The Economy Ministry says banks and credit institutions gave an estimated 475 trillion rials ($1.04 billion) in loans to 1,293,216 applicants without demanding collateral and by using their credit rating and payroll.
Collateral-free loans are given by government and private banks. Reports say specialized banks owned by the government accounted for a meager portion of such lending, with Bank Maskan at the top, the ministry said on its website without mentioning the timeframe of the loans.
Banks have long been single out for giving unusually large amounts in questionable loans to big businesses and vested interest, but small loans are few and far between accounting for a meager part of the total.
Collateral-free loans are given to salaried workers and retirees struggling with the worsening cost of living crisis and galloping inflation – a troubling phenomenon now seen across continents including in the rich countries.
The Economy Ministry says the two groups can borrow up to 1 billion rials and loans are subject to credibility.
Instead of collateral, workers need to present their salary certificate for loans up to 500 million rials. For loans above this amount they should submit a check or promissory note.
The ministry claims that the policy of lending without collateral “is not with the aim to boost the government's popularity but to help revive the people's hope” that the economic situation would improve.
Bank Sepah was in the lead with 138.4 trillion rials ($392 million) to an estimated 477,000 applicants, accounting for 21% of the total.
Bank Tejarat and Bank Refah were next accounting for 16% and 10%, respectively. Qarz al-Hasanah Mehr Iran Bank and Bank Melli were the other big lenders.
Strong Opposition
However, the program has unleashed strong criticism against the government for overburdening banks with mandates that add to the myriad of problems of the struggling banking industry not unfamiliar with mismanagement and poor performance.
In response to the criticism, the ministry says banks do not allocate extra funds for the subsidized loans and “draw on the available resources but under new lending arrangements.”
The secretary of Private Banks and Credit Institutions Association said earlier that collateralization must be upheld for loans and banks should not be ordered by the government to lend without collateral.
"Banks need to ensure that borrowers are able [and willing] to repay on time…credit ratings simply cannot be accepted as a security for loans," Mohammad Reza Jamshidi was quoted as saying.
Credit rating usually is a factor only for assessing applicants, Jamshidi noted. "However, a bank may decide to lend without demanding collateral from applicants with reasonable credit scores."
Despite the ministry’s emphasis on credibility assessment before granting loans, there is no clear-cut criteria for such appraisal.
Earlier the Central Bank of Iran said the basis for credibility assessment could vary and include factors like the borrower’s financial track record, including past loans, borrowers’ check transaction performance and even their record in paying traffic fines and utility bills.
Under the credibility assessment announced earlier by the CBI, banks must limit access of unruly customers even if they put up collateral but failed to repay debts on time in the past.
The regulator has introduced a platform for online inquiries on credibility status at mycredit.ir website. The platform keeps data on 44 million IDs and provides information on 34 million bank customers.
Raising Bank Capital
The government approved a proposal calling for state-owned banks to raise capital and enhance capital adequacy ratio by allocating an estimated 350 trillion rials ($863 million).
Per the plan, Bank Maskan and Bank of Industry and Mine will each boost capital by 100 trillion rials ($246.3m).
Bank Keshavarzi, Bank Melli Iran and Bank Sepah are set to receive 35 trillion rials ($86.3 million) to increase capital as part of the 2023-24 draft budget.
The Cooperative Development Bank is to raise capital by 30 trillion rials ($73.8 m). Post Bank Iran and Export Development Bank of Iran will do so by adding 10 trillion rials (24.6 million) and 5 trillion rials ($12.3 million), respectively.
By increasing the capital of banks the government seeks to boost lending capacity and underpin support for cash-strapped production units. The measure should also help improve bank capital adequacy ratio to above 8%.
Government-owned lenders include three commercial and five specialized banks including Bank Melli, Bank Sepah and Post Bank.
Bank Maskan (main housing lender), Export Development Bank of Iran, Bank of Mine and Industry, Cooperative Development Bank and Bank Keshavarzi (agro bank) are the five specialized banks.
Electronic Loan Contracts
The ministry commended the CBI for obliging banks to provide borrowers a copy of their loan contracts and called on the central bank and commercial banks to work on digitalization of loan contracts. The ministry says this will help improve the transparency of lenders' operations.
Last year, the CBI said banks must submit a copy of the loan contract to borrowers. The copy must bear the same legal value as the original contract.
Obliging lenders to share details of loan contracts with borrowers is with the aim of improving transparency and exposing any potential wrongdoing and reduce compound interest rates and penalties for defaulters.
The obligation is based on legislation. It requires lenders to develop electronic platforms with the aim to ease access of borrowers to data about the provisions of their loan agreement and any changes thereto.
Loan agreements must also be easily accessible to the guarantors/mortgagors and include complete data about repayment guarantees, installments, deferrals and the like.
