The Central Bank of Iran has announced new guidelines for borrowing from the interbank market using collateral.
As per the instructions posted on the CBI website, lending to banks or opening credit lines for them by the CBI is possible only with appropriate collateral.
Collateral are of different types, but the regulator has given priority to some. Government-issued securities, foreign currency, gold, corporate bonds, shares and real estate are apparently preferred by the CBI. Equities and real estate have the lowest priority.
The restrictions on lending to banks is backed by a legislation ratified by lawmakers.
When discussing the 2022-23 budget provisions in early March, MPs banned the CBI from giving credit to banks without verified collateral and obliged the regulator to make public data about amounts borrowed by banks.
The Money and Credit Council, the top monetary and banking decision-maker, is in charge of determining the amount and type of collateral.
Banks and credit institutions that have already borrowed from the CBI may not put up collateral unless they seek new loans.
The CBI says it has controlled excessive borrowing by banks from the CBI in the past two years in part via implementing open market operation (OMO).
The OMO is being implemented to control the monetary base and interbank rates. The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking rates. Selling government bonds reduces the money base and raises interbank rates.
Distressed banks have often been blamed for the expansion of monetary aggregates. The CBI says its monetary policy has gone a long way in preventing further growth in key monetary factors -- money supply and the monetary base.
The OMO has apparently enabled the CBI to navigate interbank interest rates through precise 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 overexpansion of money supply and issuance of money, the regulator has tightened oversight on bank performance, in particular their balance sheets.
Earlier, the MCC obliged banks to allocate a segment of their resources to government bonds. Based on the MCC rule, lenders must allocate at least 3% of their money to buy debt.
