The Central Bank of Iran has banned commercial banks from providing loan collateral for their subsidiary companies. The ban targets one important aspect of the non-banking activities of banks which has gained momentum in recent years.
The directive, available on the central bank’s website, was issued to banks on Monday. It points to an alleged collusion between certain commercial banks and credit institutions, whereby they “exploited loopholes in the law” to prop up each others’ subsidiary companies.
“Since the purpose of this collusion is to circumvent the regulatory laws, many basic lending rules like credit and collateral assessments are being bent,” the directive states.
The website adds that this practice, if it goes unchecked, would generate a banking oligarchy that would complicate the financial system and leave banks and credit institutions vulnerable to possible loan defaults by these companies.
Bank’s non-banking activities have recently come under heavy criticism due to their perils for the economy and manufacturing sector in particular. Banks resorted to investments ranging from the real estate to imports to compensate losses instigated by nuclear-related sanctions.
The CBI’s directive concludes with warnings to bank CEOs and board members to refuse any collateral for their affiliate companies and also reject any proposal by other banks or credit institutions to collateralize their loans.
“The consequences for failure to uphold this mandate will be borne by bank executives and board members,” it said.
