Banks Urged to Prioritize Bad Loan Recovery

As the Iranian banking system continues to grapple with the growing problem of sour loans, the governor of the Central Bank of Iran has urged lenders to direct the bulk of their efforts toward recovering their non-performing loans.

"At present, the banking system is facing a credit crunch as a result of incorrect policies of the past and with a hike in frozen assets in the balance sheets of the banks, their credit allocation capability and flow of resources has been severely hit," Valiollah Seif told a gathering of Bank Saderat executives as reported by the official website of CBI.

"Right now, a high portion of the assets of the banking system is frozen in the form of NPLs, non-banking ventures, real-estate investments and government arrears."

The administration of President Hassan Rouhani and CBI started major efforts to recover NPLs, which gained momentum and brought the NPL ratio to total gross loans closer to international standards largely as a result of the Cabinet's move in February, approving the penalty waiver for loans of up to 1 billion rials ($28,180).

In order to resolve this problem, Seif said focusing on recovering problem loans would be the most effective way of banks thriving across the country.

Stressing the importance of reviving these assets and turning them into efficient assets, the governor, who is also the head of Money and Credit Council, said banks must strive to return these resources into the loan portfolio of the banking system.

As was found by a CBI study, capital market immaturity, using banks' limited resources for solving structural problems of the economy and the internal workings of Iranian banks have largely contributed to the high rate of NPLs in the past few years.

As Seif had announced two weeks ago, "NPLs' ratio dropped in the past four years from 15% to 10%, but their volume reached 1 quadrillion rials ($26.6 billion) to register an increase of 160 trillion rials ($4.2 billion)".

Prudent Allocation

At the Bank Saderat event, the CBI governor said allocating the "limited" resources of the banking system to priority projects is one of the main mandates of the banking system.

"They must always work to grant these loans to projects with good returns that also lead to the creation of stable jobs and economic growth," he added.

Noting that the Ministry of Economic Affairs and Finance is working in tandem with the Planning and Budget Organization of Iran on repaying the government's arrears to the central bank, the official said CBI's "ultimate goal" is to use the resources of the banking system to strengthen and foster the private sector.

"That is because allocating capital to the public sector would mean more restrictions in funding the private sector," he said.

Seif then moved to the issue of charging fees for banking services, which has recently been frequently referred to by officials as one of the main sources of income for banks throughout the world.

That is while in Iran, "unfortunately not only no profits are generated through banking services, but they entail losses [for lenders]", he said.

The CBI governor noted that even though Iranian banks have made significant strides toward investing in electronic banking, generating profit through fees "has not been realized in Iran" and an "incorrect culture has been formed" that banking services must be provided free of charge or with the least amount of cost.

According to Seif, in addition to being an active business enterprise, banks are social entities with social responsibilities.

"This economic institution can only assume its social responsibilities well when it can be profitable," he said.