A former head of Tehran’s Chamber of Commerce says even if cutting interest rates would mean loss for commercial banks; they will have to adjust to lower rates because it is the first step to cure the banking industry’s long-list of ailments and poor performance.
Referring to the Money and Credit Council’s expected move to again lower interest rates, Yahya Al-e Eshagh criticized the banks and credit institutions for resisting rate cuts.
“The banking system must put an end to the manipulation of their balance sheets, rent-seeking behavior and offering unreasonably high interest rates and instead embrace reforms,” he said in a talk with the pro-reform Persian-language newspaper Shargh.
Last week, the government spokesman, Mohammad Baqer Nowbakht announced that there was agreement to go ahead with another rate cut in the coming days.
The MCC, a powerful arm of the central bank, is likely to approve a cut in interest rates by two percentage points which would bring down deposit rates to 18% and lending rates to 22%.
Its members include senior government officials, Chamber of Commerce representatives and central bank officials, all of whom are widely expected to approve the rate cut. But most banks are openly averse to the changes and have been unrelenting.
Official and regulatory bodies have been urging banks to come to terms with the lower rates and get ready to compete with foreign banks when the nuclear deal (Joint Comprehensive Plan of Action) with the six world powers comes into effect by early next year.
The JCPOA is the formal title for the nuclear agreement signed between Iran and the P5+1 (the five permanent members of the UN Security Council plus Germany) on July 14, the deal will lift many sanctions imposed on Iran’s banking and oil sectors.
Al-e Eshagh, a former commerce minister, said foreign banks usually charge 1 to 3% interest rates while Iranian banks’ interest rates are as high as 20 %, hindering them from competing with their foreign peers.
“High interest rates are actually creating a bubble that would eventually burst with disastrous consequences if not controlled,” he warned.
Banks, however, complain that lower interest rates would hurt revenues and limit their ability to compete with the army of unauthorized financial and credit institutions which offer notoriously higher rates.
Further Support Measures
“Banks can and should offset the potential loss by using the funds accumulated over the years from speculative activities and high interest rates,” he argued.
The government is also planning to help banks cut costs in order to overcome possible capital deficiency.” Al-e Eshagh said measures could be taken to reduce banks’ reserve requirement by four percentage points to 9%.
Furthermore the 36% fine for overdraft from CBI could be minimized while better-behaved banks could be rewarded for playing by the rules, he implied.
The new measures would reduce the cost of money for banks, enabling them to bear the interest rate cuts and charge less on loans.
Commercial banks are said to be infamous for openly disregarding or manipulating the CBI-mandated interest/lending rates. Such unusual behavior has drawn the ire of prominent economists and think tanks trying to help the government get out of the present financial and monetary morass.
Al-e Eshagh said non-compliance with macroeconomic policies announced by the government or official bodies is simply irresponsible and unacceptable and offenders should be prosecuted.
“The only solution to ease inflationary pressures and address the banking industry’s structural problems is to lower the interest rates.”
