Date released by the Central Bank of Iran show the reserve requirement of banks increased more than twofold in three years.
The legal reserves rose from 154 trillion rials ($570 million) in fiscal 2017-18 to 354 trillion rials ($1.3 billion) by the end of the last fiscal year (March 21) up 129%.
Funds held by banks as reserve with the CBI stood at 194 trillion rials ($718m) in 2018-19 and 260 trillion rials ($962m) in 2019-20, respectively, showing annual growth of 26% and 33.7%.
The figure reached 354 trillion rials last year, which was 36.3% higher than the year before, according to data published by the IBENA, the news agency of the Monetary and Banking Research Institute.
Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and money supply growth.
As per rules approved by the Money and Credit Council, the top monetary and policymaking body, the CBI determines the reserve requirement ratio of banks. The central bank can set the rate between 10% and 13%, based on lenders' law abidance.
In other words, the regulator reduces the reserve requirement for disciplined banks from 13 to 10% with no cuts for unruly banks. As such, cuts in banks' reserve requirements is one disciplinary tool to control lenders.
Last year, the CBI temporarily cut the reserve requirement for banks and allowed lenders to use a segment of their reserves with the CBI to lend to households and businesses impacted by the coronavirus pandemic.
Accordingly, banks were supposed to allocate one-third of their legal reserve with the CBI in aid to support businesses against the brutal Covid-19 impact.
At that time the CBI announced that an estimated 750 trillion rials ($2.7 billion) was given to businesses impacted by the virus. The loans went largely to struggling SMEs.
