Non-performing loans of Iranian banks and credit institutions shot up 27% on annualized basis during the first quarter of the current fiscal year (March 20-June 20) to reach 2,090 trillion rials ($8 billion).
This was up 25.6% compared to the January-March quarter at 1,660 trillion rials ($6.3 billion), the Tehran Chamber of Commerce, Industries, Mines, and Agriculture (TCCIM) said in a report.
The study draws on official data released by the Central Bank of Iran and aims to shed light on the state of NPL by reviewing the volume of bad loans and their ratio to total loans.
As per the report, NPLs have been rising steadily over the past two years, from 1,510 trillion rials in the last quarter of 2018-19 fiscal (Jan-March).
NPL ratio was 10.5% in Q1 or 1.5 percentage point higher than the previous quarter. NPL ratio, is the ratio of the amount of nonperforming loans in a bank's loan portfolio to the total amount of its outstanding loans. The ratio measures the effectiveness of a bank in repayments on its loans.
A bank loan is normally classified as nonperforming when payments of principal and interest are 90 days or more past due, or when future payments are not expected to be received in full.
Ratio in the present report pertains to both rial and foreign currency loans. TCCIM said the ratio was 10.1% for loans granted in rials and 12.1% were forex loans.
Higher NPL ratio for forex loans compared with rial loans means that debtors have not repaid their forex debts, apparently because of the unprecedented increase in forex rates, in particular over the past two years.
NPL ratio was 10% in the last quarter of fiscal 2018-19 and increased to 10.5% the next quarter. It declined to 8.6% in January-March of 2019-20, the lowest in two years.
NPL ratio of Iranian banks are high compared to many developing and developed countries where it is mostly in single digits and usually below 5%.
A look at NPL ratio of countries across the globe published by World Bank indicates in 2019 it was 2.5% in France, 0.9% in United States, 3.8% Poland and Brazil 3.1%. Turkey, Pakistan and Afghanistan registered NPL ratios of 5%, 8.6% and 8.9% in 2019, respectively.
The role of Iran’s banking sector in financing the struggling economy (while the capital market is not capable to play a bigger role), with their limited resources and internal trappings have contributed generously to the high NPLs.
Tehran Top Defaulter
Total rial and forex loans jumped 5,038.8 trillion rials ($19 billion) to June 20, reaching 20,695.94 trillion rials ($80b) – up 32.2% on an annualized basis.
With 13,436.4 trillion rials ($52b), Tehran Province topped the list with the most outstanding loans. At the bottom end was Kohgilouyeh-Boyerahmad Province with 70.4 trillion rials ($296 million).
The loan to deposit ratio (LDR) declined over the past two years and indicates the increasing unwillingness of banks to lend. LDR reached 77.8% to June 20 or down 2.3% annually. The ratio started declining from the beginning of fiscal 2018-19 when it was 85.7%.
LDR is used to assess a bank's liquidity by comparing the total loans to total deposits for a specific period and is expressed in percentage.
If the ratio is too high, the bank may not have enough liquidity to cover unforeseen fund requirements. Conversely, if it is too low, the bank may not be earning as much as it should be.
Observers see the trend as one of the consequences of negative real interest rates pushing banks to invest in parallel, lucrative and less risky markets, such as stocks (now struggling) and real estate, instead of lending at rates below the annual inflation rate.
