Economy, Business And Markets

Budget Amendment Paves Way for Recapitalization of Banks

Budget Amendment Paves Way for Recapitalization of BanksBudget Amendment Paves Way for Recapitalization of Banks

The new amendment for the budget law of 2016-17 will soon be sent to Majlis and it contains measures to increase banks’ capital and settle their debts, a deputy minister of economy said Saturday.

Referring to the government’s plan to increase the capital of state banks, Shapour Mohammadi said in a talk with Fars News Agency that the government has several plans, including injecting cash into  banks using forex resources of the Central Bank of Iran, “which was rejected by the last parliament.”

On the other hand “it was proposed that proceeds from selling the shares of state companies could be utilized based on Article 44 of the Islamic Republic of Iran Constitution [which calls for the privatization of state firms]. These proceeds may be used to increase the capital of state banks which has won the parliament’s approval,” he said.

The official referred to the law on removing barriers to production, saying it has been stated in this law that proceeds from the interest of loans provided by the Oil Stabilization Fund will be allocated to increase the capital of state banks.

He noted that the balance in the OSF now is 70 trillion rials ($2.3 billion), “but with the new changes to the budget law, there might only be 20-30 trillion rials ($655 -$982 m) left to increase the banks’ capital. As the loans (given by the fund to businesses) are being repaid in installments, a part of the money will be collected this year and the rest next year.”

Delving into the details of the budget law amendment, Mohammadi announced that 300 trillion rials ($9.82 billion) worth of bonds will be issued which will help banks clear their debts to the central bank.  

“These bonds are in the form of Sukuk – Islamic Bonds – and Islamic Treasury bills and their interest rates will be set depending on market conditions,” he said.

He was asked if pumping forex resources into the banks by the CBI is also included in the amendment of the budget law. He responded in the affirmative, adding that “under certain circumstances this could be a useful method and one of its benefits is the clarification and transparency of accounts.” He did not elaborate.

The Majlis may or may not accept this proposal, but the government has done this once before and using CBI forex resources is definitely one of its options,” he said.  

Iran’s lenders have long operated with low capital adequacy requirements and inadequate regulatory and supervisory mechanisms. They were further weakened by the policies of former president Mahmoud Ahmadinejad, who forced them to provide cheap loans to certain businesses plus the punitive sanctions.