The governor of the Central Bank of Iran said the banking sector is saddled with high and rising legal obligations to grant loans, which has led to agonizing macroeconomic consequences.
“Legal mandates [state ordained] for banks to lend compel them to borrow from the CBI. Over-borrowing has led to negative monetary results,” Akbar Komijani said in a talk with IRIB.
Banks have been under mounting pressure for years as they have to both help realize government budget targets and comply with the regulator’s orders to improve their balance sheets.
Komijani added that the burden of financing the economy is mainly on banks while the share of the capital market is consciously meager.
“The capital market must contribute [a fair share] to the funding needs. Despite its expanding role, the market needs to evolve.”
As per available data, the contribution of banks to funding the economy was worth 4,977 trillion rials ($18.4 billion), accounting for 86% of the total in the first quarter (March 21-June 21).
This is while, money made available by the capital market was 796 trillion rials ($3b). That was 23.8% lower compared with 1,045 trillion rials ($4b) recorded in the first quarter of last year.
Without mentioning numbers, Komijani said that banks’ borrowing from the CBI had declined dramatically in the past two years.
The decline is linked largely to the CBI’s monetary policy to control money supply and interest in the interbank market, the senior banker said.
In January 2020, the CBI implemented open market operations for the first time. As part of measures to control the monetary base, the regulator encouraged lenders to engage in OMOs. Using bonds as collateral to borrow from the CBI and regulating interbank interest rate are key elements of the OMO.
CBI measures, among other things, call for stringent supervision on banks. The CBI insists controlling banks' balance sheets is instrumental in curbing the ballooning money supply and runaway inflation.
In December 2020, the regulator launched a plan to monitor the balance sheets of banks and credit institutions at three-month intervals.
