Economy, Business And Markets

Capital Restraints Imperil Ability of Banks to Lend

Capital Restraints Imperil Ability of Banks to Lend  Capital Restraints Imperil Ability of Banks to Lend

While there is ample evidence that banks play favorites when it comes to granting loans to customers, this may not fully explain the scarcity of loans for most applicants in desperate need of money. An analysis by the news website Banker published on Friday shows that banks’ debts held by the Central Bank of Iran have been growing steadily over the years and in January 2015 it recorded a 36.86% surge over the course of one year.

On the other hand, as the banks’ debt has been growing, private sector deposits in banks have declined. According to the latest data, deposits at banks have reached $200 billion in value, the lowest level since May 2012.  The trend for banks remains bearish to this day and the recent cut in benchmark interest rates will likely have adverse effects in the coming months.

 State Deposits  

Reports show that deposits from state-owned organizations have also dropped to record lows. State deposits in banks have reached their lowest since May 2013. Therefore, it is not hard to imagine why banks are resorting to interbank dealings to make up for their losses. Their soaring debt to the CBI is clearly a sign of trouble for most banks.

 Lending Power

Banks have paid the lowest amount in loans to the public sector and private businesses since January last year, Donya-e-Eghtesad newspaper reports.  Data released by CBI shows that banks recorded 18.2% to 31.7% increase in lending to the public and private sectors, which is a paltry compared to the average growth rate during the last four years.

 Control of Liquidity

The silver lining in the CBI report, however, is the decline in money supply. The report indicates that the money supply grew at the slowest pace since May 2012. This has helped the CBI in curbing the double-digit inflation rate. It is estimated that if the CBI makes headway in its control of liquidity, it can finally win its war against the monster of inflation and secure a long awaited single-digit inflation rate.

 Capital Flight

Despite all of this, banks managed to pay up to $10 billion in loans during the previous fiscal year (ended March 20), but complaints remain as to the insufficiency of the loans and their inability to meet the needs of businesses.

Huge government borrowing, non-performing loans (NPLs), compulsory loans – which banks were forced to pay during the previous administration and the banks’ substantial deposits with the central bank are other major reasons why banks remain cash-strapped.

ISNA reckons the total figure owed by the banks to be around $90 billion. Even the recent interest rate cut is not expected to dramatically boost the banks’ lending power since the larger portion of their capital is stuck out of banks.