The Governor of Central Bank of Iran Ali Salehabadi says the government should first reimburse its mounting debt to banks to help them improve their financial adequacy.
In a tour to East Azerbaijan Province on Thursday, Salehabadi said most banks are struggling with low capital adequacy and reflected on workable solutions to address their crisis.
“The government is in debt to both lenders and the CBI. In reimbursing debts, priority must be given to settling bank debts,” he was quoted as saying by the CBI website.
He proposed that the Raisi administration give banks its shares in companies to reduce the financial burden that has ballooned to several billion dollars.
“Experience has it that governments are not good when it comes to selling shares. If they give assets to banks in lieu of their debts, it could help in easing their financial strain.”
Data released by the CBI show the government and state-owned companies were in arrears to the tune of 4,392.1 trillion rials ($14.6 billion) to banks and credit institutions up until February – up 12.5% on the corresponding period last year.
In addition, the government owes 2,119.8 trillion rials ($7 billion) to the CBI until the same period, showing a whopping 41.8% y/y increase.
As another way to help banks mitigate the liquidity shortages, the CBI chief pointed to new regulations that allow them to issue bonds of their own.
He referred to the decision by the Money and Credit Council, the top banking and monetary decision-making body, in January that gave the go-ahead to sell bonds to meet their financial needs.
Bond issuance by banks and credit institutions is subject to CBI approval. Up until now, lenders were not allowed to issue bonds and the bond market was dominated by the government. A limited number of big state-controlled listed companies also can issue bonds after putting up proper collateral.
Allowing lenders to issue bonds gives them leeway to secure funds when facing a liquidity crunch. When in dire need of liquidity, banks usually borrow from each other via the interbank market or CBI.
The senior banker said the High Council of Economic Coordination (HCEA) has recently allowed the government to give Bank Keshavarzi Iran (Agribank) treasury bills to clear a portion of its unpaid debt to the main agro bank in Iran.
“This could generate 150 trillion rials for the bank, which could be used to meet the sector’s dire need for working capital.”
HCEA is an ad hoc council, comprising heads of branches of power, who make key economic decisions.
Need for Working Capital
In a meeting with private sector representatives at the Tabriz Chamber of Commerce, Industries, Mines and Agriculture, the central bank chief said the banking sector gives special priority to help meet companies’ need for working capital.
To help optimize lending to businesses, he pointed to the ongoing supply chain finance (SCF) plan, adding that the CBI will support banks wanting to promote this lending initiative.
The new SCF is geared to facilitate the finance process of manufacturing companies in non-inflationary ways using credit financing instruments.
It is a package of solutions to lower financing costs by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this paradigm, buyers agree to approve supplier bills by a bank or other outside financier.
Officials have welcomed the scheme for its role in minimizing loans from flowing into non-productive sectors and speculative activities as the mechanism monitors the finance process from beginning to the end.
