There is no doubt that banks play a crucial role in economic development as they contribute to the well-being of Nigerians by assisting interested individuals and corporate bodies in setting up businesses.
Many think that the problem of Nigeria’s economic development is not the availability of funds to run businesses but the ability to repay loans over the years.
The rate of credit defaults in Nigeria has been described as worrisome, especially in recent times.
However, the Central Bank of Nigeria (CBN) and other researchers have assessed the rate of credit default in Nigerian banks and discovered several factors responsible for it.
Some factors that affect credit default rates in Nigeria include inflation, unemployment, and poor credit management.
Higher inflation rates are associated with higher credit default rates while higher unemployment rates also contribute to it.
Many also believe that poor credit management can lead to banks declaring fictitious projects and non-performing assets while inadequate feasibility studies can affect loan repayment.
Diverting bank loans to unprofitable ventures can affect loan repayment and poor attention given to the distribution of loans can negatively affect bank performance.
CBN report
In a report by the Central Bank titled “The Credit Conditions Survey Report, Q4 2024”, credit default in banks across the country was high while the performance of corporate loans is impressive.
Central Bank of Nigeria (CBN) disclosed in the report that lenders, including commercial banks and other financial institutions, recorded higher default rates for secured, unsecured and corporate loans in the fourth quarter of last year (Q4 2024).
Credit default refers to when a lender is unable to collect a payment on an outstanding debt.
The report added that about 91 per cent of loans obtained from banks by companies are performing.
According to the report, corporate loan default stood at nine per cent in the fourth quarter of 2024. It stood at 6.2 per cent in the third quarter, 2.8 per cent in the second quarter and 4.5 per cent in the first quarter of last year.
The CBN outlined the factors contributing to corporate credit demand to include commercial real estate, balance sheet restructuring, inventory finance, capital investments, merger and acquisition.
The apex bank said there was increased credit availability for corporate borrowers while secured lending to households dropped.
Similarly, the proportion of loan approval increased for secured and corporate lending types, while the proportion of loan approval for unsecured lending decreased within the quarter under review.
During the period, the overall spreads on secured and unsecured lending rates to households relative to the Monetary Policy Rate (MPR) widened.
For corporate lending, all lending type spreads on loans relative to MPR also widened, except OFCs, which narrowed in the current quarter.
The report, which was authored by the apex bank’s Statistics Department, Economic Policy Directorate, further stated that lenders reported increased credit availability for unsecured and corporate lending, while secured lending to households declined during the period.
CBN said the decrease in secured credit availability was primarily due to a changing economic outlook, while market share objectives led to an increase in unsecured lending.
Secured lending refers to loans granted with collateral, including a car, home, or other assets, which are generally less risky for lenders and come with lower interest rates.
The central bank stated that unsecured lending, which does not require collateral but depends on the ability of the lender to evaluate the borrower’s creditworthiness and cash flow, increased in the review period.
Unsecured credit consists of personal loans for home renovations, medical bills, and education costs, among others, but risks higher interest rates.
However, corporate lending, which provides loans to businesses and organisations and is a vital part of the financial system to aid business growth, increased in Q4.
The report further revealed that demand for credit across all lending types increased in Q4 2024, when compared to the previous quarter, including secured 11.3 per cent, unsecured 6.7 per cent and corporate 27.2 per cent.
CBN said the overall spreads on secured and unsecured lending rates to households relative to the Monetary Policy Rate (MPR) also widened in Q4.
It stated that for corporate lending, all lending type spreads on loans relative to MPR equally widened, except Offshore Financial Centres (OFCs), which narrowed in the current quarter.
In the review period, the changing economic outlook was the main factor affecting corporate credit availability.
It stated that the demand for credit increased for all lending types, though that for mortgage/ re-mortgage from households decreased in Q4.
The report said, “The demand for credit across all lending types increased in Q4 2024.
“The factors influencing the increase for secured and unsecured household loans were consumer loans from households (32.3 per cent) and credit cards lending from households (15.7 per cent), respectively, while Inventory finance (24.5 per cent) was the major factor that influenced the change in demand for corporate lending.
“The demand for credit across all lending types increased in the fourth quarter of last year. The factors influencing the increase for secured and unsecured household loans were consumer loans from households and credit cards lending from households, respectively, while inventory finance was the major factor that influenced the change in demand for corporate lending.”
The apex bank also noted that the demand for credit increased for all lending types during the period.
However, demand for mortgages and re-mortgage from households decreased.
“The demand for credit across all lending types increased in the fourth quarter of last year when compared to the previous quarter. The overall spreads on secured and unsecured lending rates to households relative to the Monetary Policy Rate (MPR) widened.
“For corporate lending, all lending type spreads on loan relative to MPR also widened, except Other Financial Corporations (OFCs) which narrowed in the current quarter,” the report stated.
The Credit Conditions Survey (CCS) reports on secured and unsecured lending to Households, Private Non-Financial Corporations (PNFCs), Small Businesses and Other Financial Corporations (OFCs). The survey was based on lenders’ responses to questions from the statistics department of the CBN.
To determine the aggregate results, each lender was assigned a score based on the lender’s response. Lenders who report that credit conditions have changed “a lot” are assigned twice the score of those who report that conditions have changed “a little”. These scores were then weighted by the lender’s credit market shares.
The results were analyzed by calculating net percentage balances, such as the difference between the weighted balances of lenders reporting that demand was higher versus those reporting that demand was lower. The net percentage balances are scaled within the range of plus or minus 100.
Surge in NPLs
As borrowers continue to grapple with high interest rates and rising inflation, credit losses in Nigeria’s banking sector are expected to remain elevated in 2025 at about 2.5 per cent to 3.0 per cent compared to 3.5 per cent in 2024.
This is according to projections from an S&P Global report titled Nigerian Banking Sector Outlook 2025, which explained that currency depreciation has been the main driver of credit losses in the sector, as foreign currency loans account for 50 per cent of total loans issued by banks in the country.
This situation is further complicated by the persistent rise in inflation and high interest rates which put pressure on borrowers’ ability to repay loans.
“The elevated credit losses reflect the currency depreciation, as foreign currency loans account for 50 per cent of banks’ loan books on average. The banking system’s dollarisation has increased following the depreciation of the naira in 2023 and 2024,” the credit rating agency stated.
“In addition, high interest rates and inflation have exerted pressure on borrowers’ creditworthiness, particularly for corporates in nonessential consumer goods sectors and import-dependent corporates that cannot fully pass through the high cost of inflation to consumers.”
Thus, the agency expects non-performing loans (NPL) to increase by 14 per cent in 2025.
However, the percentage of bad loans compared to all loans issued (NPL ratio) will likely decrease slightly from 4.3 per cent in 2024 to 3.8 per cent in 2025 owing to an increase in gross loans.
Additionally, challenges in Nigeria’s macroeconomic environment are expected to persist as inflation remains elevated at 25 per cent from an average of 34 per cent in 2024. As has been the trend, the projected high rate of inflation may force the Central Bank of Nigeria to hike interest rates, placing more pressure on borrowers.
Loan recovery
To assist banks in recovering loans to chronic debtors, the CBN had in the past barred all financial institutions from extending further credit facilities to loan defaulters in the country’s banking system.
“No Institution shall, except with the prior written approval of the CBN, grant a facility to any potential borrower who has a delinquent facility of any amount whatsoever which has been taken over by the Asset Management Company of Nigeria (AMCON),” the CBN said.
The CBN expressed concern at the level of impunity by some bank borrowers who default on their loans from some institutions, only for further credit facilities to be extended to them by other Institutions under the same or sometimes different identity.
According to the CBN, this development was capable of triggering serial defaults and an accumulation of non-performing loans and NPLs, which could negatively impact liquidity in the financial sector and ultimately hamper its stability.
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