Effect of Credit Management on Non-Performing Loans among Listed Deposit Money Banks in Nigeria

Abstract

This study examines the effect of credit management on non-performing loans (NPLs) among 10 listed deposit money banks (DMBs) in Nigeria from 2015 to 2024. Guided by Merton’s (1974) Credit Risk Theory, which explains that defaults occur when borrowers’ liabilities outweigh their repayment capacity, the research focuses on four credit management variables: Average Collection Period (ACP), Average Payment Period (APP), Debtor’s Turnover Ratio (DTR), and Creditor’s Turnover Ratio (CTR). Specifically, the objectives were to evaluate the effects of ACP, APP, DTR, and CTR on the incidence of NPLs. Using panel data, the study adopted descriptive and inferential statistics, while Pooled Ordinary Least Squares (POLS) regression and correlation matrix analysis were employed to estimate the relationships. The results revealed that ACP has a significant negative effect on NPLs, suggesting that efficient loan collection practices reduce default risks, while APP exhibited a significant positive effect, indicating that extended repayment periods may worsen defaults. However, DTR and CTR were found to have no significant effects on NPLs, implying that other factors may exert stronger influence on loan performance. These findings underscore the critical importance of effective credit management in curbing NPLs and safeguarding financial stability in Nigeria’s banking sector. The study concludes that timely loan collection and stricter repayment enforcement significantly reduce defaults. It recommends that banks strengthen their credit assessment processes, adopt robust collection policies, and regularly review repayment structures, while future research should incorporate macroeconomic and regulatory determinants of NPLs to broaden understanding of credit risk management.