Tuesday, April 15, 2025 - The Central Bank of Nigeria (CBN) has raised concerns over a significant rise in loan defaults among large Private Non-Financial Corporations (PNFCs) and Other Financial Corporations (OFCs), marking a worrying shift in credit performance at the top end of the lending market.
According to the apex bank’s Credit Conditions Survey Report
for the first quarter of 2025, both large firms and OFCs recorded negative
default index scores of -0.6. These scores reflect the net balance of lender
responses, where negative values indicate that more lenders reported worsening
defaults than those who saw improvements. The figures mark a stark departure
from the modest gains recorded in previous quarters, with large corporates
having posted positive default indices of 4.3 and 4.9 in Q4 and Q3 2024,
respectively. OFCs, which had similarly shown improvements with scores of 5.0
and 6.8 over the same period, also slipped into negative territory.
The report suggests that the deteriorating loan performance
among these larger borrowers is becoming a growing source of concern for credit
risk in Nigeria’s financial sector. Despite overall improvements in loan
performance across most other segments, the reversal in these two key
categories could have far-reaching implications for lenders, especially given
the outsized role these entities play in commercial credit exposures.
The CBN report notes that while defaults worsened for large
corporates and OFCs, lenders experienced lower default rates in other areas.
Small businesses posted a positive default index of 0.5, although this was a
decline from 9.0 in the previous quarter. Medium-sized PNFCs recorded a default
index of 3.0, showing relatively better performance. These figures point to a
gradual recovery among smaller enterprises, which appears to align with recent
lending patterns that have seen increased access to credit and more stringent
loan underwriting practices.
In the household lending segment, loan performance continued
its rebound, with secured loans posting a default index of 3.9 and unsecured
lending rising to 5.0. These numbers represent a sustained recovery from the
negative figures recorded in 2022 and early 2023, when high household loan
defaults posed significant challenges for lenders. The gains in household
lending were supported by increased demand for overdrafts and personal loans,
although mortgage and credit card products saw weaker uptake during the
quarter.
While the demand for credit remained strong across many
segments, lenders responded by tightening credit scoring criteria in Q1 2025.
Loan approvals rose in the secured and corporate categories but fell for
unsecured lending, suggesting that lenders are becoming more cautious in the
face of heightened risk. Inventory financing was cited as a major driver of
borrowing demand among corporates during the quarter, indicating increased
operational needs amid ongoing economic pressures.
The report also highlighted shifts in loan pricing. Spreads over the
Monetary Policy Rate (MPR) widened across most categories, particularly for
secured and unsecured household loans, reflecting tighter risk pricing. For
corporate loans, spreads also increased, with the exception of OFCs, which saw
a narrowing of spreads despite their rising default rates. This divergence may
suggest that some lenders are still willing to extend favorable terms to OFCs,
possibly anticipating future liquidity support or regulatory intervention.
The CBN clarified that the report reflects the perspectives of
participating lenders and does not represent the official stance of the Bank.
Nonetheless, the findings offer a critical snapshot of credit sentiment and
risk assessment in Nigeria’s financial system at the start of 2025.
The renewed deterioration in loan performance among large corporates and
OFCs could potentially impact banking sector confidence, particularly at a time
when macroeconomic adjustments remain in flux. While the resilience shown by
SMEs and households offers a glimmer of optimism, the challenges at the upper
end of the credit spectrum may prompt increased provisioning, tighter credit
standards, and more conservative lending approaches in the months ahead.
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