The Money and Credit Council–the highest monetary decision-making body – voted Tuesday to lower lending rates by two percentage points. The decision comes after private banks decided earlier this month to voluntarily lower their one-year deposit rates from 18% to 15% – a move that was soon embraced by public-sector lenders.
A cut in loan rates was indeed the missing link left unaddressed by senior bankers when they announced they would go it alone in implementing rate cuts from June 21, without any decrees from the Central Bank of Iran asking them to do so.
The decision was indeed unprecedented because nearly all the rate decisions in the past had been made by the MCC that is affiliated to the Central Bank of Iran.
But the banks’ refusal to bring down loan rates – a major complaint of businesses – had prompted some analysts to compare their move to a cartel-like mentality directed at their own interest.
“Why did banks not lower the lending rates along with deposit rates, and why wait for the MCC to make that decision,” asked a frustrated business executive in a recent TV debate.
MCC had indeed warned lenders that if they failed to lower lending rates soon, the body–which has the CBI chief and the economy minister among its members – would intervene.
According to the MCC’s Tuesday vote, the interest for both Musharaka (joint partnership) and regular non-Musharaka loans is 18%. The rate for these two types of loans previously was 20% and 22% respectively.
The council also set the rate of investment farm loans at 15% and other agricultural loans at 18%.
Decree or No Decree
The council also formally approved the banks’ decision to cut deposit rates. CBI Governor Valiollah Seif and other monetary officials had previously welcomed the move, saying it would pave the way for less state role in monetary affairs, giving the market forces space to set the rates.
But in a move contrary to what bankers had wished, the MCC said deposit rates must be fixed at 15%; this is while the bank had agreed to let the rates oscillate between 15-18%.
This rather makes a dent in previous claims that a new era of independent decision-making by bankers and thereby market mechanisms has begun.
On the other hand, there are strong views in the market that claim otherwise: banks are not yet competent enough to rule the market.
Pedram Soltani, deputy head of Iran Chamber of Commerce, Industries, Mines and Agriculture – the same business leader who criticized banks for not lowering loan rates – said recently that the private sector has indeed lost its trust in the banking system.
Banks’ involvement in and focus on non-banking activities, their dubious lending practices that mostly favor vested interests, their worryingly high rate of NPLs that have locked up about half of banks’ credits and their outdated accounting practices are among problems raised by critics.
In asking for comments on lenders’ plans to address the stark and troubling realities in the key banking industry, several CEOs of major banks refused to talk to the Financial Tribune.
The private sector, as the group that ultimately bears the brunt of highs and lows in rates, has nevertheless welcomed the lending rate cuts.
Mohsen Jalalpour, the head of ICCIMA, was among the first to respond to the MCC decision. In comments posted on the influential business body’s website late on Tuesday, he praised the move as not being another “senseless decree” but rather a move in line with market reality and the inflation rate, which has dropped to single digits for the first time in decades.
He referred to a promise by President Hassan Rouhani to increase banks’ capital in the 2016-17 budget that, he said, would help bring interest rates even lower.
