The growing trend of banks’ debt to the Central Bank of Iran over the last couple of years is widely believed to be a major setback for the banking system.
According to banks’ financial statements on February 2015, the debt increased 63% within two years reaching 850 trillion rials ($29 billion at official exchange rate).
On the other hand, banks have granted 3.4 quadrillion rials ($117 billion) in loan, 600 trillion rials ($20 trillion) higher than what the CBI authorized.
Experts believe banks’ over-lending practices have exacerbated the increasing trend of their debt to the central bank, a process widely believed to raise the monetary base and make the government’s non-inflationary policies ineffective.
According to CBI’s deputy for credit affairs, Ali Asghar Mirmohammad Sadeqi, “the economic downturn, imbalance between banks’ resources and expenditures and the central bank’s poor supervision over commercial banks’ performance” are among main factors that led to the rise of banks’ debt, ISNA reported on Friday.
Gholamreza Mostafapour, a banking expert, says toxic loans have massively increased and banks have no option but to borrow from the central bank as they ran out of resources.
The expert regards compulsory loans as another cause for limiting state banks’ resources.
“Being engaged in development projects that have long-term returns would decrease banks’ lending power as well,” he noted.
The previous government made state-run banks finance massive national projects, a policy that pushed them on the verge of bankruptcy.
Possible Solutions
Mostafapour urged banks to minimize their non-banking activities, sell excess assets and close inefficient branches to raise capital.
He also called on officials to come up with expert solutions to tackle the toxic loan crisis, a move that would release 940 trillion rials ($32 billion) in non-performing loans.
“In their general meetings, lenders should take measures to improve capital adequacy ratio in a way to increase financial resources, making them reluctant to borrow from CBI at 34% interest rate,” he added.
The expert also called for a revision of budget law, stopping compulsory loans, reforms of interbank market, disciplinary measures for in-debt banks and tighter supervision over banks’ liquidity management, which should be taken if banks’ debt is to be addressed.
