Reserve Requirements Remain Disciplinary Tool for Banks

While some economic experts and bank managers believe that the impact of banks' reserve requirements has waned over time and its ratio should gradually reduce, the director of Central Bank of Iran's Credit Department opposes the idea.

"CBI should hold on to reserve requirements and save them for a rainy day. As you can see, banks' reserve requirements proved to be necessary and useful during the recent banking  problems," Ali Asghar Mir-Mohammad Sadeqi was also quoted as saying by Fars News Agency.

Sadeqi pointed out that according to the Money and Credit Council, only CBI is in charge of determining the reserve requirement ratio of banks.

"CBI reduces the reserve requirement ratio for disciplined banks from 13% to 10% but there will be no cuts for unruly banks. In other words, the cut in banks' reserve requirements is a disciplinary tool to manage the lender," he added.

CBI Governor Valiollah Seif has said the reserve requirement ratio could drop to 10% based on each bank's performance and how they comply with the regulations.

"Such measures would increase the liquidity in the banking sector, lower deposit rates and raise banks' resources," he said.

According to CBI's latest report, the total volume of banks' reserve requirements reached 1.313 quadrillion rials ($35 billion) by the end of the previous Iranian year (March 20, 2017), marking an increase of 22% year-on-year.

Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and liquidity growth.

In April 2015, MCC agreed to cut the reserve requirement ratio by 0.5% to 13% for both private and state-owned commercial banks and credit institutions. The rate, however, remained unchanged at 10% for specialized banks and branches of commercial banks located in free trade zones.

The policy to reduce reserve requirements was supposed to act as an expansionary monetary tool to pump more liquidity into the economy beset by a long and painful recession and boost banks' lending power.