President Ebrahim Raisi has called on the Central Bank of Iran to take early action to bring dysfunctional banks and credit institutions into line.
“Drawing on existing legislation, the CBI must take immediate action against poorly performing banks and credit institutions,” Raisi said at a meeting of the Government Economic Coordination Headquarters late on Tuesday.
He singled out lenders whose questionable record has led to the explosion of money supply, which by extension has led to high and rising inflation unseen in Iranian history.
Banks have long under strong censure for unbridled issuance of money due to their weak balance sheets, which makes them more reliant on the CBI for funds.
Recent monetary data published by the CBI show a shift in factors influencing expansion of the monetary base. Growth in the monetary base is driven largely by banks’ mounting debt to the central bank.
The total debt of banks to the CBI was 1,859.7 trillion rials ($6 billion) by end of the Iranian calendar month to Feb. 19.
The monetary base stood at 5,807.5 trillion rials ($18.7b) -- up 33.2% on year ending Feb. 19. It jumped 26.6% in 11 months.
While foreign debt of the CBI was a main determining factor in the expansion of the monetary base in the past, new data suggest that it is now fueled by the huge increase in banks debt to the CBI.
Bank debt to the CBI contributed to 15 percentage points of monetary base growth in 11 months. It means the debt alone contributed 690 trillion rials ($2.2b) to the monetary base growth.
An earlier review of 23 state and private banks showed that most are struggling with capital adequacy ratios (CARs) below global financial norms.
The CAR in eight of the reviewed banks was below zero, six had a ratio between 0-4 and four between 4-8%.
Only five banks had a capital adequacy ratio above 8%, according to data published by Fars News Agency.
Also known as capital-to-risk weighted assets ratio (CRAR), CAR is used to protect depositors and promote the stability and efficiency of financial systems. It is calculated by dividing a bank's capital by its risk-weighted assets.
Tightening Rules
Financial and economic decision-makers have voiced concern about the unacceptable status of banks and proposed plans to turn the situation around.
The CBI earlier announced plans to monitor bank balance sheets at regular intervals of three months. Investment in non-bank activities, increase in bank expenses, expanding branches and buying fixed assets are among activities the regulator insists lenders avoid
The CBI, however, is hopeful about some improvement in their balance sheets resulting from capital increase and buying government bonds.
As per new polices of the Economy Ministry, loss-making banks must show profit by end of the fiscal year (March 2023). Lenders at break-even point or those with up to 2% annual profit must increase gains by 4 percentage points.
The Majlis Research Center, the influential parliamentary think tank, in a recent analytical report strongly censured the performance of banks, recalling that weak balance sheets is a near permanent feature of the banking sector and the gap between their income and expenses has only widened over time.
