Economy, Business And Markets

Interest Discounts for Struggling Industries

Interest Discounts for Struggling Industries Interest Discounts for Struggling Industries

After a four percent cut in lending rates for businesses which was approved last week, now struggling industries are set to benefit from further discounts.

The mandate comes as the parliament -- with its speaker particularly vociferous on the issue -- placed special emphasis on the support for industries which are struggling to survive.

The provision seeks to spare the industries five percent of loan rates in the form of subsidies so that industries in the red would be able to pay off their loans with a stunted rate of 19 percent, while the lending rate is now 24 percent. The initiative was announced on Wednesday by Mohsen Salehinia, the banking deputy at the ministry of mines and industries.

"Over 10,000 small manufacturing units, which account for 40 percent of the whole, are operating less than half their capacity", said Gholamreza Soleimani, deputy head of Small Industries and Industrial Districts Organization. He added the main reason for these units going bust was "lack of money".

ISNA reported that 14,000 industrial units have been forced to close during the past 23 years. The report added that 6,000 of the industries were located in industrial districts.

Last week, Ali Larijani, speaker of the parliament, proposed to set up a special committee to sort out problems which are hounding industries. Lariajni considered high lending rates as a main deterrence for business owners to apply for loans and called for exigent measures to address it. "With a little investment, these units can get back on their feet", Larijani said.  

Mohsen Salehinia earlier noted that the resources for the cut in loan rates would be provided from the funds saved from subsidy reforms and said the rescue package would be granted to struggling or bankrupt units.      

Loan Shortages   

While the cut in loan rates for cash-strapped industries is stirring new hopes for these factories, the extent to which banks can provide them with lending is another matter altogether. In a recent interview with Financial Tribune's sister website Eghtesad News, Ahmad Hatamiyazd, former CEO of Bank Saderat, said banks are no longer able to perform their main  duties as lenders since they have become "incapacitated".  

"The reason for banks failing to offer loans and therefore the long lines for receiving loans stem from the fact that many state and private organizations have drained the bank's resources by taking out huge loans and then defaulting on their debts", Hatami said. He added that since banks are facing a shortage of capital, they would have to wait for these debtors to pay off their big-ticket loans.  

Bad debts or non-performing loans amount to 938 trillion rails ($34.1 billion at official exchange rate).

Nasser Hemmati, the governor of Bank Melli -- the biggest Iranian state bank -- was another official who weighed in on the issue, saying that unless the government settles its debts with the banks, rate cuts would be good "only on paper". Hemmati told Eghtesad News that a "contradictory policy" in the past years have complicated matters in a way to leave the current banking with a "dilemma".

"As long as the consequences of past decisions continue to haunt banks, they will face shortages in their resources", Hemmati said. "When supply and demand do not go hand in hand, it would be natural for deposit rates to climb".

Hemmati, who also heads the Coordination Council of Bank Executive Managers, deemed the operation of unauthorized banks as another major threat to stabilizing rates and urged the central bank to deal with them. "These banks are used to high interest rates, now are they willing to comply with steep cuts?" he asked.