Time to rein in rising bad debts in Nigerian banks

Once again, many Nigerian banks are reporting resurgence in bad debts. Official records indicate that some banks have exceeded the regulatory limit for bad or non-performing loans permissible in the industry.

This is unfortunate and demands immediate action by the banks and the regulatory agencies. It is a return to the dark days of irresponsible credit growth that brought the nation’s banking system to its knees. Nigerians who experienced the crash of the local financial system in the wake of the global meltdown of 2008–09 will not forget in a hurry the trauma that irresponsible, poor credit control brought upon them.

That crash imposed costs on investors, the banking sector, and the federal government. Investors who bought banks’ shares watched as their wealth vanished. Some banks sank, while the government spent billions of naira through its bailout package to minimise the contagion effects that threatened the entire financial system.

In the aftermath of the crisis, the Central Bank of Nigeria (CBN) established regulatory measures to strengthen credit control and management processes and prevent the recurrence of such massive, poor-quality credit management by the banks. Part of that was the imposition of a five per cent limit on non-performing loans permissible in the banking system. However, over time, some banks have been exceeding this prudential threshold. Long before this recent development, the World Bank had raised an early warning signal, alerting authorities to the potential threat that this posed to the banking sector and the economy generally. The Bank made this declaration in 2024, when it said the NPL ratio had crossed the prudential limit, pushing it to 5.1 per cent.

However, by April 2025, at least 11 banks were found to have exceeded this limit, pushing the industry average NPL ratio to 5.62 per cent. According to the CBN account, the discovery of these excesses followed an industry-wide loan reclassification as part of a risk assessment exercise.

This deterioration in the banks’ credit quality can no longer be ignored. Nigeria cannot afford to return to the era of costly bank bailouts. We created the Asset Management Corporation of Nigeria, the special purpose vehicle that soaked up bad debts and restored life to the banking sector. That process was financed at a high cost to the public purse. Nigeria cannot afford another bailout programme at this time.

The 2008–09 case showed that the problem of NPL build-up was magnified partly by regulatory slackness. Operators, especially in the banking sector, easily engage in careless or unprofessional conduct in situations that demand professionalism. They indulge in such acts because they are not the ones who bear the consequences of wrong decisions. This explains the establishment of regulatory and supervisory agencies to put such operators under constant check.

From the banks and their inspection departments to the CBN, the Nigerian Deposit Insurance Corporation, and the Economic and Financial Crimes Commission, Nigeria has more than enough institutions to ensure the safety of the national banking system and safeguard depositors’ interests.

Banks must follow the approved credit appraisal processes, a key element of which is knowing the customer. Unfortunately, this important element in credit analysis is being neglected by the banks. In situations where this happens, it is often linked to insider loans. When powerful people connected to banks, such as directors or their cronies, apply for loans, this KYC policy becomes a casualty. It is little wonder, then, that a significant portion of the NPLs is traced to such powerful insiders. This is a matter that the banks must urgently investigate. It is immoral for those appointed as guardians of people’s resources to turn around and constitute a threat to the assets under their watch.

Beyond credit appraisal and approval, banks have an obligation to constantly monitor the quality of credits they give out. Therefore, they should strengthen their inspection departments to identify early enough when creditors begin to show signs of delinquency.

This leaves the CBN and the NDIC to undertake unscheduled inspections of banks’ books. This is the only way to keep them on their toes. With the increasing sophistication in fraudulent activities, these institutions must strive to be ahead of the banks in identifying wrongdoing.

Finally, Daily Trust calls on the EFCC to rise to its duties. This agency, which has vowed zero tolerance for financial crimes, should up its game to rein in abuses in the banking system. We call on it to get to the roots of all known delinquent insider loans and bring all those involved to book, because that is abuse of office and privilege. This will serve as a deterrent to others.

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