Mohammadreza Farzin, the governor of the Central Bank of Iran in a meeting with bank CEOs reemphasized the need to adhere to interest rates on deposits approved by the Money and Credit Council.
"Failing to comply, even if it is only one bank, will undermine fair competition clout of others. I have instructed the Supervisory Deputy of the CBI to closely monitor lenders performance to this effect and take necessary measures on any bank that does not observe the approved interest rates for both deposits and loans,” CBI website quoted him as saying.
“Unruly banks will be dealt with strictly".
Farzin emphasized that there will be no compromise in the implementation of the approved rates. "The current interest rates are fair enough and if banks operate based on these rates there will be no problem. However based on available reports some banks are in breach”.
He stressed that any bank that fails to comply will be reported to the banking regulatory authorities, and the necessary action will be taken. He did not elaborate.
Furthermore, the senior banker highlighted another issue that has been reported regarding loans given by bank branches, which is contingent upon deposits. “It is a fundamental banking principle that customers should be evaluated based on their turnover. However, reports received by the CBI indicate that some banks are making the loans conditional on deposits. Bank CEOs must address this issue in their branches and comply with the law.”
Farzin called on the his deputy for supervisory affairs to soon review and reports on the two issues and said in case of violations action will be taken against the bank's board of directors.
Back in January, the Money and Credit Council allowed banks and credit institutions to raise interest on deposits and loans. The top monetary decision-making body decided to raise interest on one-year maturity deposits by 4.5 percentage points to 20.5%.
Interest on two-year deposits was set at 21.5%, 3.5 percentage points higher. The MCC imposed a cap of 22.5% for three-year deposits. On short-term deposits with 3-month maturity the rate remained unchanged at 12%.
MCC approved 17% for six-month deposits, up 3 percentage points. The move apparently was in tandem with efforts to protect the value of the national currency and diversify deposits.
Apart from raising rates, what is new is the revival of three-year deposits. Banks for years were not allowed to park money for more than two years and long-term deposit contracts had two-year maturity.
The central bank increased interest on bank loans from 18% to 23%. Per a CBI announcement, if a client wants to withdraw before the maturity of the contract the rate would be reduced as penalty.
The CBI has warned banks against unscrupulous means and ways to offer higher interest or charge higher rates on loans saying that doing so undermines national monetary policy and leads to higher cost of money for banks.
Banks Censured
Iranian banks have come under increasing censure across the sociopolitical and economic spectrum for their sheer lack of transparency, inefficiency, mismanagement and failure to put public money where the mouth is -- lending to cash-strapped SMEs and manufactures to support domestic production.
The CBI boss stressed the need for the implementation and realization of economic policies by the regulator and the government. "We must implement the policies through continued efforts and cooperation with each other. Last year, we faced a period of high inflation accompanied by an increase in foreign exchange rates, which intensified inflation expectations due to economic and political reasons."
Farzin noted that "This year we have adopted a 'Stabilization Policy' with the focus being on controlling money supply and forex rates. We believe that if these two variables are in check we can maintain [relative] stability in the markets and deal with inflation expectations resulting from the current performance."
Cutting Liquidity Growth
The central bank Governor pointed out that in the spring of this year (started late March) they were able to control the currency market to some extent and restore stability. Regarding monetary policies he said the regulator managed to reduce chronic liquidity growth which returned to 20% after several years.
According to the head of the CBI, it is still essential to continue monitoring of bank balance sheets because it effectively helps control the liquidity rate.
Regarding the global economic recession, Farzin said, "As we predicted, this year is a year of global recession as growth rates in China and the western countries are of the ascending order. This has led to a decrease in oil prices, petrochemical products, and other imports, which is also confirmed by the latest customs data. Due to the predictable declines we allocated foreign exchange accordingly" for imports.
While the foreign exchange market is gradually moving towards stability, precaution is a must to help ensure market stability, he said. Workable economic plans and foreign policy have indeed helped direct the market towards stability, and it is hoped stability will continue in summer. Typically, market fluctuations occur in summer. “However, if the stability continues it is expected that there will be a downward trend in some sectors and asset markets.”
