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Majlis Think Tank Offers Alternative for Bank Capital Increase

Majlis Think Tank Offers Alternative for Bank Capital Increase
Majlis Think Tank Offers Alternative for Bank Capital Increase

The research arm of the Iranian Parliament has published an analytical report on the plan to increase the capital of public-sector banks, pinpointing its faults while stressing the necessity of the scheme.

The capital level of public-sector banks has been identified as one of their major weaknesses during the past few years and “to address the issue, the 2017-18 Budget Law contains measures to increase their capital”, the report by Majlis Research Center was cited by IBENA.

The Cabinet headed by President Hassan Rouhani voted last week to obligate the Ministry of Economic Affairs and Finance to allocate 200 trillion rials ($5.2 billion) of excess funds to increase the core capital of state-run banks.

MRC refers to two clauses in an article of the budget law, noting that “while increasing the capital of public-sector banks is necessary under the current circumstances, methods cited in the aforementioned clauses contain numerous flaws”.

The first regulatory measure found to be lacking by the think-tank is Clause B of Article 17, which states that “the government is allowed to raise the capital of Bank Melli, Bank Sepah and Bank Keshavarzi (Agriculture Bank) by a maximum of 50 trillion rials ($1.3 billion)” from the interest and fees related to overdrafts and credit lines paid by these banks to CBI.

As per the clause, the share of each bank will be determined on the basis of consensus reached by CBI, the Ministry of Economy and the Budget and Planning Organization.

 Rewarding Violation

The MRC asserts that the clause has failed to mention the adverse effects of waiving overdraft fees of banks and lacks transparency regarding “the various dimensions of capital increase” and is in contradiction with “budget planning principles”.

The report takes a dim view of the fact that the provision implicitly rewards violators, “prioritizes the fiscal policies of the government over the monetary policies of the central bank” and indirectly uses the assets of the central bank to increase the capital of public-sector banks.

“Even though a bank’s capital can act as a buffer against shocks, trends of the past three years have shown that the mechanisms to guard against financial shocks have in fact turned overdrafts into credit lines that are not the  banks’ capital,” reads the report.

The parliamentary think-tank adds that under such conditions, while increasing the capital of the banks “from appropriate sources” may create a positive momentum for public banks, bad credit management by these lenders and the existence of the possibility of future overdrafts “coupled with a lack of fiscal discipline in the government” will destroy the positive effects of banks’ capital increase.   

Therefore, the research center suggests that the clause be entirely removed from the budget law.

The other faulty provision, according to MRC, is Clause C of Article 17 that states that during the next fiscal year (starting March 21), “the government will be allowed to allocate up to 100 trillion rials ($2.6 billion) of its capital and financial assets to increase the capital of public-sector banks in line with the needs of the corresponding bank to conform to international standards”.

The think-tank notes that the clause does not clarify the performance of past similar legislation or how the resources will be provided for and reminds that increasing the banks’ capital by forgiving their debts to the central bank will cause “indiscipline, create further tensions in badly-managed banks and lead to borrowing from the assets of the central bank”.

It does not, however, advocate the removal of this clause.

 A Better Path

Instead, the think tanks urges regulatory bodies to proceed with structural reforms in the banking sector and cautions that any bank bailout that is not preceded by such reforms would in fact squander national resources.

It proposes alternative, fixed measures to increase banks’ capital such as using banks’ unexpected net profits and their paid taxes.  

The MRC also disclosed the capital adequacy ratio for seven public-sector banks. Only the Export Development Bank of Iran and the Bank of Industry and Mine registered a ratio higher than the 8% “minimum standard” cited by the research center, with a strong 30.86% by the former and an 11.90% by the latter.

Post Bank at 5.65%, Agriculture Bank at 5.47%, Bank Maskan at 4.87% and Bank Sepah at 2.46% are the other banks with less-than-impressive capital adequacy ratios while Bank Melli was the only public-sector bank with a negative capital adequacy ratio.

 

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