Household finances hit harder than corporates amid economic crisis: reveals CB analysis

• Small businesses eclipse general households in reporting higher non-performing loans 

Household balance sheets suffered more extensively than corporate balance sheets from soaring interest rates and inflation during the economic crisis leading to a reduction in consumption and causing deep cracks in their creditworthiness.

The financial system stability review of the Central Bank through the first six months of 2023 showed that while the non-performing loans ratios of both segments had risen sharply, households had reported higher NPLs than the institutional sector, reflecting bigger default risks in the sector. 
A more detailed analysis of the asset quality within the household sector reveals that loans obtained by micro, small, and medium enterprises (MSMEs) exhibit more pronounced asset quality issues compared to loans taken for general household purposes.

The analysis has been conducted by Central Bank based on the Credit Information Bureau data for the period ending June 2023. 
When the economy plunged into crisis, experiencing runaway inflation peaking at 70 percent in September 2022, individuals faced job losses and income reductions. This led to substantial cuts in their consumption, compelling them to adjust their lifestyles to levels they might never have imagined.

As a consequence, many individuals depleted their meager savings and resorted to taking out loans after exhausting those savings. This was done to bridge the financial gap until their incomes are restored. 
However, this recovery has yet to materialise, as companies persist in operating with minimal staff under persistently precarious conditions. Consequently, the incomes of small businesses have not experienced meaningful growth.

For instance, employment in the construction sector, which is a major employer in the country, particularly for blue-collar workers, has not started to rehire individuals who were previously laid off. This was highlighted by the construction sector Purchasing Managers' Index for November, as reported last week.

The crisis also ripped through the balance sheets of a large section of the big corporates as indicated in the financial system stability review as their creditworthiness took a dive.  “The non-financial corporate sector also witnessed a deterioration in creditworthiness during the period under review as reflected by the decline in the Interest Coverage Ratio and solvency of the sector which affected the credit quality of financial institutions,” the Central Bank said.