Economy, Business And Markets

Need for Gradual Lending Rate Cuts

Need for Gradual Lending Rate CutsNeed for Gradual Lending Rate Cuts

A banking expert has recommended lowering lending rates in gradually to make it more effective and prevent a possible run on the banks and flight of capital from the lenders to high-yielding but risky businesses.

“A sharp cut in interest rates will fuel speculative investments. Therefore, a gradual decline is preferable,” Mehdi Raeeszadeh was quoted as saying by Eghtesad News on Tuesday.

Commercial banks this month agreed to cut deposit rates in a move welcomed by the CBI, after the lifting of economic and banking sanctions renewed hopes of lower inflation and higher growth.

Banks decided to cut their one-year deposit rate from 20% to 18% while the overnight deposit rate will fall below 10%.

The Money and Credit Council—a decision-making body—also required banks to offer regular loans and Musharakah (partnership) loans at approximately 20% and 22% down from the previous 22% and 24% respectively.    

Raeeszadeh argued that if the present recession eases, more attractive markets will emerge alongside bank deposits.

“Both lending and interest rates should be cut gradually. Banks have not been able to respond as expected to the overwhelming requests for loans and a sudden reduction in lending rates would only make a bad situation worse,” he said.

Commenting on the unregistered credit institutions’ negative influence on interest rates, the expert said the Central Bank of Iran has employed appropriate measures to “contain” such lenders, although this issue should have been dealt with earlier.

Although commercial banks have agreed to uphold CBI regulations on interest rates, some unlicensed financial institutions continue to offer rates higher than those set by the regulator to attract more deposits and improve their liquidity.   

The CBI has asked quasi-lenders, who do not uphold banking regulations and continue to operate despite their shaky foundations, to either shut down or register as per the law.

 A Bit Late?

“So far, some of the illegal credit institutions, exploiting the high interest rates, have managed to attract substantial savings from the people. Now it is rather late for the CBI to set the situation right. Such lenders should have been tackled when they were first set up,” he said.

Raeeszadeh noted that forcing commercial banks not to work with the illegal credit institutions can do serious harm to the banking network, as these institutions are among the banks’ important clients.

“It will be more logical that the CBI bring the illegal institutions under its direct supervision,” he said.

The CBI recently issued a decree asking commercial banks to stop providing services to the unregulated credit and financial Institutions. The decree is the second such warning this year prohibiting legitimate lenders to end their relations with their unwanted peers.

The unregistered financial companies reportedly hold a fifth of Iran’s money supply. Over 7,000 unregistered financial and credit institutions and funds are operating in Iran, six of which have an annual turnover of 20%.