Following an announcement by the Money and Credit Council, the Central Bank of Iran on Monday issued guidelines for the issuance of bonds by banks and credit institutions.
MCC, the top banking and monetary decision-making body in Iran, in mid-January gave banks the go-ahead to issue bonds to meet their funding needs.
According to instructions posted on the CBI website, lenders can issue their own bonds via the secondary market albeit with CBI approval.
The move is in line with “diversifying financial instruments and seeks to help banks to cope with resource shortages”.
Banks that issue bonds under no condition can give loans to financial intermediary institutions that act as underwriters or guarantors of bond repayment during the period starting from the issuance of securities until the maturity date.
Banks wishing to issue bonds must sent their application to the CBI. “The regulator must assess the request based on its supervisory criteria and in the framework of its monetary and credit policies”.
In addition, lenders are not allowed to buy bonds issued either by themselves or other lending institutions.
Up until now, lenders were not allowed to issue bonds and the bond market was the exclusive premise of the government. Selected state-controlled listed companies were allowed to issue bonds after putting up robust collateral.
Allowing lenders to issue bonds gives them leeway to secure funds when facing a liquidity crunch. When in dire need of liquidity, lenders usually borrow from each other via the interbank market or the CBI.
The latest move apparently should help the CBI optimize monetary policies of the open market operations (OMO), which largely rely on bonds.
The CBI launched the OMO in January 2020 to control lenders’ rampant borrowing from the CBI and regulate interest rates in the interbank market.
Strained funding of banks are often blamed for overexpansion of monetary aggregates. The CBI says its monetary policy “has gone a long way in preventing further growth of key monetary factors, namely money supply and monetary base.
In the OMO framework, central banks buy bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. In this framework banks can hold bonds as collateral to borrow from the CBI.
However, economists and market observers say the bond market needs wider space for the OMO to deliver the desired results. The CBI launched bond auctions in May 2020 to help lift the bond market and ease banks’ access to government bonds.
Bond auctions helped the government plug gaping holes in the fiscal budget by raising money from the interbank market without the need to borrow from the CBI and running the risk of increasing the money supply.
Last year the MCC obliged banks to allocate a segment of their resources to bonds. Based on MCC rules, lenders must allocate at least 3% of their money to bonds.
