Firms apply for quality-product label
As the moratorium on debt repayment comes off sometime this year, the pressure of meeting loan repayment obligations might pose a risk to both loan providers and takers
LY LY Food Industry Co Ltd (Lyly Food) and Leang Leng Fish Sauce Enterprise became the first companies to apply for the newly-issued “Cambodian Quality Products” label at the Ministry of Industry, Science, Technology and innovation.
This comes after the ministry on February 8 called for factories, enterprises and cottage industries to apply for the label that recognises the quality and safety of their goods.
The ministry noted that it will process the applications at its one-window service office located at its headquarters on the southwest corner of the Norodom Boulevard intersection with Street 136 in Daun Penh district’s Phsar Thmei III commune.
The new label also serves to promote domestic products by improving quality and safety consistent with nationally recognised standards, penetrate the supermarket arena and instilling confidence in intermediary distribution partners and consumers, it said.
Ream Chanvanna, deputy director-general of the ministry’s General Department of Small and Medium Enterprises and Handicrafts, said Lyly Food applied for the label on four of its items and Leang Leng put in for six.
“Both companies are in the process and this’ll call for a meeting of the members of the Secretariat of the Commission for the Certification of Cambodian Quality Products to discuss, evaluate and give the first approval,” he said, adding that the ministry would look over the secretariat’s review and make the final decision.
Once given the nod from the ministry, the secretariat will hold a ceremony to award the labels to the businesses, Chanvanna said.
Lyly Food CEO Keo Mom told The Post that her company is very confident that the ministry will rule in their favour, asserting that Lyly Food complies with hygiene standards as required by law.
She said: “Receiving a ‘Cambodian Quality Products’ label will provide customers with more confidence in using our products and quell concerns over health risks.”
Srean Pich, a quality-control and food-safety inspector at Leang Leng,
said his company leads the Kingdom in the production of fish sauce, soy sauce, vinegar, chilli sauce, hoisin sauce and oyster sauce, which have a strong market and are made consistent with legal hygiene standards.
He said: “I’ve picked up on the fact that Cambodian products are currently up to standards. That being the case, getting a ‘Cambodian Quality Products’ label will help gear up our wares to capture competitive opportunities on the international market,” he said.
Federation of Associations for Small and Medium Enterprises of Cambodia (FASMEC) president Te Taingpor welcomed the two firms’ applications and vowed to call on members of his association to request the label.
He said: “Other enterprises should hurry up and apply for product certification as soon as they need it.”
The department’s director-general Hort Pheng said early in November that there were 52,154 formally registered small and medium-sized enterprises as of December 31, 2019, which contributed $2.6 billion to economic output that year.
But Covid-19 forced 13,690 of them to close or suspend their operations. Most were in the cigarette, food or beverage business, he said.
FOR many, the Covid19 pandemic brought their years of business to its knees. In Siem Reap, the tourism capital of Cambodia which posted a 97 per cent year-onyear fall in tourist arrivals as at end-November last year, saw nearly 1,500 hospitalityrelated outlets close down by September that year.
As for garment manufacturing, an industry that has held up Cambodia’s economy for decades, some 130 facilities have ceased operation.
A check around Phnom Penh would reveal shuttered businesses dotting the streetscape. What’s more, the negative impact is still unfolding as retail businesses, be it a coffee shop, local restaurant or convenient store, progressively ceased operation as the New Year rolled in.
Seemingly a delayed reaction to reduced consumer spending due to job losses, salary cuts and short-term restriction orders – the latter caused by intermittent spikes in Covid-19 cases – it is undeniably a sign that many could not hold off the pressure of rising debts amid lower sales.
It is also a sign of a looming credit risk flowing from the moratorium on debt repayment that is likely to come off in the middle of 2021, assuming the period is not extended.
As of December 31, 2020, a total of $4.2 billion loans of 285,074 borrowers had been restructured. Additionally, outstanding loan balance has shot up to $32.7 billion as of January 31, 2021, the latest
Credit Bureau Cambodia (CBC) data showed. If loan obligations are not met in the second half of 2021, a spike in non-performing loans (NPL) is in the offing.
Economist Dr Chheng Kimlong seemed to think so. “It is likely that NPL has increased to some extent among loantaking individuals and private
businesses.”
In fact, the most recent Covid-19 community transmission that bumped up total cases to 878, has raised some concerns for Cambodia Microfinance Association (CMA), which oversees a $6 billion market, as it expects an uptick of loan restructure requests in the coming
months.
While CMA waits to see the real impact, it does not expect the application volume to be anywhere big compared to that in mid-2020 because many trade or business activities are operating albeit at a slower pace, said its communication head Kaing Tongngy.
“People seem to be experienced
with such an outbreak and are continuing their daily lives [in a cautious manner],” he added.
Turnout is unclear
Overall, banks’ NPL expanded to 2.7 per cent last year from 2.2 per cent in 2019, whereas the ratio for microfinance institutions (MFIs) nearly doubled to 1.8 per cent from one per cent a year ago.
For Association of Banks in Cambodia (ABC) chairman In Channy, the rising NPL would depend on the sectors that the individual banks focus on.
If it focusses on the impact sector such as hotels, restaurants, transportation or real estate and property development, there is a likelihood of a negative impact on loan asset quality in the second half of this year.
“However, not all of them would have poor loan asset quality,” said Channy.
To date, estimates shared by the government in recent months show that more than 50,000 people in the tourism and manufacturing sectors are jobless. The government has been providing aid to them as well as poor households under the IDPoor national poverty scheme.
Separately, it is understood that scores of employees who faced salary cuts over the course of 2020 have yet to record a reinstatement of their previous salaries, which puts pressure on household income.
Early this year, the National Bank of Cambodia (NBC) revealed that customer credit rose 14.8 per cent year-onyear to $37.3 billion in 2020. This rounded up the value of total bank assets to $60 billion, up 15.7 per cent from 2019. Deposits increased 15.4 per cent to $33.8 billion in 2020.
Meanwhile, outstanding consumer loan balance was highest at 7.2 per cent quarter-on-quarter, totalling $9.8 billion in the last quarter ended December 31, 2020, CBC data stated. Of that, 52 per cent was personal finance while mortgage came in around 47.4 per cent.
Although loans growth is positive for the economy, the central bank did not rule out headwinds that could derail the upward momentum in the banking and microfinance sector such as a prolonged pandemic, soft global economy and sluggish tourism growth.
For now, it is difficult to predict the outcome if credit
risk unfurls in the financial institution sector, especially among microfinance institutions (MFIs) which restructured over $1 billion loans last year.
“It remains unclear how it will turn out,” said Kimlong, who is vice president of independent think tank Asian Vision Institute.
That being said, he indicated that the moratorium might see an extension as the pandemic has not subsided.
“Given its devastating impact on society and economy [as well as] production, supply chain, income-poverty dynamics and the private sector, the NBC and government is likely to extend the moratorium,” he opined.
However, he added, “if and only if”, the loan moratorium ended, MFI loan takers will face a financial hurdle on loan repayment obligations.
Broader loss allowance
This overall risk uncertainty is somewhat unnerving, particularly as some commercial banks have reported stellar financial results, underpinned by strong net interest income and return on assets.
But what is understated is that they have had to widen their allowance for expected credit losses (ECL), an accounting framework of the International Financial Reporting Standard 9 (IFRS 9) that requires banks to recognise impairment of loans.
For instance, Acleda Bank Plc, the only Mainboardlisted commercial bank on the Cambodia Securities Exchange, saw net profit grow 17.1 per cent to $141.5 million for its financial year ended December 31, 2020 (FY20), as revenue gained six per cent year-on-year at $578 million.
While total assets inched up to $6.6 billion in FY20, which included $4.5 billion net loans and advances, from $6.2 billion in FY19, its loanto-deposit ratio was at its highest in three years at 97.7 per cent.
Acleda senior executive vice president and chief financial officer Mar Amara puts this down to a bumping up in loans in the last fiscal year, which resulted in gross loan outstanding of $627.2 million, up 16.2 per cent during the pandemic.
“We made the plus out of a minus by making loan applications simple with high user experience via our Acleda mobile app. This is also applicable to deposits – current, savings and fixed term [with] flexible interest rates,” she said.
The group lowered its loan interest rates to range between 0.4 per cent and one per cent per annum on new applications.
But while it enjoyed a positive loans growth, its NPL ratio in FY20 was among the highest in recent years at 2.4 per cent. Following the amortisation of its loans, the group had to write up an ECL allowance of $35.3 million, about six per cent more than FY19.
The ECL is based on the possibility of loans defaulting in the next 12 months.
Amara, however, indicated that the risk is low in relation to the group’s assets, seeing that they are secured and collateralised at nearly 73 per
The supervisory results have shown that the banking institutions have been cent, higher than the previous sector, NBC moved swiftly last six months have remained per cent is the large-size loans levels. year. March to implement a host of steadily low, said CMA’s where borrowers are entitled “Since the lowest point of
The same scenario is likely Covid-19 monetary measures Tongngy, whose unit regularly to more than $30,000 credit, [NPL] at 2.6 per cent in May with other entities in the to inject liquidity. Yet, it is still monitors the NPL ratio. and where outstanding balance 2020, there has been significant banking sector but the ECL not taking any chances. Last year, 31.2 per cent of constituted 14 per cent. improvement to 1.7 allowance cannot be determined Three weeks ago, it asked household loans were approved, By the end of 2020, some per cent in January this year. as most Cambodian banks and MFIs to postpone followed by trading $1.4 billion worth of loans The figures have improved banks do not publish their dividend payouts from profits and commerce (20.9 per had been restructured but for small business as well as financial statements. to shareholders to preserve cent), agriculture (18.9 per “most-affected clients” have mortgage segments,”he said.
Nevertheless, the risk in the sector growth, stability and cent), services (16.2 per cent), resumed economic activities. However, he indicated that sector is imminent, noted certainty against any economic construction (3.8 per cent) “CMA has been observing with the latest outstanding loan Moody’s Analytics Inc which disruptions. and others (three per cent). the trends and potential balance at $32.7 billion, there issued a negative outlook on In the circular seen by The In that same period, over 2.8 risks of the MFI sector. However, has to be an joint approach to the banking sector for this Post, it also suggested that industry million clients deposited $3.8 based on our data, we see a downward revision. year in Asia Pacific (APAC). players draw up a feasible billion in six microfinance deposit-taking do not expect any big jump “While financial institutions
In a report last December, exit strategy for when the institutions. of NPL even after the loan restructure need to continue adopting it cited four drivers backing measures come to an end. CBC data showed that out policy ends in mid2021,” prudent risk management its forecast, including the This, despite lauding banks’ of the $6 billion total microfinance Tongngy told The Post practices, borrowers also need moderate weakening of asset overall solvency ratio and liquidity portfolio, micro credit via a social messaging app. to continuously monitor their quality, with loan restructuring coverage ratio in 2019. of less than $3,000, made up He acknowledged NBC’s directive financial health so that they and moratoria delaying 66 per cent, with an outstanding on dividend payouts, are fully aware of their ability the recognition of new problem balance of 17 per cent. stating that it would help to meet current and future loans, and prevailing low Small loans (between $3,000 shore up capital for the operation obligations,” he stressed. interest rates as high credit and $10,000) represented 24 of financial institutions. Even as there is some easing costs continue to weigh on per cent of total loans, with Echoing Tongngy, CBC CEO on the economy moving banks’ profitability. an outstanding balance of 33 Oeur Sothearoath said the forward, analysts think that
Moody’s Analytics also per cent. onset of Covid-19 had affected credit risks would play out as stressed that private sector Nine per cent of MFI loans the overall economy with a gradual unwinding of extraordinary debt would remain high in featured medium-size loans, certain sectors seeing more support from governments some parts of APAC due to ranging between $10,000 and significant impact. and central banks weak earnings while solvency $30,000. This segment had The credit market has started might test borrowers’ abilities concerns weigh on hard-hit the largest debt accrued at 36 showing signs of positive to pay back their creditors. companies and governments. per cent. recovery although the performance “Asset risks could grow, and Obviously a red flag on the The smallest account at one has not reached preCovid-19 NPL may increase further. Increases in NPL in 2021 will be moderate as economic recovery kicks in and banks pursue targeted loan restructuring as loan moratoria expire,” Moody’s Analytics said in the December report.
Nevertheless, it also found that monetary policies in the APAC region would remain accommodative.
“[It would] be a negative for banks’ net interest margins but a positive for borrowers’ abilities to service their debt and banks’ asset quality,” it said.
Regardless, ABC’s Channy, who is Acleda’s president and group managing director, is confident that banks would continue to stay strong since customers would not let their own businesses down.
“Banks are like any other business, they will balance three things – cost, benefit and risk. They will find the best way to mitigate risks. They won’t put their portfolios in the [way] of bad NPL,” he said.
Testing borrowers’ paying ability
Interestingly, the MFI sector, which together with commercial banks have offered over $10 billion micro loans to 2.6 million borrowers as of December 31, 2019, has little expectation that the NPL ratio would increase sharply in the second half of 2021.
This is because requests for loan restructure in the last
oans
LOUISIANA Famous Fried Chicken came to the land of its owner’s birth last year with the opening of its first restaurant in Cambodia, in the capital’s Chip Mong Noro Mall.
The history of LFFC is one dominated by the drive to succeed of Cambodians in the US, with one – Michael Eng – taking over the entire chain in 2009 after almost two decades of hard work.
And the arrival of the Cambodianowned international fast food chain in the Kingdom brings full circle a remarkable story of resilience, one that has inspired the restaurant’s general manager, Chan Katarina.
“Michael Eng’s story is very inspirational. Every aspect of his hard work has inspired not just me but many Cambodian immigrants in the US. On top of working hard, he had the vision, commitment and strong will to take over the LFFC food chain brand.
“Additionally, his focus on opening up business ownership to Cambodian people complements his love for
LFFC and his Cambodian heritage. It shows that through hard work and perseverance, one’s dreams can become reality. And I want to carry on the torch of LFFC and continue his legacy in our homeland Cambodia,” Katarina said.
Eng’s success story is one of hard work and determination. Having arrived in the US aged just 18 in 1992 after surviving the Khmer Rouge regime, he took a job mopping floors at an LFFC restaurant in LA, California.
Within two decades Eng would own the entire chain of the 100 or so restaurants, buying the Louisiana Famous Fried Chicken name from its founder Joe Dion in 2009.
And his influence on Katarina can be seen in her drive to succeed after her college education was curtailed due to financial constraints.
“I was born in Phnom Penh, and my family wasn’t well-off financially so I didn’t get to finish college. In hopes for a better future, my mother borrowed money to pay for my sister to move to the US.
“She started work at an LFFC restaurant in downtown LA as a cashier, working hard to earn enough money to be able to manage one of her own. I had the opportunity to visit
her and help her with her business. It was at that restaurant where my passion for cooking was ignited.
“And I thought: why not open an LFFC restaurant in Phnom Penh? I wanted to introduce Cambodians to the unique, flavourful LFFC taste that I believe in.
“I also wanted to bring Southernstyle cuisine to the Cambodian market and give other Cambodians the chance for success as business owners with franchising opportunities. And after getting approval from Michael Eng, this has become a reality with Cambodia’s first LFFC store at the Chip Mong Noro Mall,” Katarina said.
LFFC founder Dion said in the 2017 Los Angeles Times article “How Cambodians became kings of beloved South LA fried chicken chain” that Cambodians are a big reason for the chain’s success.
By 2009, 90 per cent of the 100 or so restaurants were Cambodianowned,
and “today there are a total of 185 restaurants in the world”, Katarina said.
“We have restaurants in Bolivia and Vietnam, as well as Cambodia, with the majority in the US, while there are plans to franchise outlets in more Asean countries and China.
“The Covid-19 pandemic has stumbled many plans, ours included. But this year we are picking up again and planning to open more stores, along with promoting franchising opportunities to those interested in the food and beverage business.
“We also plan to branch out into major provinces such as Preah Sihanouk and Siem Reap in the near future,” Katarina said.
Dion opened the first LFFC restaurant in South LA in 1976. A Michigan native, he claims to have obtained the recipe from New Orleans chef Paul Prudhomme.
And while the link to Louisiana’s famous city of jazz inspired the chain’s name, it is also key to its recipe, with the chicken coated in what the company describes as a “zesty Cajun batter fried to a soft crunch and finished with a slight, spicy heat”.
“Our well-balanced Cajun seasoning carefully hand-breaded with a special
powder mix sets our fried chicken apart from the others. These combinations make our ‘Cajun Kick’n Chicken’ receive the highest compliments.
“Cambodian and foreign customers of all ages love our fried chicken, which makes me so happy. I take it as proof of how good our fried chicken is that customers keep coming back again and again.
“We have received many requests from customers to open more outlets, with some even asking for franchising opportunities from us. So I guess many people also really believe in our tasty fried chicken!” Katarina said.