The Majlis Research Center says the banking sector is saddled with inherently weak but invisible balance sheets and the gap between banks’ income and expenditure has widened over time.
Decline in lending power, deepening economic recession and galloping inflation are some of the major consequences spawned by the weak balance sheets, it said.
The parliament’s research wing added that the week balance sheets are “fundamentally different” from their peers in other countries.
Weak annual reports are normally the result of steep decline in the value of banks’ assets. “This feature, however, is different in Iran where they are attributed mainly to poor auditing and inefficient supervision”, the MRC said.
One key factor undermining the balance sheets is the fact that bank deposits don’t grow in tandem with economic growth. The other is unreasonable growth in “fictitious assets”, i.e. unreal or intangible assets that banks show in their financial statements.
Weaknesses of bank balance sheets in Iran are much bigger and banking authorities often try to warp or disguise it. This is while such pressing issues are taken seriously by monetary policymakers in advanced banking systems.
While the problem has a long history, MRC said it was fully exposed in the past few years after the economy slumped and government revenues plunged due to the US economic blockade resulting in steep decline in oil export revenue, the lifeblood of Iran’s economy.
Poor Governance
The research center linked the deep problems of banks “to lack of efficient management and poor oversight by the Central Bank of Iran”.
According to the MRC, the problem is also rooted in the assets banks show in their reports that do not match with their liabilities.
The assets include bank loans to private companies, arrears owed by the government, bonds, and fixed assets such as real estate. When the economy is down the possibility of loan default normally increases as companies find it difficult to repay the loans. Thus, banks categorize the bad debts as non-performing loans the result being that liabilities outgrow assets.
In addition, banks’ fixed assets and the value of their securities are negatively impacted during times of deep recession.
While the asset side of balance sheets is impaired by weak macroeconomic conditions, liabilities, including deposits and interest thereof, are less impacted.
Banks in Iran, the MRC said, usually resist logging bad loans as NPL and resort to various methods to present them as “performing loans” jotting it on the asset side. One such method is loan deferrals, which the MRC said is not a reliable asset and must fall under fictitious assets.
The think tank said almost half the loans given by banks are NPLs, which the lenders have been able to distort and falsely present as performing loans in the absence of proper oversight.
Data released by the CBI indicate that total loans given by banks and credit institutions rose 8,540 trillion rials ($34.16 billion) to reach 26,278.8 trillion rials ($105.11b) in the month to January 19. It was 48.1% higher compared to the corresponding period a year ago.
Total loans rose 35.8% in 10 months since March 2020, which marked the beginning of the fiscal year. Reaching 16,763.2 trillion rials ($67.05b), Tehran Province topped the list with the highest number of defaults.
NPLs were worth 1,770 trillion rials ($7 billion) by the end of first half of the previous fiscal year, the CBI said.
Offering possible solutions, the MRC said policymakers have few options among which is active CBI intervention in the interbank market via expansionary monetary policies. The second could be meaningful reform in the ailing banking industry including “ejecting the bad players, exposing the fictitious assets of banks and mobilizing efforts to improve the balance sheets.”
