Despite persistent warnings by the Central Bank of Iran, banks continue to offer higher interest rates on deposits -- up to 22% and 24%.
There is plenty of evidence of the toxic impact of such high rates on, among other things, the already battered capital market or whatever is left of its past glory.
Another serious concern about high interest rates is that it adds to the ills of manufactures and in the process undermines the country’s economic climate, a stock market commentator said.
“As we speak, banks are offering a 20% interest for deposits of up to 10 billion rials (around $29,060), and between 22% and 24% for deposits on 30 billion rials (close to $87,184). This is while the Money and Credit Council (MCC) ruled last year that interest rates should not rise over 12% for 3-month deposits, 14% for 6-months, 16% for one-year and 18% for two-year deposits.
Most banks violated the regulation from the outset, granting over and above 18% for one-year deposits,” Ali Jabalameli was quoted by the news agency, SENA, as saying.
Coaxing the Regulator
The CBI has regularly warned banks and credit institutions to play by the rules or face the law. The last warning was in early September after reports that some banks were offering more than 20% interest on deposits obviously to attract big money. Using a variety of justifications (valid and otherwise), banks have coaxed the regulator to raise deposit rates to attract big businesses and savers.
In September the CBI sent the case of one bank in breach to the judicial authority. Five other banks and credit institutions were also identified as in breach of CBI regulations.
As often is the case, no names were named.
The capital market expert recalled that higher deposit rates also push up lending rates making a bad situation worse for manufactures already saddled with a host of seemingly insoluble problems.
Another problem that props up soon when interest rates go up, he said, is that stressed loans mount and banks end up with piles of bad debt.
“The debt market and fixed-rate investment funds too are not making it any easier for the share market. In the debt market bonds with 24% to 25% and possibly higher yields are being offered. Fixed-rate investment funds offer 23% annual interest.”
Double Dilemma
Jabalameli noted that the stock market is under systemic and non-systemic risks -- unstable commodity prices, global recession fears, rising inflation, US economic sanctions, sharp fluctuations in forex rates, and as if all this was not enough government-imposed sale prices of goods produced by listed companies.
“All this has brought our capital market to where it is today.” he said as a matter of fact.
“It merits mention that other markets like forex and gold too are not in better shape. For instance, profit from gold trade last year was in the region of 20% -- almost the same banks offer on deposits.”
Under the circumstances, he said, investors move towards low-risk activities like fixed-income funds.
“These funds have a rather less detrimental impact on the bourse than bank deposits…but not all are familiar with how these funds function and that is why they are not widely used.”
