Examine the Impact of Total Bad Debts on the Performance of Deposit Money Banks in Nigeria

Abstract

This study examines the impact of Total Bad Debts (TBD) on the performance of deposit money banks in Nigeria. Total bad debts, which represent unrecoverable loans, remain a critical indicator of credit risk and a major challenge to bank profitability and financial stability. The study adopts a longitudinal research design using secondary data obtained from the financial statements of eight (8) selected deposit money banks in Nigeria over a nine-year period spanning 2014–2022. The analysis employs the Panel Autoregressive Distributed Lag (ARDL) model to evaluate the relationship between total bad debts and bank performance, measured by Return on Equity (ROE). Findings from the descriptive statistics reveal that banks experienced relatively low and unstable profitability alongside high levels of bad debts during the study period, indicating significant exposure to credit risk. The regression results show that total bad debts have a negative and statistically significant effect on bank performance, with a coefficient of -18.66743 and a p-value of 0.0014. This implies that an increase in total bad debts leads to a substantial decline in return on equity. Although the correlation analysis indicates a weak positive association between TBD and ROE (0.03546), further analysis confirms a significant inverse relationship, suggesting that rising bad debts ultimately reduce profitability. The study concludes that total bad debts significantly and negatively affect the performance of deposit money banks in Nigeria. It recommends that banks strengthen credit appraisal and monitoring systems, adopt effective loan recovery strategies, and implement robust credit risk management practices to minimize bad debts and enhance financial performance.