Nigeria’s banking sector has reported a concerning increase in bad loans following the Central Bank of Nigeria’s (CBN) decision to withdraw regulatory forbearance that was initially granted to lenders during the COVID-19 pandemic. According to the latest macroeconomic outlook report from the CBN, the Non-Performing Loans (NPL) ratio in the industry surged to approximately 7%, significantly exceeding the prudential benchmark of 5%.
The rise in bad loans reflects the challenges faced by banks as the CBN ended temporary relief measures that allowed them to restructure pandemic-affected loans without immediately deeming them non-performing. As these measures were lifted, many previously restructured facilities became classified as bad loans, leading to the spike in NPLs.
Despite this worrying trend, the CBN has emphasized that the overall stability of the financial system remains intact. The organization highlighted robust capital buffers and liquidity positions across the banking sector, with an average liquidity ratio of 65%, well above the 30% minimum requirement, and a capital adequacy ratio of 11.6%, exceeding the 10% threshold.
The CBN attributes the sector’s resilience to strong interest income, ongoing digital transformation efforts, and a recapitalization program aimed at strengthening banks’ balance sheets. This recapitalization policy raises minimum capital requirements to enable banks to support the real sector more effectively.
However, the report also cautions that the significant increase in NPLs may impair asset quality and weaken banks’ balance sheets, potentially posing systemic risks. The CBN recommends enhancing loan recovery efficiency and credit discipline through the Global Standing Instruction (GSI) framework.
In light of these developments and the expectation of sustained economic challenges, the CBN is urging banks to adopt better risk management practices and diversify their loan portfolios to mitigate future shocks. As Nigerian lenders navigate these complexities, the CBN remains committed to ensuring financial stability through stringent supervision and proactive macro-prudential measures.
