Slower credit growth on the horizon for Cambodian lenders

Earlier covenant breaches will continue to be a problem for some of the banks.

Cambodian banks are expected to turn cautious in their lending activity leading to slower credit growth.

This lower demand for loans will ease funding strain, but covenant breaches pose risks, said Ruchika Malhotra, primary credit analyst for S&P Global Ratings.

Debt covenants are restrictions that lenders put on lending agreements to limit the actions of the borrower, as defined by the Corporate Finance Institute (CFI).

Breaches happen when the borrower fails to meet these conditions, such as financial ratios.

In 2024, three Cambodian banks— ACLEDA Bank, Hattha Bank, and LOLC (Cambodia) all breached their covenants. This followed after a rise in bad loans, which exhausted the banks’ buffers.

“Covenant breaches could affect the availability and cost of funding for Cambodian banks. Lenders could demand immediate repayments or higher spreads for the heightened credit risk,” S&P analyst Ivan Tan had warned in a report in September 2024.

Malhotra echoed this sentiment.

“In our view, the large banks we rate will ride this out, but if the current tolerance for covenant waivers abates, it could hurt smaller and weaker banks,” Malhotra said.