Economy, Business And Markets

Banks’ Soaring Debt to CBI Explained

Banks’ Soaring Debt to CBI ExplainedBanks’ Soaring Debt to CBI Explained

The twofold surge in commercial banks’ debt to the Central Bank of Iran within the last two months prompted the vice governor for economic affairs at the Central Bank of Iran to comment on the issue.

Peyman Qorbani told the press on Tuesday that the upsurge in banks’ withdrawals from the CBI had to do with “semi-budgetary” spending like government’s wheat purchases, IRNA reported.  

The latest report by the bank indicated a 100% growth in commercial banks’ debt during the past two months. The debt now stands at 118 quadrillion rials ($4 billion at official exchange rate).

“Other reasons for the upsurge in banks’ debt have to do with the maturity date of participatory bonds that had been issued earlier and banks had to pay the bond yields,” he said.

“Another reason for the increased debt is the more heavy-handed approach of the CBI in dealing with unruly private banks in the second half of the previous fiscal year (ended March 20).”

Private banks and credit institutions, however, scored a significant drop in their debt by marking a 32% decline year-on-year indicated by the latest CBI report. Their debt now totals 169 quadrillion rials ($5.6 billion).

Qorbani reasoned that the CBI injected cash into commercial banks to prevent any disruption in financial activities of depositors. “If we resort to any dramatic action to increase banks’ capital assets, it is only to protect the depositors and maintain monetary discipline in the wake of enhanced regulatory measures,” he said.

Saying that banks’ debt should not be viewed as a “white or black issue” since it is a gateway for managing the banks, Qorbani said  despite all the difficulties, the CBI had managed to control the money supply.

“We should also take into account factors like the prolonged recession and nuclear sanctions.

Iranian banks have been hit hard by rising non-performing loans since 2012 when banking sanctions against Iran intensified. Ever since, Iranian lenders have struggled to make loans to businesses—something that has put the solvency of some of these banks into question and rendered the business climate rather gloomy.

 Money Supply, Inflation

Qorbani also attributed the surge in money supply in the current year (started March 21) to a broadening of statistical horizons of the CBI.

 “There are now more credit institutions covered in our data, which were lacking before,” he said.

CBI data from 2011 show the country’s reserve was 760 trillion rials ($26 billion at official exchange rate), which grew 11.4% compared to the previous year.

“Almost three quadrillion rials ($100billion) in money supply have come about since the Rouhani administration took office in 2013, almost one third of it has to do with the new data inclusions,” he said.

Last week, Noor Credit Institution became the latest credit company to receive an operating permit from the CBI. Other formerly unauthorized credit institutions that have succeeded to secure permits include Askarieh, Kosar and Tose’e. Arman Credit Institution and Mehr Eqtesad Bank are also awaiting thumps-up from the regulator which is expected to happen soon.

Qorbani also said his bank aims to lower inflation to a single digit by 2017 and spur economic expansion as a landmark nuclear deal with world powers rolls back global sanctions.

“The impact of lifting sanctions will help us follow the path of lower inflation and stimulate economic growth,” Qorbani told Bloomberg on Monday. “When these weights are lifted from the economy, then in all likelihood we can reach those goals much more quickly.”