Bad loans breach regulatory ceiling as CBN’s covid relief exit exposes banks’ weak loans

Nigeria’s banking sector saw a renewed surge in bad loans in 2025 following the Central Bank of Nigeria’s withdrawal of regulatory forbearance introduced during the COVID-19 pandemic, with industry-wide non-performing loans (NPLs) now above the prudential threshold.

In its latest macroeconomic outlook report, the CBN said the NPL ratio rose to an estimated seven per cent, exceeding the regulatory benchmark of five per cent. The apex bank linked the increase directly to the termination of pandemic-era reliefs that had allowed lenders to restructure distressed loans without recognising them as non-performing.

“The non-performing loans ratio stood at an estimated 7.00 per cent relative to the prudential limit of 5.00 per cent. The level of NPLs reflected the withdrawal of the regulatory forbearance granted to banks during the COVID-19 pandemic,” the report stated.

Under the forbearance framework, banks were permitted to reschedule loans affected by the pandemic without immediately impairing them. With the policy now fully unwound, a number of these restructured facilities have crystallised as bad loans, pushing the industry ratio beyond the regulatory ceiling.

Despite the deterioration in asset quality, the CBN said the financial system remained broadly stable in 2025, supported by strong liquidity and capital buffers across the sector. According to the report, the industry liquidity ratio averaged 65 per cent, well above the 30 per cent minimum, while the capital adequacy ratio stood at 11.6 per cent, exceeding the 10 per cent regulatory threshold.

The apex bank said these indicators suggest that Nigerian banks retain sufficient capacity to absorb shocks, attributing the sector’s resilience to strong interest income, sustained digital expansion, and the ongoing banking recapitalisation programme.

The recapitalisation drive, which significantly raises minimum capital requirements for lenders, is expected to strengthen balance sheets and improve banks’ ability to fund large-scale projects in the real sector.

The report added that the recapitalisation exercise, combined with enhanced macro-prudential regulation and tighter supervisory oversight, helped sustain market confidence during the year. It also noted that the capital market remained bullish, partly reflecting renewed investor appetite for financial stocks.

However, the CBN warned that the rise in NPLs points to emerging vulnerabilities, particularly as elevated interest rates and weak economic conditions continue to pressure borrowers’ repayment capacity.

“A significant rise in non-performing loans could impair asset quality and weaken banks’ balance sheets, thereby posing systemic risk,” the bank cautioned, stressing the need for closer credit risk monitoring and sustained prudential discipline.

To contain further deterioration, the CBN recommended deeper operational integration of the Global Standing Instruction (GSI) framework across all financial institutions to strengthen loan recovery and enforce credit discipline. Improved recovery performance, it said, would support MSME and retail lending, reduce operational losses, and help banks build stronger capital buffers.

The report also revealed that monetary conditions remained tight for most of 2025 as the CBN focused on price stability and exchange rate management. The Monetary Policy Rate, which was aggressively increased in 2024, was only marginally eased in September 2025 after signs of improved macroeconomic stability emerged.

Looking ahead, the apex bank said the outlook for the banking sector remains positive but warned that lenders must strengthen risk management practices, diversify loan portfolios, and maintain strong capital positions to withstand future shocks. It added that recapitalisation, alongside reforms in the foreign exchange market and tax administration, forms part of broader efforts to consolidate macroeconomic stability and boost investor confidence in 2026.