The outbreak of the Covid-19 virus has impacted many businesses, especially small enterprises that are struggling to survive. The lockdown measures have led to massive layoffs; for instance, in China, around 8 million people lost their jobs in February 2020. The loss of income for these individuals significantly affects their ability to repay debts, inevitably leading to a substantial number of household defaults.

China has been the first country to signal rising defaults among small borrowers. Bloomberg reported, citing sources from two Chinese commercial bank executives, that the amount of overdue credit card debt in February 2020 increased by 50% compared to the same period the previous year.

Meanwhile, “Chutian,” an online consumer lending service, revealed that in February, the rate of late payments among small borrowers rose to 20%, up from just 13% in December 2019.

“Zhao Jian,” head of the financial research team at the Atlantis Institute in Beijing, pointed out that the default rate for small borrowers in Chinese banks has risen to 4%, compared to just 1% before the Covid-19 outbreak.

The debt problem in China, particularly household debt, has been accumulating since before the Covid-19 outbreak. In 2019, China's household debt reached approximately $7.75 trillion. Reports indicate that rising real estate prices and the growth of online lending companies, such as Alibaba's Ant Financial, have fueled this massive household debt.

Analysts from China International Capital Corporation, a Chinese investment bank, noted that since 2015, financial companies have been easing lending criteria to enhance competitiveness, which poses significant risks if a severe economic event occurs, such as the Covid-19 outbreak that has led to recession and high unemployment.

Many other countries worldwide facing the Covid-19 pandemic may also encounter similar issues with small borrower defaults. An analysis from the Peterson Institute for International Economics indicates that global household debt has accumulated to $12 trillion more than during the financial crisis of 2008, causing the household debt-to-GDP ratio in several countries to reach record highs, including France, Switzerland, New Zealand, and Nigeria.

The Covid-19 outbreak has severely impacted the ability of small borrowers to repay debts. For example, in the United States last year, credit card debt surged to a record high of $930 billion, while lockdown measures in several states resulted in 3.28 million job losses within a week, creating significant risks that these individuals would be unable to repay their debts.

Therefore, economic relief measures are critically necessary. The severity of this issue depends on the government's effectiveness in controlling the outbreak and the quality of economic relief measures. Recently, the U.S. implemented a $2.2 trillion stimulus package, which includes direct cash payments to Americans and low-interest loan programs for businesses, particularly SMEs.

China has also injected substantial funds into the system, urging financial institutions to lend to small businesses, which account for 80% of the country's workforce, along with debt repayment deferral measures implemented in Wuhan, which analysts expect may be expanded nationwide.

While these measures may alleviate some problems and increase liquidity for small borrowers, a report from the International Institute of Finance (IIF) indicates that the long-standing household debt issue means that relief measures cannot adequately cover all those affected and only provide short-term relief. Particularly in China, the ratio of household debt to income rose to 92% in 2018, compared to just 30% a decade ago.

Thus, government measures may not fully address the issue of defaults and may not encompass all those affected, especially in a global economy that is slowing down or entering recession, amidst a long-standing household debt problem that has become a new ticking time bomb due to the Covid-19 situation.

Relief measures are crucial to monitor, as the Thai government is currently working to address immediate issues by injecting funds into the system to help alleviate and support those affected, enabling them to navigate through this Covid-19 crisis.