Economy, Business And Markets

Low Inflation: Banks’ New Faultline

Low Inflation: Banks’ New Faultline    Low Inflation: Banks’ New Faultline

What has been undermining the domestic economy and by extension the banking sector the most is chronic inflation, says a board member of the Tehran Chamber of Commerce, Industries, Mines and Agriculture.

In an article for the TCCIM news website, Hassan Forouzanfar identified chronic inflation as a “disease”, slowly and insidiously eating away at all that contributes to economic stability.

“Like diabetes, chronic inflation [if left unchecked], leads to the rupture of essential organs one by one, destroying the body altogether,” he wrote.  “For years, we faced high inflation, which forced businesses, including banks, to adjust themselves with the circumstances.

“In fact these businesses were established when inflation ran at 20% or higher and now that inflation has been curbed by the government, businesses including banks are facing new problems because with a drop in inflation, interest rates also need to be cut, which has caused new developments in the banking sector.”

On Sunday reports said Bank Pasargad, a major private lender and Iran’s second-largest bank, had voluntarily lowered its one-year deposit rates from 18% to 16%. The announcement came when local media outlets said major banks have reached a unanimous agreement to lower deposit rates.  

Galloping prices and high temptation had lured banks into real estate investment directly or otherwise, according to Forouzanfard. “Banks started expanding their branches and buying property aggressively. Their financial statements show they have been relatively successful. But the question remains whether they have been competent enough in their official banking business, namely Islamic banking.”

The chamber member went on to ask: “Was the number of bank branches selected judiciously? Have they properly assessed the credibility of their customers? Have they invoked international and local rating standards to help ensure that they would not be saddled with mountains of bad loans?” without doubt the answer, according to the pundit, is a “resounding no.”   

Management in the key banking industry is facing problems and “now that inflation is tamed and most banks’ assets are locked in the housing sector and their affiliated companies, the problems have multiplied.”

Forouzanfar concluded that with inflation in check, the banks’ internal problems” and shortcomings are being exposed for all to see.

The inflation rate is on the descending trajectory from a peak of plus 40% in 2013 to 11.2% this April and projected to anchor in single digits by the end of summer.