The masters of Iran’s finance met to discuss the troubles of the banking system late Saturday. The meeting was held in Tehran to get bankers on board with central bank policies and hear their perspective.
Central Bank of Iran Governor Valiollah Seif hosted the chief executives of Iran’s commercial banks to talk about the governance of Iran’s financial system at the central bank’s headquarters on Mirdamad Boulevard.
The overlords of finance talked about the proposed interest rate cut, non-performing loans, banks’ overdrafts from the central bank, interbank market, and bank transaction fees.
Main Problems
Seif outlined the main problems of the banking system during the meeting. He sees the large portion of financing via unauthorized institutions, the government’s debt to commercial lenders and NPLs as the main problems that plague finance today.
The governor asked the chief executives for their opinion on ways to cut interest rates and methods to reduce banks’ operational risks.
Seif also asked bankers to put financing companies’ working capital on the top of their lending priorities. Recent central bank directives have necessitated funding of indebted manufacturers, even if they are in the red.
The governor also demanded that banks use the “over-branch workgroup for NPL pursuit”, stationed in the central bank, for the return of their assets.
Rate Cuts
Asserting Bank Melli’s position as Iran’s largest lender, chief executive Abdonasser Hemati, read a joint statement by the financiers.
Hemati said that banks have agreed to cutting interest rates due to the current conditions in the economy.
Calls for cutting interest rates are heard from every side these days. Proponents of a rate cut, sight the need for cheaper money to revive Iran’s ailing industries, and a reversal in the flight of savings to less risky and higher yielding deposits from other markets, especially equity markets, as reasons. They also say that rates should be cut in line with the decline in inflation to lower than 20 percent, to boost business investment.
There are however, opposing views. Opponents contend that a cut in interest rates could stoke inflation – which is already high – by increasing money supply. They also say that the downtrend in the equity markets is due to political uncertainty regarding the sanctions, and lackluster performance by the companies due to Iran’s financial crisis in 2012. They argue that the central bank should first rein in inflation, and then think about economic growth, as the bank’s mandate suggests.
Banks have proposed a 200 basis point cut in deposit rates, which the central bank agrees to. The central bank wants to “keep real interest rates positive, while keeping the rates reasonable,” the bank’s governor said last week. The bank’s analysis shows that there are few businesses that can borrow at current rates. So, it is aiming for a two percent real deposit rate and a four percent margin for banks, putting lending rates six percent above inflation.
Illegal Institutions
Hemmati also said that unauthorized financial institutions should be countered. Seif reiterated the regulator’s resolve in dealing with the said institutions.
Based on the most recent statements by central bank officials, there are over 7,000 illicit financial institutions in Iran. They do not allow for CBI supervision, engage in risky businesses, have flawed books and do not comply with the central bank’s directives. Many of these institutions are cooperatives and some are tied to state organizations.
They are considered by the central bank as one of the main reasons behind the mess in Iran’s money markets, as they attract money by offering high interest rates. Seif has warned depositors to avoid these institutions.
