Signals back to green for German rail operator
MFIs seek regulator’s support
THE apex body for the nation’s microfinance industry announced yesterday that the central bank had tentatively agreed to a number of measures it had requested to ease the burden on microfinance lenders following last week’s unilateral decision to cap annual interest rates at 18 percent as of April 1.
Hout Ieng Tong, chairman of the Cambodia Microfinance Association (CMA), told reporters that senior officials at the National Bank of Cambodia (NBC) had “agreed in principle” to reduce the annual licence fee of microfinance lenders affected by the new interest rate ceiling and provide loans in Khmer riel directly to microfinance institutions (MFIs) while acting as a guarantor.
He said the NBC would consider postponing a 12.5 percent reserve requirement on borrowing that was supposed to apply to microfinance deposit-taking institutions (MDIs) this year, as well as the deadline for microlenders to reach their revised minimum capital requirements.
MFIs are currently required to raise their paid-up capital to at least $1.5 million by March 2018, while MDIs must reach $30 million.
Ieng Tong said if the central bank were to follow through on these measures he was optimistic that the microfinance sector could weather the sudden imposition of an 18-percent cap on interest – a drastic cut from the prevailing 20 to 30 percent rates offered on loans under $1,000. Analysts have warned the new interest rate ceiling could bankrupt dozens of MFIs while drying up credit channels to the poor.
“At first, when the interest rate cap was announced, we were very worried . . . and we still hope that there will be not any institutions that go bankrupt because of this new policy,” said Ieng Tong. “But if the central bank helps us to cut the costs of our operations, it will allow us to operate sustainably.”
“Even if the financial institutions face lower profit margins, the cap can work and it could end up benefitting clients,” he said, adding that individual firms would still have to streamline internal operational costs to ensure that they continue to grow and meet credit demands.
But just to be sure, the CMA has also sought the approval of the Ministry of Economy and Finance (MEF) to exempt MFIs from tax on profit, he announced.
CMA board member Bun Mony, chairman of Vithey Microfinance Plc, said the central bank’s willingness to consider the CMA’s requests may have hinged on back-channel negotiations.
“We met with General Hun Manet last week and tried to inform him about the difficulties of this policy to the sector,” he said, adding that Manet – the eldest son of Prime Minister Hun Sen – had said the government was keen to find solutions that would allow microlenders to continue supporting rural areas.
“The problem is that some of his colleagues in the government think that all MFIs are hugely profitable and can handle this 18 percent cap, which some can, but they don’t fully understand the market and that the smaller players giving small loans are barely profitable,” Mony added.
Sok Voeun, chief executive of LOLC (Cambodia) Plc, said the rate cap would slice deep into the MFI’s profits, but was unlikely to sink it.
“Our return on equity will decrease significantly this year and next year,” he said. “In the past, we use to get a return on equity of about 20 to 25 percent, but this year we might receive maybe 5 to 10 percent.”
He said the 18 percent interest rate cap would make small loans unprofitable, but the losses could be offset by profit on loans of $3,000 or more, which account for about half of LOLC’s portfolio.
“Though we will face losses, we cannot ignore customers who ask for small loans,” he said. “We will still provide small loans and hope profits from larger loans will offset our losses.”
Voeun said there was no sign that foreign backers would stop providing capital to Cambodian microlenders, as some analysts feared. However, they were pushing MFIs to trim high operational costs and stop hiring new staff until the situation improves.
“We will cut costs and strengthen our staff productivity,” he said. “For example, a credit officer who handles a loan portfolio of $200,000 will now be tasked with handling portfolios of $300,000 to $400,000.”
Stephen Higgins, managing partner of local investment firm Mekong Strategic Partners, said that internal MFI cost cutting was a given.
“MFIs will accelerate cost-reduction strategies, which might include shrinking branch networks, reducing staff numbers, and redesigning products,” he said.
Higgins said there were various things that the NBC could do help the sector, but a cut in profit taxes should not be on the table as financial institutions should pay their fair share.
“Reducing branch licence fees would be a sensible move to help MFIs justify retaining branches in marginal areas,” he said. “And eliminating withholding tax on offshore borrowings would help to substantially reduce funding costs.”
Additionally, if the NBC did put a hold on implementing the 12.5 percent reserve requirements on wholesale borrowing for MDIs – a measure widely seen as a negative for the sector – it would be helpful, he added. PUBLICLY owned German rail operator Deutsche Bahn said yesterday it returned to profit in 2016 after its first loss in 12 years, vowing that it would push on with reform under a new boss.
Net profit stood at 716 million ($773 million) last year, a rebound from the 1.3 billion lost in 2015 as Deutsche Bahn struggled with problems in its freight division, the impact of harsh storms in Germany and repeated train drivers’ strikes.
“2016 was a good year for us,” chief executive and finance director Richard Lutz told a press conference in Berlin – just one day after formally taking the reins from former boss Ruediger Grube, who abandoned the top job over disagreements about extending his contract.
Lutz, 52, said yesterday that he will push on with reforms launched by his predecessor rather than switching to a new track.
Since mid-2015, Deutsche Bahn has been tightly focused on quality as it fends off low-cost competition from long-distance bus operators.
In 2017, the group will spend some 7.5 billion on upgrading Germany’s rail network, which bear its own trains as well as smaller privately-owned competitors – a move it hopes will help cut down on delays.
While the rail operator was able to increase punctuality – which it defines as arriving with less than six minutes’ delay – to 79 percent in 2016 and 84 percent so far in 2017, it remains the butt of frustrated but fond jokes among the German public.
The new year has also seen Deutsche Bahn install free WiFi service on all of its high-speed ICE trains.
Across Europe, the rail company transported people on some 4.4 billion journeys by train and bus last year, an increase of 81 million over 2015’s figure.
But freight division DB Cargo continues to weigh the firm down, making an operating loss of 81 million. Beyond Germany’s borders, foreign passenger services arm DB Arriva and logistics division DB Schenker face risks from Britain’s vote to quit the European Union.
“We see Brexit and the fall in the value of the pound linked to it as challenges for our business,” said CEO Lutz.
The new boss plans to compensate by expanding Arriva outside Britain, especially into eastern Europe.
Looking ahead to this year, Deutsche Bahn aims to bring in revenues of 41.5 billion – around one billion more than 2016 – for an operating profit of at least 2.1 billion.
“I can’t promise to our customers and employees that all the Bahn’s problems will vanish at a stroke,” Lutz declared from a podium between two ICE trains at a Berlin maintenance site.
“But I and my colleagues on the board promise to work with all our might to make Deutsche Bahn more attractive day by day.”
[I]f the central bank helps us to cut the costs of our operations, it will allow us to operate sustainably