M ajor banks agreed on deposit interest rates on Wednesday, after the central bank left it to them to decide on the matter.
The lenders reached an agreement on rates they will offer on short-term deposits of up to one-year and sight deposits, said Abdolnaser Hemati, the head of High Council for Banks’ Coordination. Mid-term and long-term deposit contracts are not offered in Iran due to economic instability.
The banks’ decision came one day after the central bank announced it would allow banks to compete with each other in the interest rate market, as long as they did not breach the interest rate caps set by the regulator.
The Money and Credit Council reduced the cap on one-year deposit interest rates by 200 basis points to 20 percent. The council also put a 24 percent cap on lending rate – from a previous range of 27 to 28 percent – but did not specify the maturity for loans. The move was prompted by calls to boost business lending.
New Rates
The lenders agreed to keep paying 10 percent interest on sight deposits, which have been one of the sticking points of lowering deposit rates. Banks and credit institutions use various compounding techniques to drive up their effective interest rates beyond the nominal 10 percent. But this is done with other deposit maturities as well.
Based on the agreement, 9-12 months and 6-9 months deposits were cut 200 bps to 18 percent and 16 percent respectively. However, interest on 3-6 months deposits will be kept at 14 percent and the minimum period for earning interest will be one month.
If seen as a yield curve – although rates are not priced in market trading, rather they are set by banks – it could be said that investors are not being compensated for the additional risk of longer maturity deposits. This further deteriorates the attraction of bank deposits.
So Much for Competition
Countless allegations have been hurled at banks by economists, lawmakers and even some bankers, saying they have monopolized money supply. By offering uniform interest rates and using their vast financial resources they stave off any competition. Certainly their latest act points to their cartel like behavior. Bankers have continuously denied these allegations.
When asked if smaller banks and credit institutions will offer the same terms on their deposit contracts, Hemmati replied: “Everything is possible. Authorities should exercise more control and oversight on their activities. But considering the MCC’s cap on lending rates, paying higher interest on deposits is not viable. If banks want to avoid losses, paying higher than 20 percent interest is meaningless.”
Changing Course
Previously the central bank dictated all the deposit rates. But the bank allowed lenders to offer deposit rates at their own discretion, in a move away from its traditional controlling role. The central bank did this to allow “healthy competition” between lenders.
The central bank of Iran has taken a new direction under the governance of Valiollah Seif. Most of the bank’s actions are aimed at expanding its regulatory umbrella, but opening up the money market, in what can be called smarter regulating. Sadly, the actions are sometimes half hearted or hindered by the bank’s weak position in Iran’s financial arena.
