CBN flags rising loan defaults among large firms, financial institutions amid credit tightening

The Central Bank of Nigeria (CBN) has raised red flags over rising loan defaults among Large Private Non-Financial Corporation’s (PNFCs) and Other Financial Corporations (OFCs), signaling growing credit risks in Nigeria’s upper-tier lending segment.

This concern emerged from the apex bank’s Credit Conditions Survey Report for the first quarter of 2025, which suggests a sharp reversal from the improving trends seen in recent quarters.

Despite overall gains in loan performance across various borrower categories, large corporates and OFCs recorded negative default index scores of -0.6, reflecting a higher number of lenders experiencing repayment challenges with these borrowers.

“Lenders reported lower default rates for Secured and Unsecured lending in the review quarter. For Corporate lending, Small businesses and Medium PNFCs reportedly had lower default rates, but Large PNFCs and OFCs had higher default rates,” the report noted.

The report marks a troubling return to negative credit performance for these segments, which had previously shown signs of recovery.

Large corporations posted positive default scores of 4.3 and 4.9 in the fourth and third quarters of 2024 respectively, while OFCs registered even stronger figures of 5.0 and 6.8 over the same periods.

The latest negative scores point to deteriorating debt-servicing capacity among major corporate borrowers and financial firms, who traditionally account for a significant portion of Nigeria’s commercial credit exposure.

While top-tier borrowers struggled, the smaller end of the market showed resilience. Small businesses posted a positive default index of 0.5, albeit lower than the 9.0 recorded in Q4 2024. Medium-sized PNFCs recorded a score of 3.0, reflecting a relatively stable credit performance.

These improvements are consistent with ongoing lending trends that show a strategic shift by lenders toward smaller borrowers.

Industry analysts attribute the better repayment records in these segments to stricter loan underwriting standards, improved cash flows, and increased access to credit, which help the-risk lending to small businesses.

Household loans also sustained a positive trajectory in Q1 2025. Secured loans posted a default index of 3.9, while unsecured loans came in at 5.0—a marked rebound from the negative readings recorded in 2022 and early 2023 when household defaults were a primary concern for lenders.

Increased demand for overdrafts and personal loans has contributed to this performance, though appetite for mortgage and credit card products reportedly weakened during the quarter.

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Although demand for credit rose—especially in corporate and secured lending—lenders adopted more stringent credit scoring standards in Q1 2025. Approvals increased for secured and corporate loans but dropped for unsecured loans, pointing to growing selectivity in risk evaluation.

Of note is the surge in demand for corporate loans driven by inventory finance needs, which lenders identified as a key factor shaping corporate borrowing behavior.

Loan pricing trends reveal wider spreads over the Monetary Policy Rate (MPR) across most categories, indicating that lenders are demanding higher premiums to cover potential risks.

Both secured and unsecured household loans saw increased spreads. Corporate loans followed the same trend, except for loans to OFCs, where spreads narrowed—a development that may suggest lender optimism about future liquidity injections or government support for the sector, despite the worsening defaults.

The resurgence of defaults among large borrowers and OFCs poses fresh challenges for credit confidence in Nigeria’s banking sector.

With large-ticket loans often representing a substantial portion of banks’ portfolios, further defaults could trigger stricter lending policies, increased provisioning, and a more cautious approach to high-value credit approvals.

The CBN clarified that the survey reflects the opinions of participating lenders and not the official stance of the Bank.

Nevertheless, the findings offer valuable insights into credit sentiment and risk dynamics in the financial system, especially amid ongoing macroeconomic reforms and uncertainties.

As smaller and household segments continue to show resilience, Nigeria’s lenders may further pivot toward diversified retail and SME lending strategies, while reevaluating exposure to high-risk institutional borrowers.