Business failures are increasing but the bulk of business entering insolvency are small and have little debt, presenting little risk to financial stability.
The latest Reserve Bank Financial Stability Review said there has been limited impact on lenders from small business failures and larger companies remain able to service their debts.
The RBA said banks are well placed to manage any further worsening in credit quality from business loans.
“The share of business loans extended by banks that are non-performing has remained steady at low levels,” said.
Non-banks are more exposed to risker business loans and their share of business credit has been increasing.
“Some market reports have suggested that non-performing business loans have been increasing at some non-bank lenders but system-wide business loan arrears data are not available across the non-bank sector,” the RBA said.
For those small business that do have debt, the impact of higher interest rates tends to be greater than for bigger businesses. The use of interest rate hedges and issuance of longer term fixed-rate debt slow the pass-through of higher interest rates to larger companies.
The RBA said challenging economic conditions will continue to affect business finances in the year ahead but this is unlikely to translate into broad-based stress across the business sector.
Cost pressures for labour and non-labour inputs remain elevated, and some firms are finding it difficult to pass higher costs through to the prices paid by consumers.
Firms experiencing challenging conditions tend to be in discretionary sectors, as households have pulled back on consumption. This has led to more significant declines in profitability in the retail and hospitality industries.
Company insolvencies have risen to more normal levels, as COVID support measures have been withdrawn and the economy has slowed. The construction sector accounts for the biggest share of business insolvencies.
Offsetting this trend, business-related personal insolvency numbers remain low. The share of businesses with severely overdue trade credit has increased but remains the pre-pandemic average.