Economy, Business And Markets

Debt Securities Will Help Reduce Bad Loans

Debt Securities Will Help Reduce Bad LoansDebt Securities Will Help Reduce Bad Loans

Non-performing loans, shortage of capital and the operation of 7,000 unregulated financial and credit institutions are the main problems of the banking system, a former bank official says.

Sounding the alarm on the banks’ mountain of stressed assets, Ahmad Hatami Yazd said, “NPLs are the main issue; loans have been handed out but the banks haven’t seen any returns. Some 55% of banks’ loans are sour and the debts pertain to both state companies and the private sector.”

Hatami hailed the government’s plan to issue securities to sell its debt – which includes government debt to the banks, the news website of Iran Chamber of Commerce, Industries, Mines and Agriculture reported.

The Central Bank of Iran recently unveiled a banking overhaul plan, detailing the goals of its first phase to be implemented by the end of the current fiscal year in March.  

One feature of the plan that has earned the support of economic experts and independent analysts is the settling government debts through the issuance of Islamic Treasury Bills.  

“In this method, securities with a higher interest rate than the fixed ones offered by lenders are sold to banks and contractors and those willing to purchase them in the bond market. Thereby the government commits to pay the cash owed (including interest) or issue new securities when the debt instrument reaches maturity,” Yazd said.

In his opinion, debt instruments have a good chance with investors after the recent cuts in interest rates. “In total, 100 trillion rials ($3.2 billion) worth of securities may be issued in tranches. It must be noted that this only pertains to the government debt and other mechanism will be needed for other debtors.”

The government issued 158 trillion rials ($5.12 billion) worth of Islamic Treasury Bills last year and has plans to issue 400 trillion rials ($13 billion) worth of bonds in the current fiscal year that ends in March 2017.

 Debts & Commitments

The former banker believes that the Bankruptcy Law needs to be amended to tackle the issue of corporate debt. “At the moment if someone declares bankruptcy, they are required to sell off their assets to repay back the debt,” he elaborated. “But in the case of a factory going bankrupt in developed countries, they don’t close it down and sell its assets; they leave the factory and its workers and provide it with a fresh new working plan. This practice was incorporated in the bill sent to the Majlis 12 years ago. It has still not been considered or analyzed.”

Another major barrier for banks is the shortage of capital. “Banks (in most countries) must have capital equal to 10% of their total assets, an amount which Iranian banks don’t even come close to”, says the pundit. He called the methods employed by the government to increase state-owned banks’ capital “a positive endeavor” because capital adequacy of domestic banks will help pave the way for closer international collaboration.

Hatami referred to the two issues of ‘rating the banks’ and the complete ‘reorganization of unregistered financial and credit institutions’ that have not been addressed in the latest banking overhaul plan.

“Customers need to know the difference between a first-tier and third-tier bank simply because they may be willing to live with lower interest rates but keep their money in safe hands.”

According to Hatami the unruly financial and lending institutions are like “cancerous tumors” that need to be removed for good. “Statistics released by the World Bank show 7,000 illegal institutions are active in Iran, all teetering on the verge of bankruptcy.”

The central bank can tell the banks to stop offering services to the unwanted institutions so they are eliminated as soon as possible, he concluded.