Winter of Discontent:Iranian Banks and the Need for Reform

The brouhaha surrounding the condition of Iranian banks is valid, as the crisis has been brewing for a long time. Oddly, what has now unfolded due to years of regulatory neglect and mismanagement by lenders has been blamed on an overhaul of the banks’ financial statements ordered by the Central Bank of Iran.

Instead of admitting their wrongful practices and seeking help, banks have engaged in senseless wrangling that will do nothing to end their woes which has culminated in their trading halt in the stock market. This has left shareholders and investors in a limbo for close to three months.

The controversy began when it was disclosed that Bank Saderat, the biggest of the three banks privatized in recent years, has incurred huge losses in the first half of the 2016-17 financial year. Soon, it became known that Saderat was only one of a posse of banks whose new balance sheets have sunk in the sea of red ink, prompting the Securities and Exchange Organization to suspend the share of some 14 banks from trading.

It is said that only the suspended shares of the three major privatized banks are worth over 140 trillion rials ($3.39 billion at market exchange rate), which accounts for roughly 4% of the total value of the equity market. This has caused both uncertainty and panic among investors and even prompted fears of a bank run, which–at least for now–appear to be immature.

But one lesson to be drawn from all of this is the inevitable that banks would have to accept. Emerging from a decade of sanctions, banks have been cut off from international dealings for too long but their pre-sanctions’ ways will no longer work–not if they want to be more than provincial entities.

CBI’s new balance sheets for banks first unveiled in February, which are in line with the International Financial Reporting Standards , only mirror banks’ troubles.

The present situation should be enough to galvanize banks into action, as it has been for their peers across the world.  On Friday, the Italian government approved a decree to bail out Monte dei Paschi di Siena after the world’s oldest bank failed to win investor backing for a desperately needed capital increase.  

Monte dei Paschi is the poster child among Italy’s notoriously troubled banks. It emerged as the weakest of some 51 European banks subjected to stress tests earlier this year by the European Central Bank.

 I Change, Therefore I Am

Likewise, pundits in Iran have prescribed a slew of measures for addressing the predicament of Iranian banks–going as far as recommending a state bailout. The government has, in fact, approved a capital increase for public-sector banks by revaluing the central bank’s foreign exchange assets, an act that has not remained without controversy.

But before agreeing on any solutions, banks should acknowledge their own problems and take responsibility for it. Once they do that, they will be ready to embark on a series of reforms that the CBI has been consistently advocating.

The fact that Iranian banks are still pursuing the expansion of physical branches in this electronic age is a grim reminder that they are way behind the times. Similarly, their low capital adequacy levels, their alarming level of bad debts, their botched real-estate investment and persistent government debts are bleak indicators that need to be resolved immediately.

A CBI September report indicates that time deposits of non-government banks and credit institutions are about 13.48 times their capital levels. Iran’s economy being bank-based makes reforms a necessity.

The mad race to attract more savings by offering higher interest rates on deposits is another bane of the banking system and CBI’s measures to impose rates on banks have only worsened the situation.

In a nutshell, all have to accept that the denial of the pain is no remedy for it and the halting of trade for banks–no matter how long it continues–is not a viable solution. CBI, therefore, should insist on implementing its groundbreaking regulatory measures come high or hell water.