After the Money and Credit Council finalized a decision on deposit rates in a meeting held on April 28, it also announced approvals on the reserve requirement rate, among other issues.
To control inflation and money supply and to guarantee the deposits held by commercial banks, the Central Bank of Iran keeps part of the banks’ capital, known as reserve requirement. Based on the banks’ latest nine-month balance sheet released last year (ended March 20), 770,000 billion rials ($240 billion at market exchange rate) of their funds are kept in the CBI’s account.
Due to the recent economic recession and the cash flow problems the manufacturing sector has been dealing with, banks’ CEOs and economic experts called on the CBI to reduce the rate of reserve requirement, arguing that the move could help increase lending to businesses.
CBI Governor Valiollah Seif, however, said the move could increase inflation. “1% decrease in reserve requirement rate would lead to 4.5% increase in liquidity, making recent non-inflationary policies ineffective,” he said.
But during its recent meeting, the MCC eventually decided to lower the rate nearly 0.5%, ISNA quoted MCC member Mohammad Reza Pour-Ebrahimi as saying.
Under the new approval, the figure is set to be 13% for commercial banks and credit institutions (both private and state-owned), 10% for specialized banks and those branches of commercial banks and credit institutions located in free trade zones. The figure remained unchanged for Bank Maskan, a bank largely involved in the housing sector.
Borrowing Rates
Earlier commercial banks asked the monetary officials to reduce the interest rate (currently 34%) on loans they borrow from the CBI, a request that was severely criticized by the director general of the CBI’s credits department, Mirmohammad Sadeghi, who argued that the move could have inflationary effects.
In its latest meeting, the MCC did not make any tangible changes in borrowing rates.
Short-Term Deposits
Though the MCC cut the deposit rate ceiling (for one-year deposits) from 22% to 20%, CBI’s deputy governor for economic inquiry Sajjad Mehdizadeh told ISNA that the council did not specify any precise rates for short-term or sight deposits.
The council has left the decision to the banks, he said. Any decision, if made by the MCC, would be announced to banks in the near future, he added.
Over the last year, banks provided loans worth 3.4 quadrillion rials to businesses. Given recent MCC approvals, commercial banks are expected to provide more business loans later this year, which began March 21.
Furthermore, Economy Minister Ali Tayebnia has announced that the government has taken measures to help banks raise their capital in an attempt to help them increase lending to struggling businesses.
