Iran’s central bank is preparing to set up a “bad bank” to cleanse its financial system of a vast pile of toxic loans after studying the models used by Sweden, Japan and South Korea.
The plans were part of an array of reform measures designed to bolster the country’s economy presented by a senior central bank official at the Financial Times’ inaugural Iran summit in London on Wednesday.
Peyman Qorbani, vice governor of economic affairs at the Central Bank of Iran, said, “We're committed to lowering non-performing bank loans and, if necessary, we will establish an asset management company.”
Many of Iran's banks are still struggling after piling up bad debt during the more than a decade-long sanctions era. The situation was compounded by several banks having exposure to the country's property market, which turned sour in 2012 and burdened the system with loans.
He said the central bank would unify its official and market exchange rates to make Iran more attractive to overseas investors and “take all necessary measures” to recapitalize the banking system.
Qorbani hailed the progress in lowering the interbank lending rate from 25% to 17% and said more action would be taken to lower interest rates in line with falling inflation, which is down from over 40% three years ago to just over 12%.
An asset management company is one that invests its clients' pooled fund into securities that match its declared financial objectives. These companies provide investors with more diversification and investing options than they would have by themselves.
Eurobond Issue
The central bank official also revealed that Iran was considering raising money from overseas investors in the Eurobond market.
The plans come only months after Iran and six leading powers—the US, Britain, France, Russia, China and Germany—put into force the agreement reached last July after Tehran agreed to scale down its nuclear activities in return for the lifting of sanctions.
The deal boosted hopes in the country’s financial and business community that they would be swiftly reconnected to the global financial system after many years of isolation.
However, there remain deep concerns that weakness in the banking system, which provides 90% of funding to the economy, could hold back badly needed investment.
Parviz Aqili, managing director of Middle East Bank, said a number of Iranian banks would have negative capital under Basel III and the central bank is definitely aware of it and trying to help them.
Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, said Iran needed its banks to fully disclose their level of bad loans, which account for more than 15% of their balance sheets according to official figures—well above the international average of about 4 %.
“The first step must be to know the size of the problem and then you can deal with it,” he said.
Majid Zamani, chief executive of Kardan Investment Bank, said the guarantee provided on all bonds by commercial banks was a “bottleneck” in the development of Iran’s nascent capital market as it prevented risk from being transferred to end investors.
There is also frustration among Iranian bankers at the slow progress in finding western lenders to handle international payments for them.
Some US clearing banks have warned banks in Europe, Asia and the Middle East that their US-based dollar accounts would face closer scrutiny if they did business with Iran, according to Iranian and US bankers in the region.
The warning, echoed by US Treasury officials in meetings in the Persian Gulf, has prevented banking transactions with Iran starting up again despite the removal of many sanctions.
Call for Full Int'l Access
The chief of staff to President Hassan Rouhani also said on Thursday Iran needs full access to the international banking system, adding that London has an important role to play following the lifting of sanctions, Reuters reported.
Speaking at the Royal United Services Institute in London, Mohammad Nahavandian said there should be greater clarity about the application of secondary US financial sanctions to allow non-US banks to conduct business freely with Iran.
"We need to see facilitation of banking relations as soon as possible and as complete as possible, and London can do that," he said.
US measures still in place have left non-US banks and insurers wary of processing transactions with Iran.
"Big banks are still worried about primary sanctions from the United States. I think they have to come with a very clear interpretation drawing the line between primary sanctions and secondary sanctions," he said. "Non-US banks should not be limited in any kind of banking transactions with Iranian banks."
Nahavandian suggested Britain could have moved faster to capitalize on the lifting of sanctions, adding: "Those who act quickly get the best results."
