Tehran Deputy Prosecutor Calls for Banks' Diligence in Dealing With NPLs

A large part of the non-performing loans in the banking system constitutes "doubtful debts", says a Tehran deputy prosecutor general.

"The ratio of NPLs [to total gross loans] in several banks has reached 60% with 80% of these counted as doubtful debts," Mohammad Reza Pasandideh Sahebi was quoted as saying by banker.ir in an event organized by Bank Melli Iran–the country's largest lender.

"Ours is a bank-based economy and lenders finance over 90%" of the needs of companies, he said pointing to the role and influence of banks in Iran.

Speaking at the meeting to review the performance of BMI in the first half of the current fiscal year (20 March-21 September) and outline the bank's plan for the second half of the year, the judiciary official said the banks therefore have a critical responsibility in improving the macroeconomic variables. "They should not regard themselves strictly as a profit-driven entity," he said.

On the status of the informal money market, the official referred to the wide-spread activities of cooperative credit institutions and the uncertified banks and lenders as one of the main dilemmas of the banking system. These entities have at their disposal a remarkable part of the broad liquidity, he said, while "the people do not have sufficient information regarding the way they (lenders) operate and what it means to make a deposit with them."

Thousands of uncertified and illegal credit institutions are currently operating  in Iran, which the director of the office for supervising non-bank institutions, has a vastly negative impact on the national economy. The Rouhani administration has embarked on a long and difficult campaign to tame and regulate the seemingly lawless money institutions.

Tehran prosecutor Abbas Jaffari Dolat Abadi had recently warned the supervisory departments of the banks to either ramp up their efforts to curb banking offenses and massive corruption or face the consequences.

On the status of the regulated money market, Sahebi drew attention to the lack of adherence to central bank guidelines by a number of banks and credit institutions.

He did not name names, but said, "It is regrettable that some banks have started an unhealthy competition to attract savings at any costs. This is not among their duties."

Need to Avoid Distractions

The official, who also presides over the Court of Monetary and Banking Crimes, pointed to credits allocated by banks to their own subsidiary companies and the lenders' engagement in speculative activities as two serious problems in the banking system "which distract banks from their main responsibility of functioning as financial intermediaries toward personal profit and practices which effectively turn them into investment companies."

Sahebi went on to suggest that banks "thoroughly appraise" the credit-worthiness of customers, especially corporates, before offering them loans.

"They must also take the necessary precautions regarding guarantees and collateral and this is and should be their first priority," he said.

The senior judiciary official said a review of legal cases pertaining to the banking system has revealed that the banks' lack of in-depth knowledge and professional appraisal of their corporates has turned into one of their major challenges.

"More than 70% of the NPLs are related to corporates and a series of training sessions must be held for bank officials and heads of branches because being abreast of legal aspects is an absolute necessity for banking executives."

He added that in preliminary identification and appraisal of corporates, the disciplinary, inspection and anti-money laundering divisions of banks must all have a close and meaningful collaboration with branch managers.

"In trying to collect their distressed debts, banks must try to get them in cash and or in non-cash clearances. They must make sure they are reimbursed in real terms," concluded the official.  

A recent study under the supervision of vice governor of the CBI Ali Akbar Komijani found that the bank NPLs more than quadrupled from 204.87 trillion rials ($6.4 billion) in 2007 to 863.42 trillion rials ($27.1 billion) in 2015. Furthermore, it found out that the total NPLs increased at an average rate of 19.4% while on the global scale it was less than 4% between 2005-2014.