Non performing loans an issue, economists say

VIENTIANE (Vientiane Times/ANN) - Laos banks taking initiative to reduce non-performing loan ratio. 

Commercial banks in Laos, particularly those state-owned are moving to improve their stability and minimise the rate and impact of non-performing loans (NPL) relating to private sector financing.

The Bank of the Lao PDR intends to limit the rate of non-performing loans issued by commercial banks to not more than 3 per cent of their total credit, according to sources in the sector.

Nevertheless, NPLs on the books of commercial banks, particularly the state-owned variety is currently higher than 3 per cent, posing increased potential for adverse impacts on financial and economic stability should the country’s external position deteriorate in the face of fluctuations in the global economy.

Mana Southichak is an independent economist who has undertaken significant economic research for the government, international organisations and private companies.

He said substantial amounts of money had been pumped into the real estate sector in Laos over the past ten years, in particular, commercial buildings for rent and sale.

Nonetheless, some borrowers are finding it increasingly difficult to draw returns on those investments through rent or sale and are increasingly at risk of failing to make repayments promptly.

“It’s not easy to sell land plots or to build blocks these days, so it is suddenly difficult for developers to repay money to banks. This is one of the factors driving the current NPL rate in Laos,” Mana said.

He said some ventures had not followed their investment plans and terms of loans by using money borrowed for other purposes.

For instance, they initially requested the commercial banks for loans for commercial production, but used it instead to speculate in real estate, purchasing promising land plots and holding on to them before reselling to earn profits. 

Economists say it is critical to ensure that all loans offered to entrepreneurs for ventures are made in a transparent and accountable fashion.   

It is important for all loans to be granted on merits and without special favours to be prudent and transparent to minimise the risk of NPLs to the country’s economy. 

Meanwhile, bankers attribute the rising NPL rate to loans funding private sector operators’ contributions to state-funded infrastructure projects.

They say private companies are waiting for the government to pay monies as agreed so as to access the financial liquidity to make their own loan repayments.

One of the most important considerations is that many utilise land titles as collateral to borrow funds from banks.

Bankers say although banks may not get their loans repaid promptly, they will likely recoup in time based on the terms of the loan and the quality of collateral secured.

In 2013 Laos was urged to put a dampener on rapid rate of credit growth in a bid to maintain macroeconomic stability by the International Monetary Fund (IMF).

The institution said that a rapid rise in credit would likely result in greater imports, one of the main factors causing a drain on foreign currency reserves.

As of July 2016, commercial banks had recorded deposits totalling more than 59,616 billion kip, representing 54.84 per cent of GDP, an increase of 5,692 billion kip compared to the same period the year before.

Credit in the banking system climbed to more than 60,262 billion kip, equivalent to 55.43 per cent of GDP.

The credit held by all 42 commercial banks accounted for 49.55 per cent of GDP.

Last year, the government announced an intention to increase deposits in commercial banks to 84 per cent of Gross Domestic Product (GDP) by 2020 to meet growing development needs.

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