Interbank interest rates dropped to 21.5% in the second half of November from the 28% recorded in August, according to the Central Bank of Iran.
The unprecedented plunge was accompanied by a relatively small injection of cash into the economy by the CBI. However, the lowering of interbank rates was not the function of any (government) decree as was the norm in the not too distant past. Importance of the rate cut lies in the fact that it can also have a ripple effect in other markets.
The Persian daily Donyay-e- Eqtesad reports that regulating the interbank market in order to manage interest rates is a routine practice in developed economies. However, the interbank market had lost efficiency in Iran’s banking sector because its rates were set by government order not by market mechanisms. It needs mention that the rate did not decline in tandem with a plunge in the inflation rate to 15% from a whopping 40% this year.
Now with inflation in descending order and improving sentiments about the economy, interbank rates have migrated to 20% territory from the previous 30%. Pundits and market observers opine that the rate in this market can serve as the basis for setting interest rates in the money market enabling the CBI to utilize this tool to regulate markets as is the norm in developed economies.
In recent months the CBI has tried to pave the way for lowering interest rates by reactivating its role in the interbank market and easing banks’ penalties for overdraft through installments. This strategy could be a starting point for rate cuts in accord with inflation and without resorting to fiat.
CBI Solutions
The CBI overdraft fee has been set at 34%. Bank overdrafts have been on the increase in recent years reaching 168 trillion rials ($5.6 billion) in April 2014. The figure climbed to 343 trillion rials ($ 11.4 billion) a year later. Repaying at 34% involves high risks for banks which leads to banks pushing for savings and deposits at rates over and above than those ratified by Money and Credit Council.
The CBI has established a credit line for overdrafts and has allowed banks to pay in installments over 3-4 months at 27%. This to some degree has quenched the banks’ appetite for larger credits in the interbank market and bigger deposits.
The regulator’s second strategy has been to provide loans in the interbank market worth around 5-6 trillion rials ($167-200 million) which has also served to lower interbank rates.
Lowering of rates in the interbank market can pave the way for an ultimate cut in the deposit/lending rates. Besides, the regulating body has to settle the issue of unruly quasi-lenders and decrease the amount of banks’ bad debts. The lifting of sanctions coupled with lower risks in the banking industry can also help improve competition and upend the trend in setting interest rates by decree, which has visibly failed to deliver.
