The governor of the Central Bank of Iran has called on commercial banks to remain committed to their recent agreement to lower deposit rates that was endorsed by the Money and Credit Council on Thursday.
As the MCC, the country’s highest monetary policymaking body, approved two-percentage point cuts in deposit rates to 18% as of February 20, Valiolah Seif called on both public-sector and private banks to respect the “red lines.” He also required banks to raise awareness on the new development so that the “real purpose behind the cut - which is to lower lending rates - is not interpreted as an initiative that only serves the interest of lenders, but as a boon to the national economy.
As of February 20, commercial banks should avoid offering higher than 18% on one-year deposits. They are also required to convert all one-year deposit accounts that are open to change into three-month deposit accounts and lower their interest to a maximum 10%.
“The wide gap between the inflation rate and deposit rates is rooted in the credit crunch commercial lenders face that has pushed them into unhealthy competition for clients and offer unconventional deposit rates. Such efforts are aimed at luring new resources that could help banks make up for their frozen assets”, Seif said at a recent meeting of public-sector and private banks.
Inflation rate was a whopping 45% when President Hassan Rouhani took office in 2013 but through his government’s disinflationary policies and stringent fiscal discipline inflation is now in the region of 13%.
Diversify Services
Seif criticized the negative balance sheets of lenders and their excessive focus on attracting deposits which in his opinion is “unheard of in other parts of the world.” Instead, he invited commercial banks to diversify products and services and earn commission as globally-acceptable alternatives for making profit.
He admitted that “In the past, the regulator also encouraged this approach” but recalled that the “CBI’s decisions in the past six months to regulate the inter-bank market and stimulate demand through lending and financing had produced the desired results.”
On the role of efficient “management” in economic enterprises including the banks, he said “Depositors, shareholders and borrowers are the main stakeholders of banks whose rights should be upheld within the legal framework.”
The senior official stressed that the inflation rate will continue to serve as the basis for adjusting interest rates in the future and hoped that the declining trend of inflation coupled with growing fiscal discipline in the market would help adjust interest rates.
Commercial banks had earlier this week agreed to cut deposit rates after the lifting of economic and banking sanctions renewed hopes for less inflation and more growth.
Banks decided to cut their one-year deposit rate from 20% to 18% while the overnight deposit rate were cut to below 10 %.
Later, MCC members required banks to offer regular (non-Musharakah) loans and Musharakah (joint-venture) loans at approximately 20% and 22%, respectively. The council, earlier in April, had lowered the ceiling on lending rates to 22% and 24% – from a previous 27% to 28%.
Doing All it Can
The Central Bank of Iran has mobilized its tools and capabilities to help the banking system, Bahaoddin Husseini Hashemi, an analyst said.
“The CBI lowered inter-bank lending rates to 19%, decreased the lenders’ capital adequacy ratio to 10% and regulated the uncertified institutions to some extent,” he was quoted as saying by Fars News Agency.
He added that the CBI measures successfully instilled a relative discipline in the money market. The CBI also refrained from imposing rate cuts “letting the banks to make the decision to do so before approval by the Money and Credit Council.”
Hashemi pointed to the declining inflation rate saying that it in turn necessitated further interest rate cuts. “The decision by banks to cut the deposit rate to 18% was in tandem with the decline in other variables that determine interest rates,” he added.
Lower lending rate translates into higher demand for loans while banks do not have the necessary resources to keep up with the growing demand from borrowers, according to Hashemi. “Without the needed liquidity to meet the high demand, banks will not be able to lower lending rates in practice.”
Because of the credit crunch plaguing banks, “lower lending rates will not work in practice. Only lower deposit rates will be able to deliver,” he expounded.
For the banks to be able to lower lending rates in practice, they should reform their financial structures. He elaborated by saying that “settling the issue of the non-performing loans” could be the key to the issue of lowering lending rates.
The senior analyst called on lenders to abide by the new deposit rate. “Should a single lender violate the authorized rates, the others will do likewise to be able to stop the outflow of their deposits.” Hashemi stressed the need for the CBI’s effective oversight of banks if the new rates are to be sustained.
