The Central Bank of Iran said henceforth loans and credit to banks will be possible only if they put appropriate collateral.
“New credit by the central bank to banks and credit institutions without collateral has been banned,” the CBI said.
In a press release seen on the CBI website, the regulator said the new decision is based on a law passed by parliament.
During the 2022-23 budget debate last month, MPs banned the CBI from giving credit to banks without collateral and obliged the regulator to publicly release data on the amounts borrowed.
The Money and Credit Council, the monetary and banking decision-maker in Iran, is in charge of determining the amount and type of collateral.
Banks that have taken money from the CBI in the past must also put up appropriate collateral like foreign currency, gold and securities.
The CBI says it has controlled lenders’ excessive borrowing from the CBI in the past two years in part by implementing open market operations (OMOs).
The OMO is used to control money supply and interbank rates. Using bonds as collateral to borrow from the CBI is another integral component of the monetary policy.
The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb interbank rates. Selling government bonds helps curb the base money and raises interbank rates.
Banks’ strained financial resources have often been 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.
The OMO has apparently enabled the CBI to navigate interbank rates through set targets. As a component of OMO, the regulator has set up an interest rate corridor (IRC) to control rates. Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets interbank rates move within this setup.
To curb the ballooning money supply and issuance of money, the regulator has tightened control over the performance of banks, in particular their balance sheets.
Earlier, 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 resources to bonds.
