Economy, Business And Markets

NPL Saga Continues

Business & Markets Desk
NPL Saga Continues
NPL Saga Continues

The banking sector’s outstanding loans have risen markedly for the past two years. Of all the loans given, most have gone to the private sector and a smaller portion to the government.

Private sector debt to the banking system soared by 53 percent in the past two years. Loans to the private sector have surged by 2 quadrillion rials ($61.5 billion based on market rate) and reached 5.41 quadrillion rials ($166.3 billion) in the past two years, according to the central bank.

Government debt to the banking sector also grew by seven percent to 920 trillion rials ($28.2 billion) in the first six months of this fiscal year (March 21-September 22). Of the sum, 20 trillion was owed by state-owned companies and the rest by the government itself.

A large chunk of these debts are considered toxic as they are well past their maturity. Bad loans constitute about a quarter of all loans given, which could technically make most commercial banks bankrupt. This situation has called the health of the financial system into question.

Iran’s commercial banks are struggling with 870 trillion rials ($26.7 billion) of non-performing loans, based on the last estimate announced by the deputy governor of the Central Bank of Iran, Hamid Tehranfar. But some officials put the sum at double the official CBI estimate.

Presently, the amount of overdue loans is a source of conflict in Iran’s banking system as different authorities including MPs, commercial bank CEOs, officials from CBI and ministry of economic affairs and finance and analysts give conflicting estimates on non-performing loans of commercial banks.

The best illustration of this discrepancy and ambiguity in the banking system was seen in May, when the Iran’s minister of economic affairs and finance, Ali Tayebnia, said the amount of overdue loans held by commercial banks was 1.5 quadrillion rials ($46.1 billion). This was almost double the amount reported by CBI deputy governor in the same month. Thus, it was later retracted by Tayebnia who put the amount at 80 trillion rials.

Later in August, presidential advisor, Akbar Torkan shed some light on the situation.

Torkan said the actual amount for bank NPLs is double the official number and stands at roughly 1.64 quadrillion rials ($50.4 billion).

The banks reschedule the due date on loans to make records healthier. “They give the debtors a new loan with which they can repay the other loan,” said Torkan.

If banks don’t use this legal loophole, they would have to write off these loans as losses. Even considering the least estimate on NPLs, their bulk would mean a financial disaster. Incurred losses in such a scenario would be in excess of the capital of these banks and they would have to file for bankruptcy.

“Nearly all government-owned commercial banks and some private banks are technically insolvent,” said Mousa Ghaninezhad to the Financial Tribune. CBI governor, Valiollah Seif, recently said that at least four state-run banks – Melli, Industry and Mine, Agriculture and Sepah – were incurring losses. Analysts believe that most other commercial banks are essentially in the same state, but have survived partly thanks to their non-banking commercial activities.

Iran has eight state-run and 19 “privately owned” banks. All of these banks have invested heavily in the ownership and management of commercial entities outside the banking sector.