The Money and Credit Council, the top monetary and banking decision-making body, set a higher ceiling for the legal reserve requirement of banks.
According to a press release published by the IRIB news, the reserve requirement of lenders with the Central Bank of Iran can be increased to 15% from the maximum 13% in the past.
The MCC decision gives the central bank the go-ahead to increase the legal reserve requirement of unhealthy banks to 15%.
Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve requirement ratio for each bank.
Raising the reserve requirement is one of the punitive functions against banks with weak balance sheets. Henceforth, the regulator can set the rate from minimum 10% to maximum 15% with lower percentage for well-performing banks. Cut in reserve requirements is one disciplinary tool to improve the performance of banks.
Banks are increasingly under criticism for unbridled issuance of money due to weak balance sheets, which makes them more reliant on the CBI for funds.
Economists and experts have often voiced concern over the unacceptable status of banks and called for effective action to help them improve.
The issue was addressed earlier by the President Ebrahim Raisi, who instructed the central bank to take prompt action to bring dysfunctional banks and credit institutions in line.
“Drawing on existing legislation, the CBI should take early action against dysfunctional banks and credit institutions,” Raisi said in June.
The CBI earlier announced plans to monitor bank balance sheets at three-month intervals. Investment in non-banking activities, increase in bank expenses, expanding branches and buying fixed assets (real estate) are among the activities that the regulator wants banks to end sooner rather than later.
