Issuance of money was curbed in the past few months as banks and credit institutions reduced lending, the Economy Ministry said.
In a press release seen on its website, the ministry said outstanding loans increased by 3.6% in the first quarter of current fiscal year (ended June 21).
The growth is down compared to the 13.6% rise in the corresponding period last year.
This is construed by the ministry as a “significant decline in the creation of money by banks in Q1”. Decline in lending means banks supplied less money to the economy, which by extension, cut the growth in monetary base and money supply.
Latest data released by the Central Bank of Iran show that growth in monetary factors has lost pace. Among the variables is the money multiplier– a valid indicator of banks’ contribution to issuance of new money.
As per CBI data, money multiplier stood at 7,972 by June 21, indicating 7.8% rise in one year but 0.4% decline in Q1.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Broad money was near 51,049.6 trillion rials ($164.6 billion) by the said period, indicating 5.6% growth in three months or one percentage point lower than Q1 growth last year.
On annualized basis, broad money increased 37.8%, which was 1.6 percentage points lower than last year.
The monetary base stood at 6,403.7 trillion rials ($20.6 billion) as of June 21, down 0.4% on the month before.
In the 12 months ending June 21, the monetary base expanded 27.8%, which was 2.7 percentage points lower than 30.7% last year.
Improving Oversight
The ministry said the positive monetary developments were due to the improvement in financial discipline thanks to effective supervision on banks by the CBI.
It said the regulator has imposed tougher disciplinary measures on dysfunctional banks and exercises strict control on bank balance sheets, namely big loans.
The CBI increased the reserve requirement of five unhealthy banks by 13%, which was the highest requirement ratio until last Tuesday.
Reserve requirement 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.
The Money and Credit Council, the top monetary and banking decision-making body, set a higher ceiling for the legal reserve requirement of banks last week.
The reserve requirement of commercial lenders with the CBI can now be increased to 15% from the maximum 13% in the past.
Raising the reserve requirement is one of the punitive measures vis-à-vis weak banks. Henceforth, the regulator can set the rate from a minimum 10% to a maximum 15% with lower percentage for well-performing 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 long voiced serious concern over the poor performance of most banks and called for effective action to compel them to improve.
The CBI earlier announced plans to monitor bank balance sheets at three-month intervals. Pouring billions in non-banking activities, increase in bank expenses, expanding branches and buying fixed assets (real estate) are among the controversial activities that the regulator wants banks to end sooner rather than later.
