The stagnant state of the economy has disrupted company earnings, causing firms to delay paying their debts to commercial banks. So, with non-performing loans continuing to pile up, the banks will suffer. On the other hand, providing liquidity has become a troublesome issue for commercial banks when firms fail to pay debts. As a result, the banks would fail to address cash flow problems of the firms – it’s a vicious cycle.
In the second half of the fiscal year companies tend to purchase more goods than they do during the first half, an analytical report by Eghtesad News suggests. Thus requests for loans to settle cash flow problems also surge.
Additionally, the report says, the majority of Iranian firms have postponed most major business decision makings till after the ongoing nuclear negotiations between Tehran and six world powers known as P5+1 are settled, yet another factor resulting in increased loan requests.
Given financial sanctions imposed on the Iranian banking system, firms are required to provide the entire amount of money needed for a purchase in form of a bill of exchange before the deal is settled. Compared to normal trading situations, firms are in need of larger loans to solve cash flow problems.
Loan Contracts
Tejarat-e-Farda magazine had earlier investigated the issue of what banking managers plan to do to provide businesses with loans that can solve their cash flow problems.
It might seem that lenders would logically welcome the idea of providing loans to businesses in a bid to make more profit, even if temporarily. The current restrictions set on loans, however, have complicated the process.
High interest loans available in three, six, and nine month contracts (with a 28 percent interest rate) were previously commonly used, since they were economically justified for banks. Loans with lower interest rates (22 percent) however, are not economically justifiable for commercial lenders and would result in loss.
The high interest loans carry their own risks as the entire amount paid is returned only after the project is completed and once profits and losses are made clear. Thus for a certain period, the amount paid falls entirely out of the control of the bank and they face problems in organizing funds which have come to maturity.
A positive fact with loans with lower interest rates is that portions of them can be returned to lenders during the term of the loan.
Assessing the true condition of the firms reveals that wanting to pay 28 percent interest rate on loans is much higher than many firms can afford.
The only option firms would be left with for repaying the loans rather than expanding their markets or proportionately increasing their prices would be to shrink their corporations in size, the report suggests. This would further increase stagnation in the following years and create more problems for commercial banks, it adds.
Assets as Collateral
During the past couple of years the banking system’s vision has altered in regards with collaterals. Even real estate which was once considered to be the most reliable type of pledge no longer appeals.
Not only are banks no longer accepting real estate as collaterals, on the contrary suspicions arise if a firm attempts to apply for a loan and pledges real estate as collateral.
When such cases happen there is a high chance that the firm is already struggling with repaying previous loans. As several firms take out loans to buy real estate which they can pledge as collateral for their next loans; the case is much more common among trade companies and the vicious circle imposes high risks on the banks.
All in all, if a hierarchy were to be presented the highest trusted firms with the banking system are manufacturing companies, followed by companies offering services, and the least reliable of all are trade companies especially because they do not have any major assets (such as factories) and can easily cancel their businesses whenever they wish to do so.
Credit Records
Banks logically prefer to do business with clients who have healthy credit records; however, assessing firms’ credit records carries its own complications. Firstly, there’s the domino effect of bankruptcy in a chain of companies.
Several companies are linked to one another in financial or production processes. If, namely, the company providing raw material fails to prepare the needed goods or funds, the shortcoming will leave a domino effect on all the other companies involved in the production chain and stain their credit records as well.
After such incidents credit records of numerous companies are marred and it is difficult to differentiate between those who are chiefly responsible and others that have fallen victim to the wrongdoings of others.
On the other hand sanctions, instability of prices, and incorrect decisions in choice of business partners are also reasons why certain firms have not received their foreign exchange payments and their credit records have gone wrong.
Tax Evasion
Tax evasion is widespread in Iran. Many companies, even those that are actually making profit, cook their books to avoid paying taxes, the report says, citing recent studies.
When banking processes are carried out, the companies’ delegates explain that their books have been cooked to avoid paying fair taxes and their companies are in fact yielding profit.
Studies also affirm the fact that the financial situations of the companies are actually much better than what their books show, according to the report. As books are unreliable, this issue has caused serious trouble for banks’ credit assessment processes.
