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The interest rate war has exacerbated the issue of the banks’ liquidity flow.
The interest rate war has exacerbated the issue of the banks’ liquidity flow.

CBI’s Komijani Explicates Banking Reform Plan

One of the goals of the overhaul plan package is to eliminate the negative consequences of the war of banks in luring savings to balance interest rates proportional to the inflation rate

CBI’s Komijani Explicates Banking Reform Plan

Vice-governor of the Central Bank of Iran says the banking overhaul plan has been devised, among other things, to curb the effects of a war between the banks and credit institutions on interest rates.  

“One of the goals of the [overhaul plan] package is to eliminate the negative consequences of the war of banks in luring savings to balance interest rates proportional to the inflation rate,” Akbar Komijani said in a talk with Tazehaye Eqtesad Publication as reported by IBENA.

Banks, saddled with billions in non-performing loans and dodgy investments, have been trying desperately to attract savings in order to stay afloat. Their persuasion tactics in recent years have deteriorated into a war in which they offer higher returns on deposits, resulting in high interest rates.

“The interest rate war has exacerbated the issue of the banks’ liquidity flow and therefore it is imperative deposit rates be cut further with the goal of checking the liquidity growth,” he added.

The MCC-- CBI’s monetary policy committee–lowered interest rates twice in the past six months, citing the significant drop in inflation as the main reason. Officials close to the decision-making body had hinted that another rate cut could be coming soon – a plan strongly opposed by the lenders.

The banking overhaul plan was enacted by President Hassan Rouhani with the aim of reviving the lethargic banking system. The blueprint has been hailed by monetary officials as a giant step in modernizing the outdated banking system and addressing its many challenges.

On the other hand, notes the senior official, with the aim of stabilizing the interest rates and making directives issued by the Money and Credit Council relevant and effective, it is necessary that the CBI adopt a different tone when dealing with banks.

 Calling it Quits

In his opinion, based on the level of banks’ compliance with CBI regulations and based on their performance and conduct, the central bank must employ “various incentives and punitive measures to contain and reverse the pattern that makes the way for price wars and defuse its effects.”

Komijani notes that in the reform plan, efforts have been made to terminate the effects of rivalry on bank interest rates, increase the capital of banks, restructure the government debts to banks and address the mounting problems of bad loans.

The action plan also seeks to solve issues about liquidity and banks’ soured assets with the goal of creating suitable grounds to implement fundamental reforms in the monetary system.

“Approval of regulations by the parliament, effective action on part of the CBI to monitor and deal with the uncertified financial institutions, issuance of government bonds and making them marketable, incorporating the cost of bonds in the annual budgets and a clear timely repayment mechanism for the bonds, proper management of government debts and setting a ceiling for the issuance of bonds proportional to the country’s GDP,” are among the 10 prerequisites that will insure the success of the Banking Overhaul Plan, as detailed by Komijani.

Prioritizing the repayment of any new debts through issuance of bonds in the capital market, devising a cap for the bonds in CBI’s balance sheet, securitizing the bonds mutually by the CBI and the banks and implementing open market policies, paying attention to Islamic finance principles in designing and issuing the bonds and allocating the necessary budget to increase the capital of governmental banks are the other factors pursued by the CBI in its reform plan.

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