Cambodia should set up an asset management company to clean up the heightened level of bad loans in banks, says an economist at the Asean+3 Macroeconomic Research Office ( Amro ).

According to Guo Zhan, seconded to Amro from the Export-Import Bank of China, bad loans are a “persistent headache” for Cambodia’s banks.

“But with the right treatment, this challenge can become a catalyst for progress,” she says.

In a commentary published by the Singapore-based research office on November 20, Guo warns that rising repayment failures are beginning to weigh on the balance sheets and profitability of banks in Cambodia.

“If left unaddressed, this could undermine the soundness of the banking system and, in turn, macroeconomic stability,” she says.

Research by Amro and the National Bank of Cambodia shows that the country’s non-performing loan ( NPL ) ratio hovered around 5% of all loans between 2012 and 2022. But the NPL ratio has since shot up, reaching 8.1% in June this year.

Factors behind surge

According to Guo, the surge reflects the delayed recognition of distressed loans during the Covid pandemic and slowing credit growth amid more cautious lending and subdued demand ( credit growth has slowed from more than 20% in 2022 to less than 2% this year ).

Compounding these factors is the central bank’s extension of a loan forbearance programme in 2024, letting banks restructure bad loans up to twice without extra penalties.

But while forbearance offers temporary relief, “it may also mask deeper solvency issues for borrowers who ultimately cannot repay”, Guo says.

“With the programme set to phase out gradually, Cambodia needs a longer-term, structural solution.”

Tried and tested

She notes that asset management companies proved effective in Indonesia, Malaysia, South Korea, and Thailand during the Asian financial crisis in 1997-1998.

To address domestic banking crises, China, Japan, and Vietnam set up similar vehicles two decades ago. The Philippines and Laos have done so as well – to deal with non-systemic banking problems.

“At present, Cambodian banks have limited institutional capacity and experience in handling surging bad loans,” Guo says.

“Due to legal and regulatory gaps, they mainly rely on basic tools such as loan restructuring, write-offs, and direct debt collection.”

But “these measures can be slow and, in some cases, vulnerable to fraud or misuse”.

Far better to set up a vehicle to buy NPLs directly from banks – to clean up balance sheets faster and build expertise in asset recovery and restructuring.

“This would not only support renewed lending and growth but also help build a more robust financial system,” Guo says.

‘No panacea’

But an asset management company is “no panacea”, the economist warns.

“Poorly designed models can induce moral hazard and become dumping grounds for bad loans, drain public funds, or even encourage reckless lending.

"To avoid such pitfalls, Cambodia would need a thorough pre-establishment assessment and a clear, well-crafted mandate."

Guo reckons a centralized model, backed by public and private funding, could be tailored to Cambodia’s needs.

“Key success factors would include prudent asset selection, sound valuation methods, robust governance frameworks, and competent staff that ensure independence, transparency, accountability, and efficiency,” she says.

“Close coordination between the public and private sectors will also be essential to build institutional capacity and ensure smooth implementation.”

Designed well, an asset management company "could help modernize Cambodia’s financial architecture, strengthen its crisis management frameworks, and enhance financial resilience in the years ahead.”