Reforms Distance Banks From Central Bank

The banking overhaul plan–a roadmap enacted by President Hassan Rouhani to transform the outdated banking system–would allow the banking sector to fend for itself without relying on the Central Bank of Iran, said Masoud Nili, a senior economic advisor to the president.

“The reform proposes a new model for the banking system in which the central bank is no longer responsible for providing resources to the banks, and  lenders are allowed to borrow in the interbank market, which is set to be settled within several nights ,” he told the Persian-language journal Tazehaye Eghtesad published by the Monetary and Banking Institute.

Referring to CBI’s intervention in the interbank market from last November he said, “The central bank managed to lower the rates in the market; however, some banks started to use the market as a systematic method to attract financial resources.”

“This resulted in the allocation of CBI resources to unhealthy lenders.”

The CBI overhaul  plan is based on 10 major factors, namely active management of the interbank market, reinforcing bank credits, balancing the reserve ratio of commercial banks, rating banks and close supervision of  beleaguered lenders,  utilizing open-market tools  in implementing monetary policies, disciplining the money market by regulating  unlicensed credit institutions, increasing capital of private banks, reducing bad debts, merging, reforming, rebuilding and dissolving loss-making money and credit institutions and improving oversight of the lethargic banking industry.

 “What is important now is to keep the banking sector away from a trap – the huge amounts of nonperforming loans. Allowing this trend to proceed unchecked will result in an economic crisis,” he warned referring to the billions in troubled credit and distressed debt that have pushed the lenders into a sea of red ink.

The government of President Hassan Rouhani is struggling with a mountain of debt it inherited from its predecessor. The administration now owes over 1 quadrillion rials ($29 billion) to the banks alone.

The senior economist went on to say that the government averted a crisis by preventing surges in the country’s monetary base.

“The banking network would probably face a crisis if these issues were not resolved,” he said and added that the new plan would help underpin sustainability of the banking sector.

Bank Rating Imminent

Nili is of the opinion that the unhealthy monetary and banking policies of the past have not affected all banks in the same way and therefore they should not be tarred by the same brush. "It is apparent that they need to be rated differently."

According to the overhaul plan, he says, banks with serious problems will be identified, cut off from the interbank market and financed separately. "Therefore the interbank market will be limited to banks that need resources for short terms and this in turn will curb interbank rates which then will translate into lower deposit and lending rates."

Another factor for the CBI in categorizing the banks and dealing with them will be the volume of their toxic assets, according to the presidential aide and respected economist.

Repaying Government Debt

Nili notes that the ballooning government debt to banks has long persisted as one of the biggest dilemmas of the banking system, mainly because the banks were unable to pressure the government to repay the debts and have no idea how and when the debts will be cleared.

"That is why repaying government debt to the banks was incorporated in the banking overhaul plan as an important component. To address this problem the  government will restructure a part of its debt in the form of bonds to the banks."

Nili detailed the scheme, saying for instance, the government owes money to contractors and the contractors owe the banks. Therefore the government will allocate bonds to the contractor who in turn will give it to the bank. "It must be said that these bonds will not create new debt for the government and only the past debts will turn into bonds."

"The bonds have maturities and banks will be assured of the repayment time," he added.

If a bank is in dire need of capital it can sell the bonds, but since the government cannot allow for a new wave of bonds to enter the market abruptly, the CBI will  communicate to the recipient bank that it will only lend to banks in exchange for collateral and inform the banks that they can use the bonds as collateral.