In a report on the government’s 2022-23 budget outlays, the Majlis Research Center said the section on increasing the capital of state-owned banks will do little in improving their efficiency.
Among other things, the budget allows the government to reevaluate the assets of state lenders and use the (additional) income to raise their capital.
The influential parliamentary research center said most banks that are potentially eligible for asset revaluation have already done so recently, rendering another asset revaluation unwanted, irrelevant and ineffective.
“Recently most state banks embarked on significant capital increase via revaluation of assets and repeating the same in a short time will not be economically viable,” the MRC noted.
Government-controlled lenders include three commercial banks and five specialized lenders. The main government-owned banks are Bank Melli Iran, Bank Sepah and Post Bank of Iran are the three commercial banks.
Bank Maskan (housing bank), Export Development Bank of Iran, the Bank of Mine and Industry, Cooperatives Development Bank and Bank Keshavarzi (agro bank) are the five specialized banks.
Bank Melli Iran, Bank Keshavarzi and Export Development Bank of Iran raised capital by 720 trillion rials ($2.5 billion), 97 trillion rials ($346 million) and 20 trillion rials ($71m), respectively, in the last fiscal year. Bank Sepah added 120 trillion rials ($428m) two years ago.
“Raising capital by means of revaluation of assets or bartering debts [with government] will not help in improving the financial health of banks,” the MRC stressed.
In another section of the budget, the government has permission to spend 300 trillion rials ($1.07b) of income from selling shares and property in state companies to boost the capital of state banks.
“In exchange, the banks are obliged to lend three times the raised capital to boost production and employment”.
The MRC said this provision too runs the risk of lenders’ failure to monetize the assets owned by the government and use the money to raise capital.
Furthermore, it is at odds with Article 44 of the Constitution, which obliges the government to use income from privatization to fund development projects, fight poverty and create expand infrastructure in less privileged regions. “Therefore, using the income from divesting shares to raise capital of banks is not warranted.”
Low CAR
The think tank acknowledged that low capital adequacy ratio of banks has undermined their role in lifting the economy, underlining the need to find effective venues to raise capital.
Financial statements of Iranian lenders show that the majority of banks are struggling with capital adequacy ratios (CARs) below global norms.
Citing guidelines issued by the Central Bank of Iran, the MRC said the CAR of Iranian banks must be at least 8%. “This is while the CAR in the eight state lenders on average is 1.12%”.
Data show that the low CARs is also true for private and semi-private banks. Out of a total of 23 reviewed banks, CAR in eight banks is below zero, six banks have a ratio between 0-4%, and four between 4-8%.
Only five private banks have a capital adequacy ratio above 8%, according to data published earlier by local media.
Also known as capital-to-risk weighted assets ratio (CRAR), CAR is used to protect depositors and promote the stability and efficiency of financial systems. It is calculated by dividing a bank's capital by its risk-weighted assets.
Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a reasonable amount of loss before becoming insolvent and consequently losing deposits.
