Gov’t Wants Margin Between Deposit, Lending Rates
Economy, Business And Markets

Gov’t Wants Margin Between Deposit, Lending Rates

Referring to the 40% inflation in 2013 rate that was reduced by the current government to around 10% last month, Economy Minister Ali Tayyebnia emphasized on Monday that there has to be some margin between deposit and lending rates.
“There needs to be a logical 2-3% or a maximum of 3-4% difference between deposit rates and lending rates,” he said speaking at a panel of experts from the government and the private sector at Iran Chamber of Commerce, Industries, Mines and Agriculture, IRNA reported.
Banks are apparently frustrated with the sky-high deposit returns they pay customers, the minister said, adding: “When lending rates are high, defaults will increase. Furthermore, high deposit rates lead to increased cost of resource mobilization for banks. Now banks have come to the conclusion that they need to pitch in to reduce rates.”
On Sunday, Bank Pasargad, a major private lender and Iran’s second-largest bank, became the first to voluntarily lower its one-year deposit rates from 18% to 16%. Other lenders are expected to follow suit as news reports indicate a broad consensus to cut rates is in the cards among bankers. Lending rates, however, have so far remained unchanged at 22%.  
According to Tayyebnia, the government is keen on a growth rate of 5% in this fiscal year that started in March and the lower rates can and will work toward that declared goal.
He warned, however, that the “credit crunch” remains a barrier to growth.” High interest rates, shortage of loans and diverting liquidity from real production to unproductive sector are some facets of the credit crunch, which have been a thorn in the government’s side.”
He said the government is trying to augment the lending power of banks, steer interest rates in a direction that is friendly to manufactures long struggling to survive and help channel credit and financial resources toward real production.

  Rate Cap at 15%
In a separate development, Kourosh Parvizian, the head of Association of Private Banks and Credit Institutions said high deposit rates will push up lending rates and when lending rates are high cost of production will rise.
“On the other hand, high deposit rates lead to a decrease in investment in the manufacturing sector because investors prefer to park their money in banks – which entails lower risks and is also tax free – instead of dabbling in manufacturing,” he said in an interview with Iran newspaper as reported by banker.ir.
After deposit rates are lowered, he stressed, the next step would be to go after the high lending rates.
According to Parvizian, following an understanding between the CEOs of state and private banks, the process of lowering interest rates has begun.
 “In the past, this (rate setting) was the function of official decrees of the Central Bank of Iran, but now the banks are the “main enforcers”, deciding interest rates based on the economic reality.”
 The voluntary move that some private banks have made to decrease interest rates by two percentage points indicates a new method, he said. “This time, in a coordinated and voluntary move banks want to cap interest rates at 15%.”  
Although the approval of Money and Credit Council–a decision-making body – will be essential for the rate cuts to be legally binding, market observers agree that banks seizing the initiative to implement the rate cuts is in and of itself, a welcome break with tradition in the Iranian banking industry riddled with red tape and a bloated bureaucracy.

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