Economy, Business And Markets

CBI Outlines Banking Roadmap

CBI Outlines Banking RoadmapCBI Outlines Banking Roadmap

The Central Bank of Iran has detailed the first phase of the banking overhaul plan and identified the strengthening of its supervisory and monetary policymaking role among the main goals of the plan.  

The banking overhaul plan was unveiled by President Hassan Rouhani on Sunday to be implemented in the current fiscal year that ends in March 2017. He signed the much-anticipated plan into law last week seen as a milestone in implementing major reforms in the ailing banking sector.

According to a CBI press statement, the plan has been devised with 10 guidelines: active management of the interbank system, reinforcement and allocation of the banking network resources, balancing the reserve requirement of commercial banks; rating banks based on their performance and supervising the performance of beleaguered banks.  

Taking benefit from open market mechanisms in implementing monetary policies, inculcating discipline in the money market by reorganizing unregistered lending institutions, increasing the capital of private banks, reducing non-performing loans, merging, reforming,  and dissolving ailing banks and credit institutions, and finally improving oversight of banks' are the other main points of the plan.

The second part of the plan will be executed with a focus on the Ministry of Economy, reducing government debt and selling it in the market.

The banking sector's problems have affected the economy on two fronts: the credit crunch and financial stability. The former has exacerbated the recession by hitting resources and data shows that the problem of bad debts was partly due to the unpaid government debts, the CBI press release said.

"If the government fails to effectively repay its debts, a continuance and even worsening of the recession does not seem far-fetched."

Three-Point Action

Also providing details about the newly-implemented banking overhaul plan, the governor of the Central Bank of Iran said it covers three main aspects: addressing fundamental and infrastructure problems, the credit crunch and banks' capital adequacy.

In a talk with state TV late Sunday, Valiollah Seif echoed President Rouhani's thinking, heralding the implementation of the first phase of the plan by the yearend.

"This year, we will focus on three issues: the first is infrastructural and institutional problems, second and the third is to tackle the banks' credit crunch and the shortage of capital."

Building Momentum

Seif noted that the Rouhani administration has made it a point to create an economic momentum by reforming the banking sector.

"The reality is that our banking system has not grown in parallel with our economy, therefore the most important thing is to make sure that the banking system provides enough support (credit) to the production sector."

 Noting that a cut in interest rates as a result of the decline in the inflation rate was "what we had expected", Seif said steps have been taken to ensure a favorable outcome.

"Last year, we entered the interbank market and managed to bring the interbank rates down to 16.5% from the previous 29%."

"However we need to reduce the NPLs, non-financial debts and the government debt to the banking system so the interbank rates can be lowered further," he said.

He referred to plans to reduce banks stressed assets as one dimension of the CBI and the government plans for the future followed by financial discipline and transparency which he said will be pursued with utmost seriousness.

"Economic growth demands a mechanism of transparent financing."


Debt Instruments

The governor said his bank is taking action by issuing Islamic bonds in the capital market which will be sold to debtors, contractors and creditors. As Seif says, the banks can choose to do one of two things with the bonds: "sell them to the central bank or accept them as guarantees."

Elaborating the point, he said, "Not only can the government bonds help discipline the government, they can help it to pay for its financing, which in turn will make the government do more and have a stronger tendency toward bringing down deposit and lending rates."