At a recent meeting with bank CEOs, the Governor of the Central Bank of Iran Mohammad Reza Farzin said banks have six months to rectify their excessive withdrawals.
"If a bank continues to have an imbalanced financial statement, it will be dissolved. All these banks have considerable assets, including real estate, which could be used to address the issue," CBI website quoted Farzin as saying.
He stressed the need for banks to control overdraft and noted that lenders with poor financial status will be subject to “proper procedures to resolve the issue”. He did not elaborate.
Last week he said the regulator plans to dissolve several troubled banks by September as part of efforts to restructure the long ailing banking industry, prevent the rampant increase in liquidity and ultimately tame the chronic inflation.
One of the main economic problems has been excessive lending and money creation by some banks, Farzin told state TV without naming names. "We cannot and will not allow such banks to continue," he stressed, adding that "lenders who cannot fix their problems will have to go."
The senior banker, however, did not name the troubled banks on their way out, but noted that the central bank has prepared a list of such lenders and sent it to the government, and that the process of dissolution has already begun for some of them.
"If we want to restore financial and monetary discipline through non-inflationary methods, banks have to increase their capital. Banks that do not have enough capital and are saddled with bloated balance sheets should understand that if they cannot solve their problems they will be shuttered."
Farzin emphasized the importance of implementing effective monetary policies to control inflation and promote economic growth. "The CBI and the banking system are responsible for achieving the goals of this year's goals announced by the Leader premised on controlling inflation and increasing production."
The governor concurred that the key to achieving these goals is based on CBI’s mandate to “effectively implement monetary policies and control currency rates”.
Responsibility of Managers
He also addressed the issue of some banks struggling with shareholder problems and said talks are underway to resolve it. In his words, “bank management is responsible for resolving these issues and that it is paramount to sustain coordinated efforts to control inflation and liquidity.
Regarding monetary growth, Farzin said the monetary growth rate dropped by 9% in fiscal 2022-23 compared to the previous year.
“The inflation rate of 46.5% has had a more significant impact on the real liquidity growth. As a result, the higher inflation has been mostly due to inflation expectations, psychological factors, forex rate fluctuations and other factors contributing to rising production costs.”
Controlling currency rates is a key factor in taming galloping inflation and by extension managing liquidity growth that has reached historic levels, the CBI boss said. He added that the target for liquidity growth this calendar year is 25%, which is “achievable due to the 30% liquidity growth in the previous year.”
Clear Message
The CBI’s message to the banking industry is to focus on implementing strong and effective monetary policies, controlling excess withdrawals, resolving shareholder issues, and coordinating efforts to control inflation and liquidity. The announcements are part of the regulator’s efforts to underpin economic growth and stability.
With regard to closing troubled banks, the law says if a bank is dissolved, the CBI is responsible to the savers without any excuse. It remains to be seen how this rule will be implemented.
It has been reported that the exponential growth in the monetary base is driven largely by the lenders’ mounting debt to the central bank.
Monetary experts say overexpansion of broad money is partly linked to weak bank balance sheets. Monetary data published by the CBI show a shift related to factors influencing expansion of the monetary base.
Isaak Saeedian, an economist, said by addressing these issues and dissolving or merging the troubled banks, the problem of excessive bank withdrawals and injection of colossal volumes of liquidity into the economy can be resolved.
“By reorganizing the structure or merging such banks, we can control and even reduce inflation in the medium term. Exploding liquidity without effective support in the economy is a key factor contributing to [galloping] inflation.”
With a clear vision and commitment to deal with the troubled banks the value of the tanking national currency can also be strengthened, he noted. Iran’s currency, the rial, has crashed to historic lows in the past several months dealing an economic body blow to the livelihood of millions of fixed-wage earners and the manufacturing sector.
About the challenges that may arise if banks with toxic assets are shut, Saeedian said people with savings in those banks have valid reasons for concern. “As such, merging the banks into one entity seems to be a better option.”
