Cambodia’s central bank is preparing to allow private asset management companies ( AMCs ) to acquire bad loans from commercial banks, but views among the banks are mixed, according to a recent report.

“Some private sector banks favour a state-sponsored AMC,” states the International Monetary Fund ( IMF ) in its report on annual consultations released in Washington on December 2.

The Association of Banks in Cambodia supports a public AMC, but “faces differing views among its members,” the report says. “They envisage the AMC as a mechanism to clean banks’ balance sheet quickly, encourage capital injections, facilitate corporate restructuring, revive asset prices ( particularly real estate ) and reduce uncertainty.”

Notwithstanding the mixed feelings among banks, the IMF notes that the central bank –  the National Bank of Cambodia ( NBC ) – is already putting together regulations to allow the creation of private AMCs.

The NBC is also working on strengthening the bank resolution framework and establishing a deposit insurance system.

“Authorities are mindful that a state-sponsored AMC entails significant fiscal and quasi-fiscal risks,” the report says, “and are not pursuing that route.”

Last-resort option

A state-sponsored AMC, the IMF notes, is often considered a “last-resort option” to help banks resolve their non-performing loans ( NPLs ) and allow them to focus on core operations.

However, before choosing that option, the fund adds: “Policymakers should be committed to recognizing and fairly allocating losses ( including those on related parties ); addressing any shortcomings related to the legal, institutional, regulatory and market environment for NPL management; and making a realistic assessment of the risks and costs that an AMC will entail.

“[In Cambodia,] proper conditions are not present for the establishment of a state-sponsored AMC. “[Moreover,] AMCs do not offer blanket solutions, and managing AMCs poses significant challenges and risks.”

Focus on banking reforms

As such, authorities are appropriately focusing on alternatives – banking sector reforms – that embark on greater market discipline. These include early supervisory intervention and better asset-quality assessment, along with advancing regulations on bank resolution, emergency liquidity assistance and deposit insurance frameworks.

Authorities are also working on legal reforms towards improving bankruptcy, foreclosure and collateral recovery processes to facilitate NPL resolutions.

“These reforms, coupled with efforts to address the governance-related risks, are the priority, and [they] strengthen market discipline for banks to improve their business models under enhanced supervisory and regulatory frameworks,” the report points out. “Banking sector reforms should supersede the establishment of a state-sponsored asset management company.”

Public AMC recovery rates, the report notes, are usually below 33%. Over the past three decades, relatively successful cases in Sweden ( 51% of book value recovered ), Malaysia ( 64% of asset value recovered ) and Ireland ( 43% of book value recovered ) were “all characterized by strong legal frameworks.”