The government has placed new demands on lenders in the 2023-24 budget obliging them to continue giving cheap loans to a wide range of applicants.
However, economists have voiced renewed concerns saying that such decisions are ill-informed and must be made in accord with the lending power of banks.
Iraj Nadimi, an economist and a former MP, is of the opinion that subsidized loans “do not necessarily” hurt bank resources so long as the government pays the difference in the interest rate paid by borrowers and those set by the Money and Credit Council, IBENA reported.
"However, when the rates are set arbitrarily, lenders will obviously face challenges," Nadimi said.
"Banks usually use deposits to give loans. Any hasty decision to support the [needy] people can put their deposits at risk. Therefore, banks need to be reimbursed for the cheap loans in accord with budgetary requirements.”
In fiscal 2023-24 banks and credit institutions are mandated to allocate up to 2,000 trillion rials ($4.92 billion) in interest-free lending for government-led programs like loans to newlyweds, for childbirth and to support households struggling with the cost-of-living crisis.
This is incorporated in the budget bill submitted by President Ebrahim Raisi to the parliament last week.
Banks are obliged to lend in the form of as Qarz-ol-Hassanah schemes (interest-free microcredit) despite mounting concerns about the detrimental impact of such a heavy burden on the already troubled banking industry.
Prominent economists and senior bankers have censured policy and decision making bodies for imposing such obligations on banks to keep lending beyond their ability and capacity.
The subsidized loan schemes demanded from banks has undermined their already overstretched financial resources and pushed many in a precarious condition.
Lenders were obliged in April last year to give loans to new parents to encourage childbirth. The money is given to low-income households who had a child in the previous fiscal year (March 2021-22) and after.
First-time parents are granted 200 million rials for the birth to their first child, 400 million rials for the second child, 600 million rials for the third, 800 million rials for the fourth child and 1 billion rials for five children and more.
Marriage loans are interest-free repayable in seven years. Couples can apply for loans up to two years after the pronouncement of their marriage.
The government doubled marriage loans this year. Per the 2022-23 budget, each partner who ties the knot is eligible for 1.2-billion-rials.
To help encourage early marriage, lenders are required to grant 1.5 billion rials per partner if the bride is below 23 years and the groom under 25.
Increase in lending in this scheme is to help population growth. Many sociologists have warned that the population is ageing and the youth are disinclined to tie the knot, start a family or have children due to the lack of jobs, worsening economic conditions, galloping inflation, prohibitive housing costs and an uncertain future.
Limited Impact
So far, the government's efforts to encourage people to have more babies have had a limited impact.
Lenders are also obliged to pay cheap loans to a wide spectrum of needy families as well as knowledge-based companies.
CBI figures show that banks and credit institutions gave 1,390 trillion rials ($3.42 billion) in loans to encourage youth marriage and childbirth since the beginning of the calendar year that ends in March.
The Central Bank of Iran said the money was given to 1.57 million hard up applicants in nine months. “Banks processed 643,330 loan applications worth 259 trillion rials [$637 million] to promote childbirth,” the CBI website shows.
Almost 1,027 trillion rials ($2.52 billion) in marriage loans went to 743,000 applicants -- up 51% on the same period last year.
According to the CBI, lenders also gave security deposit loans worth 105 trillion rials ($258 million) in the same period to 183,000 low-income people wanting to rent a home.
Security deposit loans were announced by the government in 2020 after the Covid-19 struck. The move was to support those unable to rent a home due to the skyrocketing rents and home prices that have continued unabated, making home ownership for many a fantasy unheard of in recent history.
The CBI boss Mohammad Reza Farzin has urged the parliament to take banks' shrinking resources into account before deciding the lending largesse. Referring to the 2023-24 budget bill being debated in parliament, he urged MPs not to order banks to give loans as it would further undermine the already overstretched banking sector.
