Economy, Business And Markets

CBI Takes Banks to Task for Resisting Reforms

CBI Takes Banks to Task for Resisting Reforms CBI Takes Banks to Task for Resisting Reforms

Governor of the Central bank of Iran Valiollah Seif called on banking executives and other major players in the money market to embrace policies that serve the entire financial system and not just their own interests.

Addressing a meeting of CEOs of major commercial banks in Tehran, Seif cautioned against “myopic thinking” in financial decisions which he said would ultimately damage the whole banking system.

In remarks posted on the CBI’s website, Seif discussed the recent ruling by the Money and Credit Council (MCC) to lower the benchmark interest rates saying the cut “was good for the economy.”

“Some are questioning our decision regarding the interest rate cut, asking why it was a top-down order to the banks and also why we applied the cut only to long-term (one-year) deposits”, Seif said. He defended both decisions as necessary under the peculiar economic conditions of the country.  

“Bad debt and high economic risk have eroded the lending power of the banks and increased the cost of money, which  in turn created a divergence with inflation’s declining trend”, Seif  maintained, adding that for the first time after the 1979 Islamic Revolution, positive real interest rates have been secured.

Seif, who also presides over the MCC meetings, explained that banks could no longer mange high deposit rates since they were cash-strapped.  “If the CBI hadn’t intervened to lower the interest rates, the problem could have become more complicated”, he warned.

He also criticized the sensational way that banks are promoting their sight deposit rates in an attempt to woo customers and urged bankers to change their behavior, saying it was creating bad publicity.

The ceiling rate on deposits is now set at 20 percent, but banks are free to offer 10-20 percent interest on sight and short-term deposits.

 Call for Reforms

Seif urged banks to start implementing reforms to fix structural and management problems.

“The CBI and MCC have granted much autonomy to banks and in return expect them to fulfill their commitments”, Seif said. Imposing a cap on lending rates was meant to improve the banking system, he added.

The MCC has put a 24 percent cap on lending rates, down from 28 percent.

Seif complained that banks are ignoring global standards in their transactions, and by extension hurting the banking system. He considered non-performing loans (NPLs) and unusually high deposit rates as dark chapters in the history of Iranian banks.

“Banks should grow more efficient and mature by swiftly implementing the new deposit rates in a transparent manner”, he said, adding that lack of financial discipline is no longer tolerable.

 Illegal Institutions    

Elsewhere in his comments, the CBI chief harshly criticized the way some commercial banks are collaborating with unauthorized institutions.

He said providing services to uncertified financial firms are not justifiable and urged banks to sever ties with the illegal institutions. “Sadly enough, illegal institutions are setting benchmarks for interest rates and even legal banks are looking to these firms in order to decide their deposit and lending rates”, Seif bemoaned.

The official later asked banks to provide the CBI with a list of illegal firms with which they have cooperated.

He took banks to task for failing to counter money-laundering effectively, saying the banks’ shortcomings in this area would foster white-collar crime. “Transparency in financial statements and other activities should be top priorities for all banks”, he concluded.