according to data from NBC.

Chan noted that credit in the banking and financial sector increased at a slow pace, only about 3 percent, compared to 2023, when the growth was about 5 percent. Of these, customers using this credit service had more than 4 million accounts or about 5 million people.

“This decrease was due to demand and supply factors. For the demand factor, it was due to the slow recovery of some sectors such as construction and real estate, tourism, and wholesale and retail, which led customers to reduce borrowing, and for the supply factor, it was due to banking and financial institutions increasing caution in providing credit in a situation where the regional and global economies were highly uncertain,” he explained.

“However, if we look at it from another angle, deposits continued to grow well, with a growth rate of 16.3 percent, with a strong capital position and high liquidity, which shows that the banking system is resilient with strong confidence. As of the end of 2024, customer deposits in the banking system reached $57 billion,” he added.

Not all debt is bad, Chan explained, using an example to illustrate his point. He stated that when assessing debt, it should be compared to the value of our assets or net worth. While debt may increase, the assets acquired through it can also appreciate making the overall financial situation positive. For instance, if someone takes out a $50,000 mortgage for a house worth $60,000, their net worth would be $10,000. In this case, although the debt has risen, the increase in asset value offsets it, demonstrating that debt can be beneficial.

Another important question is whether an increase in credit indicates a positive or negative trend. To determine this, it is essential to examine how credit is distributed across different sectors, whether it is being used effectively, and the extent of bad credit. “In short, credit in the banking sector is allocated to almost all sectors. Over the past two to three years, banking and financial institution loans have been directed more toward productive sectors such as manufacturing, small and medium enterprises, agriculture, transportation, retail, wholesale, and personal mortgages.

Additionally, the quality of non-performing loans has slightly increased to approximately 6 percent, but it remains manageable,” Chan explained.

In February, Governor of NBC Chea Serey said that credit in the banking system continues to grow but at a slower pace. This decline is driven by both demand and supply factors.

On the demand side, the slow recovery of certain sectors – such as construction and real estate, tourism, and wholesale and retail – has led customers to reduce borrowing, she said.

On the supply side, banking and financial institutions have become more cautious in providing credit due to heightened uncertainty in regional and global economies, she added.

“However, deposits have continued to grow at a solid rate of 16.3 percent, supported by a strong capital position and high liquidity, indicating that the banking system remains resilient and maintains strong confidence,” Serey said.

According to NBC’s 2024 Annual Report and 2025 Work Plan, the NPL ratio continued to rise in 2024, reaching 7.9 percent in the banking sector and 9 percent in the microfinance sector.

Despite this increase, banking and financial institutions have set aside sufficient provisions to cover potential loan losses, with a provision coverage ratio of 55.1 percent.

After deducting these provisions, the net NPL ratio drops to just 3.5 percent, a manageable level that shows banking and financial institutions are well-prepared to manage credit risks and maintain financial stability.

According to the NBC’s report, Cambodia’s banking sector has shown resilience and reliability, playing a crucial role in maintaining economic stability amid global uncertainties and domestic challenges.

The report highlighted that this resilience stems from careful regulatory policies and strong public trust, which continue to bolster the sector’s contribution to economic recovery.

Although credit growth has slowed due to more cautious lending and reduced demand, the sector’s solid deposit growth, high liquidity, and ongoing reforms illustrate its capacity to endure external disruptions and adjust to evolving financial conditions.

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