The Central Bank of Iran has announced new measures to prevent banks from giving loans to related persons, head of the CBI department for banking health assessment said.
"Rules include caps on bank lending to related persons. The value of every loan paid to subsidiaries or related persons must not exceed 3% of the bank’s base capital. Moreover, the collective amounts lent to related persons must not exceed 40% of the bank capital," Ali Akbar Miremadi was quoted as saying by IBENA.
Subsidiaries and affiliated companies are considered as a bank’s related entities. However, "henceforth shareholders of the bank, affiliated companies or any person that can impact the board's decision will be seen as related entities to whom bank lending is restricted."
The new regulation states that loans to related persons, including the interest rate and securities, must be similar to other applicants with no strings attached.
According to Miremadi, the CBI has come up with new measures to discipline unruly banks. "Penalties, previously enshrined in the regulations were ineffective. Therefore the CBI is improving the role and reach of its law enforcement arm to confront lenders that fail to play by the rules."
"Moreover, we are developing new supervisory platforms to choke loans beyond acceptable norms."
A supervisory platform is to be developed and used for monitoring bank loan contracts "that would allow the CBI to prevent lending to related persons beyond the approved cap."
The CBI is also working on a mechanism to make optimum use of its supervisory tools to monitor the collective amount of lenders' give to their own affiliated companies.
Miremadi noted that funding affiliated firms and individuals without proper checks and balances can (already has) created imbalances in bank liquidity and hurt their books. He did not elaborate.
As lenders increasingly grapple with NPLs and other financial problems, the issue of big loan defaulters has attracted renewed interest among economists, independent political analysts, the people and sections of the media.
The CBI recently obliged banks to regularly publish the names of big defaulters in the hope that it could help recover the billions in bad debt that have almost devastated the banking sector’s lending ability and capacity, hurling some towards insolvency.
Publicizing the name of big defaulters is backed by law that now obliges lenders to update the list of borrowers on a quarterly basis.
A glance at the list of big defaulters shows that bank-affiliated companies account for a large part of bad loans.
The CBI had warned lenders who have given “huge loans in the past to their affiliated entities”. It said they will face the law and big defaulters are banned from new loans.
President Ebrahim Raisi has called on the CBI to take necessary measures to monitor big loans to enterprises and l institutions related to banks and vested interests.
The CBI earlier said that in the absence of robust supervision and lack of an integrated data bank in the past, banks gave unusually large loans without proper collateral. Over the years, such bizarre lending resulted in large NPLs undermining the role and viability of many banks.
Total bad loans were estimated at 2,697 trillion rials ($8.9 billion) by the end of third quarter of the last fiscal year on Dec. 21.
NPLs of Iranian banks are often higher compared to their peers in the developing and developed world where it is mostly in single digits and usually below 5%.
