Economy, Business And Markets

Senior Banker Sets Conditions for Promoting Bank Competition

Finance Desk
Senior Banker Sets Conditions for Promoting Bank Competition
Senior Banker Sets Conditions for Promoting Bank Competition

The head of the Coordination Council of Public-Sector Banks defended the recent interest rate cut enforced by the Central Bank of Iran, saying current market conditions do not allow for competitive rates among banks.

Abdolnasser Hemmati made the comments in a lengthy interview with ISNA on Friday.

“Although interbank competition [in setting interest rates] is a positive act, complaints about the rate caps imposed by the CBI is not acceptable since market conditions are not fit for such rivalry at present,” Hemmati said.  

Hemmati, who is also the chief executive of Bank Melli—Iran’s largest lender, criticized breaches of central bank’s interest rates ceilings by other lenders, calling it “suicide”.

“This is contrary to professional ethics and its persistence will ultimately prompt law-abiding banks to turn away from their standards,” he cautioned.

CBI’s Money and Credit Council lowered its cap on deposit rates (for one-year deposits) from 22% to 20% in April, following several weeks of heated discussion on the issue. It also reduced the lending rate ceiling to 24% from 28%.

To no one’s surprise, not all lenders welcomed the initiative that left them with less room for maneuver in their race to attract depositors. A particularly pestering issue was commercial banks’ contest with unauthorized credit institutions whose inclination for offering exorbitant deposit rates is notorious.

Hemmati, however, ruled out the prospect of another rate cut by the central bank in the foreseeable future, saying a 20% interest rate would be reasonable as the inflation is expected to hover around 15%-16% toward the end of the fiscal year ending March 19, 2016.

 Road to Competition

Hemmati said three conditions should be met before lenders could engage in full-blown competition. First and foremost, all credit institutions must fulfill their reserve requirement. Secondly, banks and credit institutions should streamline their activities by scrapping much of their non-banking ventures.

“It’s not fair for a bank or institution to allocate 80% of its revenues for speculative activities while another bank is lending the biggest portion of its assets,” said the chief executive.

Banks’ entry into non-banking activities have ruffled feathers with officials and analysts who say the trend has pitted banks against small businesses as rivals and not partners. A parliamentary investigative team recently revealed that over half of lenders’ revenues is generated by speculative activities.    

The third prerequisite to foster interbank competition, Hemmati said, is for banks’ executives to hold themselves accountable to their shareholders.

“Bankers should provide enough guarantees to indemnify their shareholders if a crisis erupts.”

 Deposit-Rate Issue

A major sticking point evident in Hemmati’s remarks is the knotty issue of deposit rates and the legal loopholes around it.

No sooner had the MCC issued its verdict on key interest rates in April than public-sector and private banks unanimously gave their blessing to the decision.

But news of violations surfaced soon after with lenders finding loopholes allowing them to exceed rate caps. Since short-term deposit rates had remained the banks’ fief, they used it as an avenue to backslide into offering high deposit rates.

Hemmati said non-performing loans and mammoth government debt to banks were the main reasons for banks to renege on their promise to comply with the new rate caps.

Although the coordination council lacks the authority to punish banks for their unruly behavior, Hemmati made a strong case that the CBI is pondering over ways to crack down on them soon.    

Pundits have repeatedly cautioned against the damage inflicted by high deposit rates on the real economy and have called for sweeping banking reforms to salvage the country’s bank-based economy.