Connected Lending By Iranian Banks to Face Prosecution

The Tehran prosecutor general has spoken out against directed credit schemes by banks, stressing that loan allocation violations must be reviewed by the experts.

“We are now facing loans that have been granted based on personal recommendations and favors while no creditworthiness assessment has been conducted for the receiver and collaterals were fake,” Abbas Jafari Dolatabadi was also quoted as saying by Banker.ir.

The official, who was speaking at a meeting attended by the chief executives of banks and CBI Governor Valiollah Seif, emphasized that any loan allocation to entities active in production sector is a positive measure.

“Our problem is with individuals who enter other markets with the credits they receive [from banks] and are not in any way concerned with production activities,” he said.

The senior judicial official noted that in the eyes of the judiciary, people who benefit from connections are guilty of criminal conduct and those who give these loans are also party to the offences.

Dolatabadi urged banks to be proactive and run a “healthy banking system”.

The judiciary will always act against the activities of illegal credit institutions and banking violations, “but it must be noted that the intervention of the judiciary in these matters must be a last resort”.

He stressed the importance of expert review and investigation of such cases, noting that the Court of Monetary and Banking Crimes was formed for this purpose.

According to the official, CBI and the banking system must provide assistance in educational and professional fields, emphasizing that judges must receive better academic training to be able to deal with these matters with optimal efficiency.

In its latest report on Iran, the International Monetary Fund encouraged Iranian authorities to support recapitalization of public banks with measures that improve their commercial viability and wind down directed credit schemes.

A legacy of government payment arrears, directed and connected lending, and poor risk management practices have left banks’ balance sheets badly impaired and capital positions weak.

 Poor Creditworthiness Assessment

The director of the High Council for the Association of Banking and Credit Investment Consultants, an organization mandated with providing consultancy to banks over their investments, says the association currently services only 10% of loans allocated by the banks in a year.

In a talk with Fars New Agency, Siamak Samimi Dehkordi added that more than 200 consultancy firms are currently members of the association founded nine years ago.

The official pointed out that consultants with these firms review the viability of the projects, supervise how loans allocated to them are spent and keep up their monitoring “almost until the end of the project”, all under the umbrella of the association.

However, Samimi said this is definitely not the maximum capacity in which the association is able to offer its services.

“The total value of loans paid to these projects has been 200 trillion rials ($5.33 billion), while the total loans allocated by the banks are about 4 quadrillion rials ($106.7 billion),” he said.

He noted that a part of these loans was a rollover of previous ones.

The official said “perhaps it can be said that the total amount of new loans handed out by the banks during one year has been around 2 quadrillion rials ($53.37 billion)”, which means that only 10% of all the loans allocated by the banking system have been extended following professional consultancy, “which is very low.”