Interbank Rates Betraying New Signs of Defiance

A banking official admits a significant rise in the interbank interest rates, but denies reports that put the rates as high as 24%.

“Interbank interest rates have increased from 16% to 21% but the 24% figure is not confirmed,” Gholam Hassan-Taghi Netaj the chief executive of Bank Ghavamin told IBENA.

“The maximum interbank rate that was signed and approved by bank CEOs were 21%.”

Media outlets quoted unnamed banking officials that had put the interbank rates at 24%. However unconfirmed, higher interbank rates indicate the failure of the Central Bank of Iran and the government in keeping the interest rates low in line with declining inflation.

By active intervention in the interbank market, the CBI had succeeded in gradually lowering them from the unusually high 29% at the beginning of March 2015 to 17% in May.

“The interbank market rate is not long-term and it could actually be called an overnight rate,” the official added.

In an analytical report, Financial Tribune’s sister publication the Persian-language newspaper Donya-e-Eqtesad examined the reasons that have contributed to the halt in the decreasing trend of interest rates.

Currently, while interest rates are usually higher than the 15% that was formally approved by the Money and Credit Council in June, their downward trend has also stopped in the market. According to the paper, this lack in decline with the inflation rate has given way to new challenges in the money market.

In late June, the inflation rate fell below 10% for the first time in more than two and a half decades.

Sources in the CBI claimed that since 1990 and when the country was recovering from the Iran-Iraq war (1980-88), average inflation was never in single digits.

 Illegal Interest Rates

According to Donya-e-Eqtesad, unruly credit institutions have once again become the forerunners in offering interest rates higher than those sanctioned by the CBI. Their average interest rates are in the 21% region or higher and for savings going north of 2 billion rials ($), they are ready to offer 22.5%.

Jumping on the bandwagon of high interest rates have been the privately-owned commercial lenders. With an average rate of 21%, they boast more varied schemes which offer customers ways of getting higher-than-usual interests.

State-owned banks come next: although opting for a more conservative approach, they offer interest at an average of 17.5% which is still 2.5 percentage points higher than what it was decreed by the CBI. It is said that with the  increase in the unhealthy competition, banks will come up with new ploys to prevent deposits from leaving.

 Obdurate Rates

While rates on deposits in banks and credit institutions have registered an official increase, CBI data shows that interest rates rigidly refuse to come down in the interbank market.

The central bank put the average interbank interest rates at 18.6% in the second month of fall (22 October- 21 November) – in fact the rates had started to climb to 18% from the last month of the previous year and continued. This is while in the previous year, interbank rates had begun a significant downward trend.

According to the report, while economic policymakers insist that interest rates must come down in order to decrease the cost of financing, studies show that a decrease through official decrees is not the way forward.

Experts believe, it says, that structural hurdles of banks must be considered in order to address most problems and response to the existing problems must come sooner than later.

Donya-e-Eqtesad reports that pundits have proposed eight ways to reform the structure of banks and address their ills. These include creating a legal insurance for bank depositors, determining the exact amount of the non-performing loans, banning unregistered institutions from absorbing new savings, putting together an emergency liquidity fund, restoring trust with creditors and depositors, reforming bank structures, handling doubtful debts, reviving corporate debt structure and empowering the government to periodically increase the volume of state-issued bonds.