Lenders’ ‘Case-by-Case’ Debt Relief Too Slow, Civil Society Groups Say

7 min read
Bank and microfinance institution offices in Phnom Penh (Matt Surrusco)

Weeks after the National Bank suggested financial institutions cut struggling borrowers a break, microlenders say they are relieving customers affected by the Covid-19 economic downturn on a case-by-case basis.

But 135 civil society groups on Monday said the measures by some microfinance institutions (MFIs) wouldn’t offer debt relief quickly enough.

Unions, human rights organizations, local communities and other groups called on the government and National Bank to order MFIs to suspend all loan repayments and interest accrual for at least three months, and return land titles held as collateral to borrowers to avoid threats to land tenure and “further risky loans” that could lead to human rights abuses.

“Immediate steps must be taken to ensure that no one is forced to sell their land to make loan repayments during this economic crisis,” the groups said in a statement. “Cambodia has over 80 MFIs, and a case-by-case process will not work fast enough for the 2.6 million borrowers who need immediate relief.”

On Tuesday, the Cambodia Microfinance Association (CMA) and Association of Banks in Cambodia (ABC) issued a statement in response, saying the civil society demands did not reflect reality, showed “no spirit of responsibility” and caused harm to the banking and financial sector, including by diminishing investors’ trust in financial institutions.

Borrowers are still able to use their land or other property while it’s held as collateral, the associations said in a statement. They said it was wrong to suggest that borrowers needed their titles in order to conduct business and accused civil society groups of aiming to confuse the public.

A Finance Ministry spokesman on Tuesday referred questions to the National Bank of Cambodia, which did not reply to an emailed request for comment.

In early March, Prime Minister Hun Sen asked banks and MFIs to assist workers who were suspended from their jobs amid the pandemic downturn by delaying loan payments. CMA and ABC at the time expressed support for a similar proposal from the National Bank that called on lenders to “exercise flexibility” in dealing with loan payments.

Phal Vandy, CMA’s executive director, on Monday said the association and its members have been working to restructure loans for clients who are “seriously impacted” by Covid-19 economic disruptions. He said the measures were in line with the National Bank directive.

“The impacts of this disease have caused large numbers of Cambodians to face job loss and a decrease in their incomes,” Vandy said in an emailed statement.

Individual MFIs have their own procedures to resolve issues for clients, which vary depending on the level of impacts from Covid-19, he said, adding that the industry “cannot use a single solution for every client.”

Last week, Kaing Tongngy, CMA’s head of communications, told VOD that member institutions would help seriously affected clients to delay their repayments or restructure a loan, based on the individual MFI’s assessment of a borrower’s conditions.

“A serious case would include clients who have a single income that was totally affected,” Tongngy explained. “For example, if they used to have $500 income per month and then it decreased to just $100, they have no ability to pay [loans] as usual. When their income decreases, they can come and meet the MFI that they borrowed from to find a way to pay back or delay based on the actual ability [to pay].”

However, Tongngy noted that MFIs were not obligated to delay borrowers’ payments. 

Still, he said MFIs would be compelled to ease burdens on their customers during the pandemic in order to maintain professional and competitive advantages. Most MFIs, he added, had followed the National Bank directive, which last month directed lending institutions to consider aiding four key sectors of Cambodia’s economy — garments, tourism, construction and transportation — that have been most impacted by the global recession, as well as indebted individuals.

“Most of the members had actively participated in reducing and restructuring the loan for clients who are seriously affected by Covid-19, except for a small number of members, of which their clients are not very affected and did not ask for a compromise,” Tongngy said. 

Bun Mony, CEO of Vithey Microfinance, on Friday said the company would consider delaying payments or restructuring loans for any client who says they need the assistance, but he said only five to 10 borrowers had requested relief last week. 

Vithey had not restructured any loans or delayed payments so far this year, but Mony said the company may start to do so from April.

Following the release of the civil society statement on Monday, Mony said he felt its writer didn’t “understand the economy,” but declined to comment further.

According to a 2019 report from rights organizations Licadho and Sahmakum Teang Tnaut, both of which endorsed the civil society statement, debt owed to MFIs in Cambodia has resulted in “serious and systematic human rights abuses,” poses a “significant threat” to indebted families’ land holdings, and has also been linked to coerced land sales, child labor, debt-driven migration and food insecurity. Industry leaders dismissed the report’s conclusions as overstated at the time.

Amret, one of Cambodia’s largest MFIs by loan portfolio size, said last week that the company was offering an automatic loan repayment grace period of three months for 120,000 group loan clients who requested relief.

“The group loan customers are predominantly rural-based, smallholding farmers, who often depend for a part of their income on family members working in the nation’s garment factories which have seen widespread closures because of the pandemic,” the lender said in a statement.

Individual clients with larger loans will be offered repayment options based on a “case-by-case assessment,” including partial or full deferred payments from three to six months, Amret said.

Amret’s group and individual borrowers’ average outstanding loan size is $500 and $4,800, respectively, Ngay Somealea, a company spokeswoman, said in an email.

Asked how many borrowers had requested loan restructuring or delayed payments since the beginning of the year, Somealea said it was too soon to say, but Amret expected its low-income and micro segment, accounting for 120,000 borrowers, to be the most in need of support.  

“Our priority is to support clients to grow their business, not to provide loans they could not afford to pay,” she added.

Moeun Tola, executive director of the labor rights group Central, another organization that endorsed the civil society statement, said last week that the lenders’ measures did not actually address the cause of workers’ debt, noting that all laborers with debt, including farmers, still face financial burdens as a result of Covid-19 even if they can take advantage of delayed payments. 

“The state announced to give $70 per month to [suspended] workers, but if we look at that $70, it cannot help them be able to save and repay the banks and microfinance institutions,” he said. “I think it’s not a clear solution.”

Indebted garment workers told VOD this month that they fear shortened hours or suspended contracts due to the global economic slowdown would impact their ability to repay loans, a greater threat than the spread of the novel coronavirus itself.

Stephen Higgins, managing partner of Phnom Penh-based investment advisory firm Mekong Strategic Partners, said loan repayment holidays were a “very sensible move,” both for borrowers and financial institutions, as the alternative would be more late payments and defaults.

“Not having to meet loan repayments for 3-6 months will take a lot of pressure off people who have been hit hard by the economic impact of COVID-19,” Higgins said in an email.

He also pointed to the potential downsides of returning land titles to borrowers and freezing interest accrual, as called for by civil society groups.

“If people have willingly taken out a loan, secured by a land title, and have been granted a repayment holiday so they’re not at risk of loan foreclosure, I don’t quite understand why the land title should be returned, or what it actually achieves,” he said.

“Furthermore, if titles were to be released before the loan was repaid, it is human nature that at least some borrowers would use that title to borrow further funds, potentially from loan sharks at much more expensive rates,” he added.

In addition, the entire microfinance sector would be put at risk if no interest was accrued on loans for three to six months, Higgins said, noting that millions of Cambodians have their savings held by microfinance deposit-taking institutions, and expect their deposits to be safe, and, for many, to earn them interest.

Additional reporting by Ouch Sony

(Translated and edited from the original article on VOD Khmer)

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