Reform Plan to Help Tackle Distressed Debt

The Central Bank of Iran has come up with a slew of measures to reduce the mountain of non-performing loans. The proposals, as part of the banking overhaul plan, would also help curb future growth in the distressed debts of banks.

According to Peyman Qorbani, the CBI deputy for economic affairs, having an active presence in the interbank market, lowering law-abiding banks’ capital requirements as an incentive, rating lenders based on their performance and keeping a closer watch on troubled banks are among key measures included in the banking overhaul plan for lowering the bulk of troubled assets in the banking sector.

“Implementing open market monetary policies, regulating unauthorized financial institutions, and increasing private banks' capital are also included in the banking overhaul plan,” he told Tazehaye Eqtesad Journal, published by the Monetary and Banking Institute.

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 The blueprint has been hailed by monetary officials as a giant step in modernizing the outdated banking system and addressing its many challenges.

The official also noted that consolidation, punitive measures and finally dissolving unruly banks and credit institutions are also among the proposed measures for promoting the efficiency of central bank’s supervision and lowering the NPLs.

The total amount of NLPs in Iranian banking system is estimated to range between 800 trillion rials ($25.5 billion) and 1 quadrillion rials ($31.9 billion). Government debts to banks constitute a considerable portion of the total bad debts.

Debt Instruments

Addressing the issue Qorbani said, “A special department for debts is set up at the Ministry of Finance and Economic Affairs, which has started issuing treasury bonds.”

Qorbani said however that the government could have addressed the issue more effectively by launching a prober debt market.

Elaborating on the main causes of the growth in toxic loans, Qorbani said, “In the past decade, bankers were under government pressure for allocating loans…That disrupted the technical procedure of qualifying applicants.

“Due to financial pressures [on banks and businesses], many borrowers decided not to repay their debts.”

Some big borrowers preferred to pay fines for defaulting on their loan repayments “because taking out new loans would be more costly.”

As a result, the volume of non-financial assets started to rise in the banking sector, Qorbani said, adding that the recession in the property market added to the problem.

Moreover, banks had to offer higher interests in order to attract savings, he said. “This resulted in higher lending rates and larger amounts of bad debts.”

The CBI has managed to enhance the condition by implementing various measures, according to the senior banker. Lowering the duration of term deposit–from five years to approximately one year– and lowering interest rates in the interbank market to 17.5% could be named as the key measures.

It also managed to lower deposit rates from 40% in 2013 to 15% now.

However, issues like the mountain of bad debts and shortage of capital still pose a challenge to the struggling banking sector.

The central bank hopes that the banking overhaul plans can and will help address major issues. In the reform plan, efforts have been made to also terminate the unhealthy rivalry on bank interest rates, increase the capital of banks, restructure government debts to banks and clear banks' balance sheets.