Most of the state-owned banks in Iran do not meet the Basel 3 standard and their capital adequacy ratio is below 7%, the neglect of which would raise their risk of bankruptcy, the head of the Foreign Investment Association of Iran, Hossein Salimi, told Iran Chamber of Commerce.
The financial statements of banks, both public and private, have sounded the alarm for the banking system.
At the 30th Monetary and Exchange Policy Conference, Economy Minister Ehsan Khandouzi said, “The issue of non-performing banks is on the agenda of the Central Bank of Iran and the Ministry of Economy is also taking actions in this regard as a shareholder of certain banks. Last year [March 2022-23], 350 trillion rials were added to the capital of state-owned banks, and this year the figure is 500 trillion rials [around $1 billion at the current market exchange rate], which has never been seen before. This shows the government's effort to compensate for the capital adequacy of banks.”
Salimi said according to the regulations of the Central Bank of Iran, which are derived from the strict recommendations of the Basel Committee, the capital adequacy ratio of Iranian banks should not be less than 8%, while the financial statements of some banks show that their capital adequacy ratio is below this threshold, as several banks ended the fiscal year with a negative capital adequacy ratio.
“Banks should have adequate capital to cover the risk of their activities and be careful that the losses are not transferred to depositors. One of the ways to control this issue is to check the capital adequacy ratio of banks,” he said.
According to the Basel 3 standard, the capital adequacy ratio should be 13% or higher in relation to assets and liabilities for them to qualify as active and committed.
Salimi noted that the condition of Iranian banks is exceptional; they do not have enough capital because they indulge in (non-banking) business activities.
“The business of a bank is not mining or real estate. Instead of providing loans, banks invest in real estate and other economic sectors, and earn 100-200% profit when inflation goes up. The result of business ownership is that banks are not committed to their philosophy of existence, i.e., attracting deposits and lending. The more the banks cut business deals, the lower will be their capital adequacy ratio,” he said.
The official stressed that economic players and experts have been pointing out this problem for years, but recently the government itself has declared that banks should distance themselves from business activities.
“Currently, the conditions of banks have become very unorganized and sometimes the capital adequacy has reached 2% or 3%,” he said.
Calling on the government to prevent banks from going bankrupt, Salimi said, “Looking back, several banks and funds that were going bankrupt merged with Bank Sepah, and even now this risk is threatening other banks. The risk of banks’ lower capital adequacy ratio should be taken seriously otherwise, sooner or later, it will shake the economy and banks in particular.”
