Economy, Business And Markets

High Collateral Threatening Micro Borrowers

High Collateral Threatening Micro BorrowersHigh Collateral Threatening Micro Borrowers

Unlike past practices, the Central Bank of Iran has decided to leave it to banks to decide the collateral required in return for micro-loans, causing fears that heavy collateral is awaiting small loans applicants.

The CBI’s decision came after borrowers made objections to the incompatibility of loan’s amount and the required collateral that was previously decided by the regulator.

The move, however, has now intensified the borrowers’ concerns as, even in the past, some banks used to act against the regulator’s instructions demanding relatively heavy collateral, according to an article published on Banker news website.

CEOs of banks argue that the heavy collaterals required in return for small loans were simply a precaution to avoid further surge in the size of non-performing loans (NPLs), which has now reached a worrying level – about $33 billion. The central bank, however, says the share of non-performing micro-loans is “insignificant”.

According to the report, the collateral demanded by banks is in some cases several times the value of the loan. For instance, an applicant of a 100 million rial ($3,000) Je’aleh -- or the small home renovation loan -- should provide the bank with a property as collateral.

The same holds true for other loans such as auto loan that has recently been increased to 150 million rials ($4,500), the report said. “Although the purchased car would remain under the ownership of the bank until the loan is fully repaid, at least two employed guarantors with banking checks are required by the banks,” the report added.  

Critics say accessing micro loans has become more difficult now, with the CBI leaving the decision on collaterals to banks.

“Applicants should pursue their case several times with the respective bank to finally obtain a loan. Big private and public banks are reluctant to pay such loans driving people towards smaller banks or financial institutions, some of which are unauthorized”, Mehr news agency said, citing a loan applicant.

According to another customer, banks in general act very cautiously when it comes to collateral. “Only regular clients do not face strict procedures. In most cases, it’s difficult for loan applicants to find the collateral the bank requires,” the customer said.