The Governor of Central Bank of Iran Akbar Komijani has again called on banks to exercise a robust control over their books.
Addressing senior bank managers on Tuesday, Komijani said weak balance sheets have dire macroeconomic consequences in the long-term.
“Banks need to clean up their balance sheets [needless to say] weak balance sheets will have long-term impacts on macroeconomic factors, such as money supply and inflation,” he was quoted as saying by the CBI website.
Bank managers were asked to curtail borrowing from the CBI to address their need for liquidity. “If the banks do not control over-borrowing, the regulator will be compelled to intensify cautionary and supervisory measures,” Komijani said without elaboration.
The CBI had earlier announced plans to monitor the balance sheets at regular3-month intervals. Investment in non-banking businesses, indiscriminate lending, rising costs, expanding branches and buying fixed assets are among the main contentious activities that the regulator wants banks to end.
The CBI, however, seems optimistic about improvement in the balance sheets resulting from capital increase and buying government bonds.
As one measure to improve banks’ balance sheets, Komijani pointed to rules that oblige lenders to allocate 3% of their financial resources to bonds and again urged banks to comply with the rules.
Setting a Precedent
The rules were approved last year by the Money and Credit Council, the top monetary and banking decision-making body, setting the precedent for banks to buy government bonds as the Rouhani administration struggled with plunging revenue amid colossal spending -- a bad situation made worse by the brutal coronavirus.
Following the enforcement of rules, lenders tried to allocate bigger amounts to bond buying. According to Komijani, banks’ now held 922.8 trillion rials ($3.4 billion) in bonds by the end of the last calendar month ending August 22.
“This accounts for almost 2.4% of the total non-government deposits with banks and credit institutions”.
Undermining banks’ lending ability, the deep recession and runaway inflation are just a few consequences spawned by the weak balance sheets of banks.
The Majlis Research Center, the parliamentary think tank, in a recent report strongly censured banks for their financial track record. It recalled that weak balance sheets are ingrained in the banking system as the gulf between lenders’ income and expenses keeps on getting bigger over time.
Money Supply Expanding
Highlighting the negative consequences of financial indiscipline on macroeconomic variables, the CBI boss presented an update on the money supply -- a key issue that has attracted warnings across the board.
Money supply reached 39,214.3 trillion rials ($145 billion) at the end of the last calendar month, up 12.8% in five months of the current fiscal year. It was 39.1% higher on an annualized basis.
“Despite the undesirable growth in money supply,” Komijani said, “the regulator has managed to tame growth via the regular implementation of open market operation”.
The CBI has restrained money supply in the interbank market by implementing reverse repurchase agreement in recent months to absorb excess liquidity in the interbank market.
Reverse repo is a component of OMO, which is a short-term agreement to purchase securities in order to sell them back at a slightly higher price.
Money supply reached historic levels in the recent past due mainly to the US sanctions, growing government budget deficits and monetary policies to fight Covid-19.
The US economic blockade has taken a heavy toll on Iran’s crude oil export, the lifeblood of the economy. The absence of sustainable revenue and steep decline in oil export have led to a worrisome pattern of deficit spending.
