Banks:Bad loans rise after CBN ends forbearance

Bad loans in Nigeria’s banking sector rose to 8.03 per cent in January 2026, seven months after the Central Bank of Nigeria moved to end regulatory forbearance granted to banks on some credit exposures and single obligor limit breaches.

The figure, contained in the CBN’s January 2026 Economic Report, showed that the industry’s non-performing loans ratio rose by 0.52 percentage point from 7.51 per cent in December 2025.

It also remained above the CBN’s prudential threshold of five per cent, indicating a further deterioration in asset quality across the banking industry despite the apex bank’s insistence that the sector remained resilient.

The report said, “Following the bank’s loan reclassification after the withdrawal of forbearance, the non-performing loans ratio rose by 0.52 percentage point to 8.03 per cent compared with the level in the preceding period and was above the 5.00 per cent prudential threshold.”

The development came after the CBN, in June 2025, directed banks still benefiting from regulatory forbearance on credit exposures or single obligor limit waivers to suspend dividend payments, defer bonuses to directors and senior management, and halt fresh investments in foreign subsidiaries or offshore ventures.

The regulator said the measure was aimed at strengthening capital buffers, improving balance sheet resilience, and forcing affected banks to retain earnings while exiting temporary regulatory reliefs.

In a separate transition measure, the apex bank also moved to terminate COVID-19-related regulatory forbearance and waivers on single obligor limits effective June 30, 2025, requiring banks to align affected credit exposures with existing prudential guidelines.

Regulatory forbearance had allowed banks to restructure loans affected by the pandemic without immediately classifying them as non-performing. With the withdrawal of the measure, a number of previously restructured facilities have now crystallised as bad loans, pushing the industry ratio above the regulatory ceiling.

The latest NPL reading suggests that the clean-up is beginning to expose weaker loans that had previously been cushioned by regulatory reliefs. Once those loans were reclassified, banks had to recognise more credit weakness on their books, pushing the industry’s bad loan ratio further above the regulatory limit.

In its macroeconomic outlook report, the CBN warned that a “significant rise in non-performing loans could impair asset quality and weaken banks’ balance sheets, thereby posing systemic risk,” showing the importance of monitoring credit risk and sustaining prudential discipline.

It also recommended deepening “the operational integration of the GSI framework across all financial institutions to enhance loan recovery efficiency and credit discipline.”

The CBN also recommended strengthening credit discipline and reducing non-performing loans by fully integrating the Global Standing Instruction framework to boost loan recovery efficiency.

Earlier, in February 2025, the apex bank ordered bank directors with non-performing insider-related loans to step down immediately. Insider loans refer to loans granted by a bank to its own executives, directors, employees, major shareholders, or related parties.

According to the CBN, the decision aims to strengthen corporate governance and improve risk management in the banking sector. To minimise financial risks, the apex bank instructed banks to recover debts through collateral enforcement and seize the shareholdings of affected directors.

“Directors with non-performing insider-related facilities are required to step down immediately from the board, while the bank should commence immediate remediation of the loans through the recovery of the collateral, including the shareholdings of the affected directors,” the circular read.

More recently, the CBN directed banks to deny certain banking services and additional credit facilities to large borrowers with non-performing loans as part of measures to strengthen credit discipline in the banking sector. The directive was contained in a letter dated March 12, 2026, and signed by the Director of Banking Supervision, Dr. Muhammad Abdullahi.

Under the directive, borrowers whose loan facilities have been classified as non-performing and recorded in the Credit Risk Management System or any licensed private credit bureau will no longer be eligible to obtain additional credit from banks.

The apex bank said the measure was designed to reduce risks posed by large borrowers whose defaults could threaten financial system stability. “Effective immediately, all financial institutions shall: Restrict further credit access: Any large-ticket obligor with a non-performing facility recorded in the CRMS and/or any licensed private credit bureau shall not be granted additional credit facilities.

“For the purpose of this restriction, credit facilities include loans and other forms of direct credit. In addition, such obligors shall not be granted banking facilities or contingent liabilities such as bankers’ confirmations, letters of credit, performance bonds, or advance payment guarantees,” the bank said.

The CBN explained that the restrictions apply to borrowers classified as large-ticket obligors under the prudential guidelines for deposit money banks. According to the regulator, such borrowers include individuals or companies whose combined exposure across banks exceeds the Single Obligor Limit or whose financial obligations could significantly affect a bank’s capital adequacy ratio.

The bank also directed financial institutions to obtain additional realisable collateral from affected borrowers to adequately secure existing loan exposures. It said the determination of affected borrowers would rely on information captured in the Credit Risk Management System and reports from licensed private credit bureaus.

However, the CBN maintained that the wider banking system remained stable. The report showed that the industry’s liquidity ratio improved to 63.38 per cent in January from 57.22 per cent in December, staying well above the 30 per cent prudential minimum.

The capital adequacy ratio stood at 12.05 per cent, lower than 12.35 per cent in December, but still above the 10 per cent regulatory minimum. According to the CBN, “The Nigerian banking industry remained resilient, with most financial soundness indicators staying within prudential regulatory thresholds, affirming financial stability and institutional soundness.”

The figures indicate a mixed picture for the banking sector. Liquidity remains strong, and capital levels are still above the minimum benchmark, but the rise in bad loans points to pressure from legacy exposures, currency devaluation, high interest rates, and tighter regulatory classification.

The worsening asset quality in the banking sector also drew concern from members of the CBN’s Monetary Policy Committee during its February 2026 meeting, with policymakers warning that rising bad loans could threaten financial stability despite broader improvements in macroeconomic conditions.

The CBN’s Deputy Governor for Economic Policy, Dr Muhammad Abdullahi, said increasing non-performing loans had emerged as a key risk to the financial system and could undermine the effectiveness of monetary policy transmission if left unchecked. “Additionally, rising NPLs could pose financial stability risks, and the broader macroeconomy needs to rebalance growth and stability objectives,” Abdullahi said.

The deputy governor noted that the challenge was occurring alongside persistent excess liquidity in the banking system, warning that both factors could weaken the impact of monetary policy measures and limit the efficient flow of credit to productive sectors of the economy.

Echoing similar concerns, MPC membr and corporate governance expert Aku Odinkemelu said the increase in bad loans required closer regulatory scrutiny. “The increase in Non-Performing Loans within the banking system… underscores the need for heightened supervisory vigilance to safeguard asset quality and ensure effective credit transmission,” Odinkemelu said.

The comments suggest that while the banking sector remains broadly resilient, regulators are increasingly focused on the quality of loan assets as the industry adjusts to stricter prudential rules following the withdrawal of regulatory forbearance.