If they would carte blanche allow fan games of their IPs then that would weaken the IPs, which could lead to them loosing the IPs completly. For that it is irrelevant if the games are monetized or not.

Nintendo would need to implement some kind of process for developers of fan games to get them officially licensed. But for that to be effective as a tool to protect the IP they could not just give such a limited fan game license to everyone who request it, so a complex request process with multiple steps would be needed, and they would need to deny lots if not even most of the requests.

And this gets even more complicated when the very complex japan software patent system is added to the mix.

Could Nintendo be less shitty? Oh yes they could, but they decided to go the Cobra Kai way and strike first, strike hard, no merci!