EFFECTS OF NON-PERFORMING LOANS ON RETURN ON ASSETS OF SELECTED COMMERCIAL BANKS IN NIGERIA

Abstract

The essence of creating Commercial banks is to act as intermediary between the surplus (supply side) and deficit (demand side) units of funds. This is, in addition to other crucial objectives of profitability, growth in assets, and growth in customer base. To achieve these objectives, commercial banks grant loans to individuals, business organizations and governments among other profit yielding ventures. Loan defaults could be rampant resulting from low quality of assets, high non-performing risk assets (credit risk) that may result in huge loan losses, and reduction in bank profitability leading to adverse effect on return on assets of commercial banks. This study investigates the effect of non-performing loans (using loan loss provision as proxy) on return on assets of selected commercial banks in Nigeria. Annual time series secondary data from 2010 to 2021 were sourced from Central Bank of Nigeria Statistical Bulletin and the Annual Financial Reports of affected bank, and panel least square method of analysis was used as our estimation technique. The results revealed that while loan loss provision has negative impact on return on assets of the selected commercial banks, interest rate has a positive impact on return on assets of the selected commercial banks within the period of study. The study recommends, amongst others that effective credit policy, reflected in flexible tenure; restructuring of credit terms; and conversion should be adopted in the selected commercial banks to minimize the negative impacts of loan defaults. This is because decline in loan default will lead to reduction in non-performing loans, and subsequently boost return on assets of affected banks in Nigeria.
 Keywords: Non-Performing Loan, Return on Asset, Interest Rates, Bank Performance, Bank Profitability, and Loan Loss Provisions.