CBI Tapping Capital Markets to Moderate Interest Rates

CBI Governor Valiollah Seif has named the newly-formed cordial relationship between the country's monetary and capital markets as a factor for moderating bank interest rates, announcing that consequently, "banks have been allowed to sell some of their bonds in the secondary market".

A committee comprising the Ministry of Economic Affairs and Finance, the Management and Planning Organization of Iran and the Central Bank of Iran will supervise and control any supply of bonds to "prevent unprincipled fluctuations of interest rates", Seif was also quoted as saying by the official website of CBI.

Seif's comments come in the midst of a debate on interest rates, which has taken center-stage in the economic agenda of newly-approved ministers of President Hassan Rouhani's second Cabinet. As businesses complain of sky-high lending rates suffocating entrepreneurship, both the new industries and economy ministers have pledged to concentrate their efforts on reducing interest rates.

The CBI chief, who also heads the decision-making Money and Credit Council, pointed to inflation rate as an alter ego of bank interest rates, reiterating his emphasis that the inflation and interest rates must have a maximum discrepancy of 1-2%.

Addressing a meeting of banks' chief executives on Saturday, Seif said the elimination of illegal credit institutions and subsequently the shadow money market will remove a significant barrier on the way of balancing the interest rates.

He also backed the performance of CBI vis-à-vis the shadow banks, stressing that by not making an illogical decision under heavy pressure, the monetary policymaker managed to "put an end to the activities of these institutions after two decades".

The illegal credit institutions gained traction during the tenure of former administrations and because they held up to a quarter of the nation's liquidity and were seriously damaging legitimate lenders, dealing with them became an increasingly hot-button topic during the final months of Rouhani's first term in office.

In his meeting with top bankers on Saturday, Seif revisited the issue, saying that three authorized lenders have acquired the last of uncertified credit institutions and that managers and founders of shadow banks will ultimately be held accountable for any wrongdoing.

"Banks should stay vigilant in the face of the activities of illegal institutions so that no new shadow banks are formed in the future," he said.

The central bank itself is taking steps to prevent the formation of more such illegal entities by ramping up its monitoring  as part of the Central Bank Bill–one of the twin bills sent to the parliament days ago for reforming the ailing banking system after more than four decades.

Other Rate Disruptors

Seif spoke of overdrafts by the banks as another factor that negatively affects the interest rates, urging the lenders to pay extra heed to balancing their assets and expenses.

However, he conceded that due to their dire state, banks are sometimes forced into overdrafts, in which case the regulatory body will turn overdrafts into credit lines to drive down the cost of funds.

According to Seif, a series of disruptive measures by auto manufacturing companies that have engaged in "quasi-banking activities" have also exacerbated the high interest rates.

These detrimental activities were stopped in cooperation with the Ministry of Industries, Mining and Trade, he added.

The CBI governor pointed at the total volume of loans allocated by the banking system during the previous fiscal year that ended in March, saying 64% of the 5.48 quadrillion rials ($146 billion) were extended to boost working capital.

Given the fact that the banking system is to boost loan allocation further to hit 6.71 quadrillion rials ($176 billion) in the current year, he called on lenders to optimize their lending process and use the funds to increase job creation and support production.

In conclusion, Seif called on the bankers to operate in a united manner in line with the macroeconomic policies devised for the banking system, mainly by sticking to the fixed 15% deposit rate decreed by MCC last June.