The ratio of non-performing loans to total loans by Iranian banks was 8.5% by end of the third quarter of the last fiscal year (Dec. 2020).
It was a slight improvement compared to the 8.7% reported for Q2 and down from the 10.5% in the same quarter a year earlier, indicating a 16.7% annual decline.
The figure declined 5.6% in nine months since the beginning of the fiscal year in March 2020, according to data released on the Central Bank of Iran.
NPL ratio is the ratio of the amount of nonperforming loans in a loan portfolio of banks to the total amount of outstanding loans the banks hold. The ratio measures the effectiveness of a bank in receiving repayments on its loans.
A bank loan is normally classified as nonperforming when payments of principal and interest are 90 days or more past due, or when future payments are not expected to be received in full.
The CBI did not provide details on the amount of NPLs but the amount can be determined using available data about outstanding loans. With total outstanding loans near 25,709.3 trillion rials ($111.7 billion) in December 2020 and NPL ratio at 8.5%, the NPL would be close to 2,180 trillion rials ($9.8b) by end of the Q3 in fiscal 2020-21.
This ratio in the report relates to both rial and forex loans. It was 12.5% for loans taken out in foreign currency, posting a 17.9% increase in nine months. The rial ratio was 7.4% down 14% in the three quarters.
Data suggest the decline in overall NPL ratio mostly was due to bad loans in rials. Increase in NPL ratio shows that loan defaulters were mainly in the forex segment who failed to meet their commitments due to the prohibitive rise in currency rates, the Us economic blockade and rising production costs.
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%.
A look at the NPL ratio of countries across the globe published by the World Bank indicates that in 2019 it was 2.5% in France, 0.9% in the United States, 3.8% in Poland and 3.1% in Brazil. Turkey, Pakistan and Afghanistan registered 5%, 8.6% and 8.9% in 2019.
The complex role of Iran’s opaque banking sector in funding controversial projects have contributed to the high and rising NPLs.
Big Fish
Decline in the growth of bad loans in successive quarters indicates the relative success of the CBI and other supervisory bodies in recovering bad debts.
The former CBI governor Abdolnasser Hemmati said earlier that the big defaulters had repaid 30% of their arrears and “11 major debtors owe 900 trillion rials ($3.9b) to the banks.
High NPL ratios have hurt the balance sheets of banks and forced them to suspend lending, despite the chronic need of businesses to borrow. For this and other drawbacks (lack of transparency and collateral in granting big loans) most banks have often been castigated by economic experts and business leaders.
Some defaulters tend to hide behind the guise of entrepreneurs to avoid or delay their financial commitments, arguing that the repayment of debts would lead to closures and furloughs.
