The Central Bank of Iran on Tuesday announced new rules to curb the growth of banks assets and control their balance sheets.
The regulator appraises the performance of banks based on internationally acceptable “health indices” at six-month intervals.
Based on the assessments, it determines the ceiling up to which a bank can increase the “asset” side of its books.
As per an earlier CBI bylaw, the monthly growth of assets of specialized lenders must not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets beyond 2%.
Iran’s banks have long been under censure for unbridled issuance of money due to weak balance sheets, which makes them more reliant on the CBI for funds.
According to instructions posted on CBI’s website, lenders are required to manage their assets in ways that don’t exceed levels set by the regulator. However, “financially healthier” banks may expand their balance sheets beyond the set levels.
The CBI says banks and credit institutions are rated based on the CAMELS system, which appraises lenders in terms of capital adequacy, borrowing from the central bank, non-performing loans and the like.
CAMELS is a recognized international rating system that bank supervisory authorities use to rate financial institutions according to six factors represented by its acronym. The CAMELS acronym stands for "Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity."
The rating system is on a scale of one to five, with one being the best rating and five the worst. A lower rating indicates a more financially stable, less at-risk bank.
Apart from CAMELS rating, the CBI said banks are assessed based on their adherence to anti-money laundering rules, the extent to which they stick to interest rates set by it and their abidance to rules on lending, investment and financial transparency.
Penalties
The central bank has made known penalties for managing director and members of the board of directors of unruly lenders.
Banks rated unhealthy based on the CBI’s criteria, face financial measures that require them to increase their legal reserve requirements.
Reserve requirements guarantee deposits and serves as a tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve requirement ratio of banks.
In late August, the Money and Credit Council, the top monetary and banking decision-making body, allowed the CBI to increase the reserve requirement of lenders up to 15% from the maximum 13% in the past.
The ratio ranges from a minimum 10% to 15% and the regulator can cut the reserve requirement for disciplined banks to as low as 10%.
Moreover, dysfunctional banks are required to place 15% of their resources with the CBI as legal reserve. This is seen as a tool to better control bank performance.
According to rules related to bank balance sheets, investment in non-banking activities, increase in bank expenses, expanding branches and buying fixed assets are among activities lenders have been warned to abstain from.
Expanding balance sheets via capital increase and purchasing government bonds has no restrictions.
Economists and financial experts say overexpansion of broad money is partly linked to the poor balance sheets of banks. Recent data published by the CBI show a changing pattern with regard to factors influencing expansion of the monetary base. It is driven largely by lenders’ mounting debts to the central bank.
