The Central Bank of Iran on Thursday said lenders can raise the ceiling when issuing certificate of deposit up to a level that doesn’t cross 20% of total long-term deposits at the end of last fiscal year (March 19).
It allowed banks to issue CDs at 18% interest. The decision will be valid until Sept 22, according to a notice on the CBI website.
The move comes after private banks announced in April that they would set the interest on term deposits at 15%. Before that they had leeway to raise rates up to 18%.
Banks also decided to lower interest rates for short-term deposits to 8% down from 10%.
Certificate of deposit is offered by banks and credit institutions, providing a fixed interest rate in exchange for the customer agreeing to leave a lump sum untouched for a predetermined period of time. Normally the period is 12 months, but if a client wants to withdraw, the interest rate is cut as a penalty.
While on paper it appears that the interest rate on CDs per se has remained the same as the previous 18% on deposits and only ordinary deposits have been replaced by CDs, financial experts say the latest decision was made to balance banking resources.
One difference is the fact that in the past the lenders were obliged to pay 18% on unlimited amounts as deposits.
However, in the new rule lenders are allowed to issue CDs up to a ceiling subject to their need for funds.
Banks can issue CDs when they see the need and usually do so to a level that they are confident their long-term deposits are adequate.
Break Fees
In addition, CD’s have higher break fees compared to ordinary deposits, which makes it more attractive compared to past term deposit regulations.
According to the Persian-language economic newspaper Donya-e-Eqtesad CDs enjoy 10% break fees while for ordinary long- term deposits it is 8%.
This means depositors will receive 10% interest if they break the term deposit and withdraw before maturity date.
Lenders say the lower deposits should reduce the cost of money for banks and help them correct their balance sheets. But there are fears that policies to cut rates could force depositors to pull out their money and look for other safe havens to protect the value of their savings, which is fast shrinking as the economy flounders.
The sliding rates seem too low to convince depositors to keep their money in banks as the national currency tanks and galloping inflation eats away at their rainy-day savings.
As per a recent CBI report, sight deposits are growing at a higher pace and term deposits are losing appeal.
Total sight deposits increased by 58.9% by the end of last fiscal year (March 19) on year-on-year basis, to reach 3,661.6 trillion rials ($17 billion).
This is while term deposits grew at a slower pace (26.8%) to reach 18,568 trillion rials ($86.5 billion) in the mentioned period.
Long term deposits stood at 11,486 trillion rials by March 2020, registering 30.6% growth compared to the same period a year ago. Short-term deposits rose 21.1% annually to 7,081 trillion rials.
