Lao Economy

Economists Concerned About Increase In Non-Performing Loans

Source: Vientiane Times

Economists have expressed concern over non-performing loans (NPL) that banks have given to the private sector.

Bankers said NPLs are currently higher than the rate of 3 percent set by the Bank of the Lao PDR, which could have negative impacts on financial and economic stability.

A senior banker who asked not to be named said the rising NPL rate is linked to state infrastructure projects, with private companies waiting for the government to reimburse them so they can in turn repay their bank loans.

One of the most important features to note is that people mostly use land titles as a guarantee to borrow money from banks.

However, as a result of economic slowdown, it’s not easy to sell land and this is one of the factors driving up the NPL rate.

Bankers say although commercial banks may not get their loans repaid promptly, they will get them later on since the commercial banks often take into account issues related to NPLs.

Dr Mana Southichak is an independent economist who has done a lot of economic research for the government, international organisations and private companies.

“I have learned that the NPL rate is rising, particularly in state commercial banks,” Dr Mana said.

“If this continues, it could affect the banks’ financial stability as they need to have sufficient cash to pay their customers on demand.”

As of June last year, the volume of money circulating in the economy (M2) increased by 11.3 percent compared to the same period the year before, according to a government report.

The rise in credit took place after the central bank lowered interest rates to make it more affordable for entrepreneurs to borrow money from banks and boost domestic productivity .

The central bank should increase efforts to keep non-performing loans at below 3 percent as planned, otherwise the country will face economic challenges.

In 2013, the International Monetary Fund (IMF) urged Laos to put a dampener on rapid credit growth if it wanted to maintain macro-economic stability.

The international finance institute said the rapid rise in credit would result in higher import values, one of the main factors causing a drain on foreign currency reserves.

Last year, banks in Laos implemented stricter controls on foreign currencies notably the Thai baht and US dollar in a move to stabilise exchange rates and sustain the economy.

The move came after Laos encountered falling foreign currency reserves because businesses constantly require Thai baht and US dollars to import goods.

The falling reserves are the result of Laos’ exports, predominantly mining and agricultural commodities, which have fallen while imports are increasing and this trade has to be paid for in foreign currencies, according to economists.