For the second time this year the central bank’s board of directors have met with economists and monetary experts to discuss deposit rates.
During the meeting held on Monday, Valiollah Seif, the central bank governor, said he was concerned about the gap between the deposit rate ceiling and the inflation rate.
After a long period of financial recession, deposit rates increased to as high as 27 percent, in an attempt by banks to attract more capital.
“However the matter which has raised criticism within the banking system is the fact that deposit rates have not been properly aligned with inflation’s downward trend,” he explained.
According to the Central Bank of Iran’s monetary and credit policies, deposit rates need to be set in line with inflation, which is hovering above 15 percent now.
The illegal actions of unauthorized credit institutions, which cannot be officially monitored by the CBI, have disrupted the monetary market, Seif said, referring to the institutions still offering higher deposit rates than those agreed with monetary officials, which is maximum 22 percent for one-year deposits.
“Official banks have even ventured into unhealthy competition, an issue which has mutated into a major obstacle for regulating interest rates,” he added.
The senior banking official stated that the decision taken by the CBI to limit long-term deposits to maximum one-year has yielded effective results.
The measure has benefited the banks as deposits with longer terms would inflict loss. For instance, in five-year deposits banks were obliged to pay interest rates for as long as the deposit was available, the clients however would withdraw the funds at any given time before the maturity date without even having to pay a fine.
Despite the fact that banks have been 90 percent loyal in upholding the new regulations (22 percent interest rates on long-term deposits), banks are in competition with the unregulated money market (credit institutions and cooperatives), which do not operate under the supervision of the CBI.
Unlike official banks, credit institutions and cooperatives do not pay reserve requirements and some still continue to offer high deposit rates regardless of norms and regulations.
The CBI governor harshly criticized the practices within the unregulated money market, saying that the CBI “must assist official commercial banks and prepare the conditions for adhering to the maximum deposit rate, as agreed.”
He said the regulator has been putting all its effort into regulating the credit institutions in recent months.
Next Year Policy
Seif further propounded on the forecast directions of CBI’s monetary and credit policies for the upcoming year.
He stated that controlling inflation will remain the bank’s top priority.
Also, major financial needs of the economic sectors, specifically, providing cash flow in the manufacturing sector will be facilitated.
Seif admitted that the struggling economy and non-performing loans (NPLs) have put the entire banking system at risk. “As the CBI wants to correct the faults within the system, this matter is also one of its major concerns in drawing up a plan of action for monetary and credit policies of the next year (starting March 21).”
