Economy, Business And Markets

Lending Rates Should Be Cut

Lending Rates Should Be Cut  Lending Rates Should Be Cut

As the Central Bank of Iran is preparing to submit a report to the Money and Credit Council on another interest cut, a finance expert has called on the two monetary authorities to shift their focus on lowering lending rates instead of deposit rates.

“Since productivity and cost of money vary in and among banks, productive banks could offer higher interests to depositors and minimize the gap between the lending and deposit rate. That is why the CBI and MCC should shift their attention toward lending rates instead of deposit rates,” Bahaodin Hosseini Hashemi told Fars News Agency. He added that “a deposit rate cut will only serve the interest of lenders and the real economy will never benefit from such measure.”

He said consensus among lenders to cut rates is unlikely as they struggle with structural problems. “If lenders agree to lower deposit rates to 18%, state-owned banks would have to comply and private lenders will (then) attract more deposits by offering higher rates.”

He went on to say “If the deposit rate is finally reduced to 18%, the inter-bank interest rate should be at maximum 20%+1% as common practice in other parts of the world where the inter-bank interest rate is an average of deposit rates plus one percentage point.”

He warned that inconsistent deposit and inter-bank interest rates will encourage the banks to attract deposits with 18% and then offer it in inter-bank market at 24%.

Approved deposit rates, in his opinion, are applied only to micro deposits that account for 90% of the total deposits in banks while “large deposits are offered far higher rates using various tricks.”

He noted that high lending rates are rooted in strong demand for loans and said “The banking system operates based on cash credits and that exerts pressure on their resources. In most parts of the world banks earn 50% of their income through service fees. In Iran, the figure is a paltry 10%.”