Higher interest rates seem inevitable but understanding the need, composition and rationale is of the utmost importance, Kamran Nadri, a monetary and banking commentator said
“Deciding rates is a challenge of epic proportions. Estimating the consequences of such measures is the other key issue the central bank must be prepared for,” Nadri said.
However, what is apparent is that if the “Central Bank of Iran sticks to its passive position in the market, banks will face a liquidity crunch and pile pressure on the regulator to increase the monetary base. The outcome will he higher inflation rates plus rise in inflationary expectations for which the passive monetary policymaker will be responsible.”
The Money and Credit Council (MCC), the top decision-making body of financial and monetary markets, is expected to endorse the higher rates sooner rather than later. The CBI boss Ali Salehabadi last week took stock of what lies ahead for interest rates.
Meanwhile, the Executive Board of the Central Bank of Iran said at the weekend that banks can raise the interest rate on certificates of deposit (CDs) up to 23%.
EcoIran interpreted this move as paving the way for the much-debated and long-awaited higher rates. The website quoted one unnamed source as saying that the CBI will soon allow banks to increase interest on deposits by 5%.
Nadri said if the CBI decides to increase interest rates by one or two percent it would not help. He stressed that any increase must be such that it convinces savers to keep their money in the banks.
“Over the years and due to the skyrocketing inflation, banks have poured money into forex, housing and land markets. The profit they make from such investments is obviously higher than the interest they pay to clients.
Some banks have even bought government bonds that have high yields. So, it can be said that insolvency is not threatening our banks so far.”
Iranian banks have come under increasing censure across the sociopolitical and economic spectrum for their sheer lack of transparency, inefficiency, mismanagement and failure to put public money where the mouth is -- lending to cash-strapped SMEs and manufactures and underpin production.
Mountain of Bad Debt
For instance, over the years many banks have given billions in loans to vested interests without demanding proper collateral the catastrophic outcome of which has been skyrocketing inflation and mountains of bad debts as the big borrowers have been unwilling and unable to return the unusually huge amounts.
The average goods and services Consumer Price Index in the 12-months ending Nov. 21 increased by 50.2% for the first decile (the lowest income households) and jumped 41.7% for the 10th decile (highest income).
On the issue of interest rates, banks argue that it “must rise in tandem” with the high and rising inflation to make it attractive to savers. Interest that banks pay at best is less than half the annual inflation rate and in many cases far much lower.
Nadri is of the opinion that the “conundrum banks are struggling with is thanks to the string of CBI’s repeated broken policies. For example, the regulator ordered banks to charge 18% for long-term loans. That rate in and of itself was flawed to say the least. Raising interest rates on deposits at this juncture and under such [worsening] economic conditions could imperil lenders.”
In mid-2020 the MCC increased interest rates on one-year maturity deposits by 1 percentage point to 16%, on two-year deposits the rate was set at 18%. The rate for short-term deposits with 3-month maturity was hiked by 2 percentage points to 12%.
The CBI’s expected move to officially raise rates comes after it warned banks and credit institutions for years that interest rates are illegal and those in breach would face the law.
The regulator later announced 14% for six-month deposits, up 3 percentage points while the cap on lending rates was 18% -- seen by most businesses as unaffordable.
Despite the warnings, some private and state lenders have been offering interest as high as 22% and sometimes 24% to selected clients to attract big money and compete with their peers.
