CBN’s Regulatory Measures To Reduce NPLs In Nigerian Banking Industry

The Central Bank of Nigeria (CBN) has implemented regulatory policies that are gradually reducing the Non-Performing Loans (NPLs) in the Nigerian banking industry.
A non-performing loan (NPL) often called “bad debt” is a Bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full.
NPLs are a major challenge facing the Nigerian banking industry because they reduce inflows and profitability.
Poor credit risk management has been identified as a significant contributor to NPLs and bank failures in the country.
Earlier, in 2020, data from the National Bureau of Statistics (NBS) shows that the NPLs in the banking industry dropped by N42.4billion to N1.17 trillion.
NBS said, the total amount of non-performing loans in Nigerian banks fell from N1.21tn at the end of the second quarter of 2020 to N1.17tn as of Q3 2020.
According to CEIC Data, Nigeria’s non-performing loans were reported at $3.315 billion (N2.7trillion) in March 2021, which is an increase from the previous number of $3.251 billion for December 2020.
Banks recorded non-performing loans of N1.3trillion as of November which was above the industry benchmark, according to the CBN.
The figures obtained from CBN showed that the bad loans represented 5.4 percent of the total gross credit in the banking sector, which is higher than the 5.0 percent prudential benchmark.
The CBN Governor, Godwin Emefiele, said in a report, “Prudential indicators such as NPLs stood at 5.4 percent in November 2021.
Recall that in June 2010, the CBN issued the revised Prudential Guidelines to deposit money banks in Nigeria as part of its efforts to enhance the quality of banks’ assets.
Under this circular, CBN said, the maximum ratio of non-performing loans to total gross loans for FCs shall not at any point in time exceed 10 percent or such other level as may be prescribed by the CBN from time to time.
In 2022, CBN disclosed that the average NPF closed at 4.2 percent from 4.9 percent in 2021, attributable to write-offs, restructuring of facilities, Global Standing Instruction (GSI), and sound credit risk management by banks.
Meanwhile, a recent report has put the non-performing loans in Nigerian banks at N478 billion as of September 12, 2023.
This could be attributed to some of the policies introduced by the CBN aimed at reducing the growth of the NPLs in the industry.
CBN in the last Monetary Policy Committee (MPC) meeting in Abuja disclosed
NPLs ratio of 4.1 percent as of the end of June 2023, as against the NPLs ratio of 4.4 percent of April 2023.

Causes of NPLs
Poor Financial Planning by Debtors: Debtors who have poor financial planning, such as losing their main income or being absent in making payments, can cause bad loans.
Classification of Credit Smoothness: Loans can be classified as substandard, doubtful, or loss based on the borrower’s ability to repay the loan. If the borrower is late in paying the installments more than the specified deadline, a fine will be charged, and the loan can be classified as a loss.
Lending Fraud: Lending fraud is a prevalent issue that can cause non-performing loans. Small business lending fraud has increased since the pandemic started.
Poor Management of Banks: Poor management of banks can result in bad-quality loans, which indicates an increase in non-performing loans.
Incorrect Risk Profile Assessment: Incorrect risk profile assessment can lead to non-performing loans. Common causes include an incorrect risk profile assessment, bad risk management, and poor underwriting standards.
Tighter Financing Conditions: Tighter financing conditions can impact both business lending and household lending, affecting their ability to service their debts and ultimately impacting non-performing loan ratios.
Nevertheless, the CBN has taken the following measures to reduce non-performing loans (NPLs) in the banking industry in Nigeria.
Prudential limit: CBN has set a prudential limit of 5% for NPLs in the banking sector and has urged banks to bring down their NPLs below this limit.
Credit reporting system: CBN has made it mandatory for all financial institutions to have data exchange agreements with at least two credit bureaux to ensure a credible credit reporting system.
Credit risk management: CBN has been working with banks to improve their credit risk management practices to reduce the incidence of NPLs.
Loan restructuring: CBN has allowed banks to restructure loans to customers affected by the COVID-19 pandemic to prevent them from becoming NPLs.
CBN’s financial regulations, such as capital adequacy, liquidity ratio, and NPLs, have also been found to have significantly reduced bank failure in Nigeria.