Economy, Business And Markets

Appraisal of Lending Rates

Appraisal of Lending RatesAppraisal of Lending Rates

Speculation over further cuts in interest rates has triggered a hot debate among analysts and experts on the rate conducive to growth and business environment.

In early November top banks reached a consensus to reduce deposit rates by two percentage points to 18%. Shortly after, the announcement was dismissed by Abdolnaser Hemati, head of the State-Owned Banks’ Coordination Council saying that the commercial banks are determined to offer the 20% interest rate approved by the Money and Credit Council back in April. The council, which is affiliated to the Central Bank of Iran, has deferred the decision to its next meeting.

Saeed Leylaz, an economics professor says “It is good to cut deposit rates while maintaining the lending rate. However, the banks will not benefit because dwindling deposits will weaken their lending power.” He also warned that low loan rates could encourage corruption.

The expert believes in the long run, saying lower deposit rates eventually reduce lending rate in parallel and called on the government to leave the decision to the banking sector as is the practice in most countries.

Meanwhile, he reiterated that uncertified financial institutions pose the real big threat to the struggling economy. “Uncertified institutions are not accountable to the central bank nor are they scared of the authorities. They can easily neutralize the government’s economic policies.”

On favorable interest rates, Reza Padidar, an industry representative in Tehran Chamber of Commerce, Industries and Mines, believes manufacturing should become more lucrative compared to investing or putting money in the banks. He regretted that “currently, the return on manufacturing is lower than 20% which means the bracket of return on industrial manufacturing activities falls between 10%-15%, too low to attract and encourage industrial ventures,” Eghtesadnews reported.

He called on the government to focus efforts on boosting production instead of protecting capital and said when production picks up, the banking system will regulate itself as industry becomes less reliant on its resources. “If and when this happens, interest rates are set by real supply and demand mechanisms of the market.”

Ahmad Sadeghian, a representative of the agriculture sector at the TCCIM also acknowledged that high deposit rates have caused problems for industry and manufacturing. “Optimal interest rates should be single-digit,” he said, and hoped that the policies adopted by the CBI to curb inflation at some point will help realize lower rates.

Reza Haji Aghamiri, the commercial representative at the TCCIM’s board of representatives said “Interest rates should be lowered to the extent possible. Now that the inflation rate is down to 15%, interest rates of 18% seem reasonable.”