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A new report has shown that the ratio of banks’ non-performing loan (NPL) portfolios for 2025 increased to 7 percent. This surpassed the prudential limit of 5 per cent. The situation may weaken banks’ assets quality and balance sheets, despite the Central Bank of Nigeria’s insistence that the stability of Nigerian banks’ liquidity and capital positions remain solid. The average liquidity ratio stands at 65 per cent, which is well above the 30 per cent minimum requirement.
The CBN says the banks’ capital adequacy ratio currently stands at 11.6 per cent, a little more than the 10 per cent required. The report of rise in bad loans was contained in the apex bank’s latest macroeconomic outlook released a few weeks ago. It was sequel to CBN’s decision to end regulatory forbearance, a temporary relief that was introduced during the COVID-19 pandemic in 2020. The temporary relief measures had allowed banks to restructure pre-pandemic affected loans without immediately classifying them as ‘bad loans’.
During the pandemic, Nigerian banks, like their foreign counterparts, were permitted to reschedule stressed facilities to ease pressure on borrowers. However, in June 2025, the CBN directed the banks to operate under forbearance to suspend dividend payments, defer executive bonuses, and halt investments in foreign subsidiaries and offshore ventures. With the withdrawal of the regulatory relief, several previously restructured loans have now been reclassified as Non-performing loans. This has pushed the banks’ bad loans ratio above the regulatory threshold.
Undoubtedly, Nigerian banks experienced fluctuating NPL trend from 2021 to 2024. Despite the solvency of the banks, the latest spike in the banks’ NPLs is worrisome. In April 2025, bad loans in seven big banks in the country surpassed N1.57trillion, in spite of improved loan quality. Data compiled from 2024 financial statements of the banks showed that though the aggregate NPL ratio declined marginally to 3.93 per cent, down from 4.18 per cent in 2023, in absolute terms, bad loans are on the rise. Non-performing loans of seven banks grew by 30 per cent from N1.21trillion in 2023. This is against the backdrop of 39 per cent surge in total customer loans which expanded from N28.9trillion to N40.1trillion.
This was largely driven by the naira devaluation and the pursuit of higher interest income in a high rate environment like Nigeria. Besides the naira devaluation, the uptick in bad loans in the banks is linked to foreign denominated loans that now have a higher nominal value in naira terms. It also reflects a strategic response by banks to boost interest earnings, as interest income became the mainstay of their earnings. Therefore, with higher earnings by banks, this profitability comes at a heavy cost, that is, rising default in loan repayment. Consequently, higher lending rates are straining borrowers’ ability to repay, contributing to rising NPLs. Between 2024 and 2025, the industry witnessed the growing concentration of credit exposure to the traditionally high-risk sector of oil and gas, as well as manufacturing sector. Statistics show that loans to the oil and gas sector grew by 55 per cent to N11.5trillion from N7.4trillion in 2023, while manufacturing sector loans increased 44 per cent to N6.6trillion from N4.6trillion. The oil and gas, and manufacturing sector were often hard hit by foreign exchange (FX) volatility and inflationary pressures. Unfortunately, these constraints carry high latent risk.
Amid the unpleasant challenges that have resulted in bad loans, the banks can do more to significantly reduce the bad loans. There is need for stronger operational integration of the Global Standing Instruction framework. This is a policy that authorises the banks to recover past-due loan obligations from defaulting borrowers by directly debiting funds in any of the borrower’s account across all other participating financial institutions in the country. Beyond that, banks can substantially reduce bad loans through rigorous preventive measures during lending process and by implementing robust early detection and recovery strategies. This often involves using both traditional credit reports and attractive data to get a complete financial picture, especially for borrowers with credit profiles. While some banks are already doing that, others have not been operating within defined, strict lending criteria, thereby inflicting a lot of bad loans in their balance sheets.
This entails ensuring that loans are only granted to customers who are likely to pay within specified timeframes. In addition, banks should diversify their loan portfolios. This will insulate them from economic downturns. In fact, high-risk loans should require more collateral. This will reduce the banks’ risk.
Banks should not grant loans without due diligence. Transparency from the outset of loan agreement will help manage borrowers’ expectations. Maintaining a stable bad loans ratio will make the banks gain more investor confidence and stimulate economic growth.
