The Center for Khmer Studies
Before the COVID-19 pandemic, researchers raised concerns about high levels of household over-indebtedness, questioning the relationship between debt and household vulnerability. In 2017, a sector-sponsored survey (N= 802) was conducted with household borrowers in 12 provinces and Phnom Penh, and it suggests that 28% of micro-finance household borrowers were insolvent, and another 22% were at risk (MFC and Good Return 2017). Concerning over-indebtedness, many researchers have pointed to several problems: land loss (Green 2018; Green & Bylander forthcoming), distressed migration (Bylander 2014; Ovesen and Trankell 2014; Green and Estes 2018; LICADHO 2020), and declining household nutrition through a reduction in food consumption (Seng 2018). COVID-19 pandemic, which induced economic slowdown and unemployment, has dramatically exacerbated vulnerable households’ livelihoods, especially micro-finance borrowers, in the country. Given these challenges, the World Bank (2020: 3) claims that “the global epidemiological and economic crisis unleashed by COVID-19 poses the greatest threat to Cambodia’s development in its 30 years of modern history.” The Bank continues, “poverty could increase between 3 to 11 percentage points from a 50 per cent income loss that lasts for six months for households engaged in tourism, wholesale and retail trade, garment, construction, or manufacturing.” In this essay, we attempt to briefly describe how the loan restructuring policy was enforced by financial institutions (FIs) and examine the extent to which this policy has benefited the debt-distressed or economically vulnerable households, and how they cope with the effects of the pandemic.
In response to COVID-19 induced economic crisis, loan restructuring policy or known in Khmer as Kareapcham Inatean Loeung Vinh or, in short, Inatean Saloueng Vinh policy, emerged. This directly follows a request by the government for leniency on debt-stressed borrowers impacted by the COVID-19. In March 2020, the Prime Minister of Cambodia called on financial institutions to be lenient towards borrowers and not to confiscate collateral assets from the debt-distressed households. Following the Prime Minister’s request, on 27 March 2020, the National Bank of Cambodia (NBC) issued a circular requesting banks and microfinance institutions to carry out a loan restructuring policy to relieve the debt burden of their clients whose incomes were adversely affected by the COVID-19.
To address the debt-distressed issues, NBC recommended nine options for the banks and financial institutions: 1) Reductions in the principal amount or the amount to be paid at maturity; 2) Reductions of the interest rate to a rate lower than in the original loan agreement; 3) Extension of time for the loan principal or interest repayment or interest capitalisation; 4) Extension of maturity; 5) Addition of and/or change of joint borrower or guarantor (if any); 6) Change in loan type from an instalment loan to a bullet loan; 7) Waiver of or reduction of collateral requirement; 8) Reduction of contract condition; and, 9) Provision of a grace period, which could last for six months counting from the effective date of the new contract.
To date, according to Cambodian Microfinance Association (CMA), there were USD 1.3 billion worth of total loans being restructured or around 16 per cent of total outstanding loans in 2020. As of December 2020, 271,117 borrowers (about 12 per cent of the total number of borrowing households) have benefited from some forms of loan restructuring. The CMA and Association of Banks in Cambodia then called on the NBC to extend the loan restructure policy into 2021, as the economic impact of the COVID-19 crisis remains in addition to the flood crisis (White 2020). The NBC granted the request so that the loan restructuring policy will continue until mid- 2021 (Sok 2020).
While the nine options and loan restructuring have been officially implemented, it is not clearly defined by NBC what should be involved or who should receive which option. As such, the banks and FIs have opted for their discretion in responses to the COVID-19 crisis. As a result, the implementation of the loan restructure policy varies from an institution to another. However, the financial institutions with which we spoke offered three key aspects of restructuring available for COVID-19 affected borrowers:
- Payment Holiday: Borrowers granted a payment holiday is not required to repay loans at all for a specified period. The interest payments associated with that period of time are added to the left-over principal amount, and a new repayment schedule will be issued at the end of the payment holiday.
- Period Extension: With a period extension, loan periods are extended so that the monthly payment is reduced to a level within the borrowers’ capacity to repay.
- Grace Period: Borrowers granted a grace period have the option to repay only interest payments for a specified period of time. This allows them to minimise monthly payments and not pay down the principal for the duration of the grace period.
Our data from interviewing borrowers (N=119) and FI representatives (N= 34) show that the popular option enforced was the “grace period.” We found that 16 were given a grace period, 6 were granted a payment holiday, and in one case, a FI allowed a borrower to repay flexibly. 11 borrowers approached the FIs but were verbally rejected because of ineligibility of the sector (6 borrowers) and the loan restructuring was generally unavailable in their areas (5 borrowers). Seven borrowers were offered a “grace period” but rejected the offer because they were concerned about the financial loss (khart) it would create. Meanwhile, thirty-one borrowers were not aware of the loan restructuring policy at all, and the rest either had the ability to repay or approached their FI for the fear of impacting their credit history and/or being ashamed. The unawareness of the existence of loan restructuring policy is consistent with a finding of a survey (N = 997) conducted in July 2020 with registered and non-registered medium, small, and micro-enterprises of tourism-related businesses in four zones in Cambodia. The survey found that 60 per cent of the respondents were not aware of the bank/MFI debt restructuring policy (The Asia Foundation 2020).
Not only have FIs limited options for the COVID-19 impacted households, but they also decided not to publicise the loan restructuring policy. Since the loan restructuring policy is informed to clients on a case-by-case basis, many, predominantly, low-income household borrowers in the rural areas are not aware of the policy.
During our field visit, there is a growing sense of fear and confusion among debt-distressed households. These households do not know what kind of supports could be provided to them. A case study below illustrates this sense of fear.
Pu (uncle) Theurn and Ming (aunt) Mao started borrowing in 2014; their first loan was to buy a tractor to plough their 15 hectares of land. After a few years (he could not recall exactly when), his corn and cassava production failed due to drought, at which point the household began to struggle to repay their debts. After sustained losses, the couple decided to sell the tractor. However, they could not repay all the debt, and they decided to sell 10 hectares of their land to repay the loan. At the time of the interview, the middle-aged couple was chopping cassava roots, which were not fully ready to harvest but were harvested a few months early because the couple needed the money to repay the micro-finance debt. Our research team asked him (husband) about the key risks he perceived in agriculture, using the Khmer term phey, literally translated as “to be fearful of.” He responded jokingly, “The main phey (fear)is the due repayment date because I have to repay one after another.” After finishing the sentence, he laughed gently. This story reflects a reality for many borrowers who are struggling to repay—the feeling of phey (fear). To date, the couple is still struggling to make their monthly repayments.
Overall, it is important to make all options of loan restructuring available to all COVID-19‑affected borrowers. As evidenced in this case study, debt-distressed households can resort to coping strategies, such as land sale, migration, food consumption reduction, repayment phobia, or fear of FI’s retaliation: collateral confiscation. All of which has (and will continue to have) exacerbated economic vulnerability. At last, the loan restructuring policy should remain even after COVID-19, and other forms of restructuring such as debt forgiveness or interest cancellation should be considered.
This is an excerpt from a study report to be released in June 2021. The full report can be found here on the website of The Center for Khmer Studies (CKS) or The Asia Foundation (TAF) in English and Khmer.
Phasy RES is a doctoral student in anthropology and sociology at Université Paris 1 Panthéon-Sorbonne and a research fellow at The Center for Khmer Studies (CKS) under The Asia Foundation’s Ponlok Chomnes Program, funded by Australia’s Department of Foreign Affairs and Trade (DFAT). Her PhD research looks at the relationship between microfinance expansion and land security by examining how access to microcredit shapes land access and control in Cambodia. At CKS, under Ponlok Chomes Program, she specifically examined the social and economic impact of the COVID-19 crisis on microfinance borrowers and loan restructuring processes. Apart from these, she has conducted research on a range of topics, including agricultural mechanisation and intensification, anti-malaria drug resistance, the subjectivities of financial literacy, and labour migration in the Sub-Mekong region. Her work has been published in Espace Politique, Malaria Journal, Development Policy Review, Development and Change, and Mekong Migration Network.
The views expressed in this article are solely mine
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