COVID-19 spells debt overhang for households

Although COVID-19 is posing severe challenges to people of all sections of the society, the most affected are the households with loans. As a result, it spells a situation of debt overhang and likely onset of defaults, points out a report by the Central Bank of Oman. “Notwithstanding the high credit quality of the households before the pandemic, the COVID-19 outbreak poses severe challenges to a cross-section of the households,” states the apex bank in the Sustainability Report released last week. The contraction of economic activity has adversely affected the earnings and employment conditions of the households and has increased vulnerabilities in the household debt portfolio. Moreover, points out the report, “Deferment of loan instalments to help affected borrowers fare through the pandemic has extended maturity profile of the household.” Since the onslaught of the pandemic, the Central Bank announced a slew of measures including loan deferment schemes to support the affected borrowers. According to the apex bank’s report, household indebtedness relative to non-oil GDP rose during the past few years as the household credit grew at a faster pace than the non-oil GDP. In Oman, the likely shocks from household loans, which are also known as personal loans, are limited through caps on interest rates and limits debt burden by setting repayment patterns based on income. Still, says the report, “There remains a risk that some households may experience financial stress in the event of a large negative shock.” Lending to the households grew steadily over the last five years from RO 8.3 billion in 2015 to over RO 10.3 billion in 2019. However, household debt-to-income ratio remained broadly unchanged. During 2019, the borrowing by households increased at a slower paced by 2.5 per cent than the total balance sheet of the banking sector at 3.6 per cent. “This modest growth in lending to households reflects weaker demand, changing risk appetite for longer tenor loans in the interest rate expectations, and stringent non-price credit terms,” adds the report. SAMUEL KUTTY @samkuttyvp