Economy, Business And Markets

New CBI Directive on Interest Rates

New CBI Directive on Interest RatesNew CBI Directive on Interest Rates

Deposit rates will be lowered as of Dec. 22, the Central Bank of Iran announced on Saturday. The bank has also banned the provision of financial services to unauthorized financial institutions.

Agreement to lower the rates was reached in a meeting between Central Bank officials and directors of Iran's commercial banks, based on which deposit rates will be limited between 10 and 22 percent for short term and annual deposits.

Currently banks do not offer long term deposit contracts due to the country's uncertain economic outlook.

During the meeting, the CEOs expressed dismay at current violations regarding deposit rates. The current situation regarding interest rates is damaging the economy they said, calling for stricter central bank oversight.

Authorities have been quoted as saying 'some' unauthorized banks and credit institutions are offering higher than 22 percent deposit rates. However, the Financial Tribune has found that most banks are breaking CBI directives by offering deposit rates as high as 27 percent to VIP clients.

During the meeting the CEOs discussed the challenges of implementing the CBI's June directive on reducing interest rates.

The New Cost of Money

Annual deposit rates will be 22 percent. If inflation falls below 20 percent – as is the government's target – that would mean a 2 percent real interest on annual deposits. Inflation will slow to 23 percent in 2014 from 35 percent last year, according to the International Monetary Fund estimates in April, which would mean a negative interest rate.

Based on the agreement 9-12 months deposits will earn a 20 percent interest rate while 6-9 months deposits get 18 percent. Interest on 3-6 months deposits will be 14 percent and the minimum period for earning interest will be one month.  Any withdrawal from the accounts during the deposit period will cost customers 500 basis points in interest.

Interest on sight deposits will be based on the bearers minimum account balance during the month. Banks will pay 10 percent interest based on minimum balance at the end of each month.

Banks and credit institutions have to tailor their existing products so that their effective interest rate remains within the central bank's set rates. Any new financial product has to be vetted by the CBI.

Any deposits made before Dec. 22, apart from sight deposits, will carry the contracted rate until the end of the contract. But, banks must have the full documentation for these cases ready for inspectors if needed. Upon the completion of the contract period, the new interest rates will be applied to these deposits.

However, the new interest rates will be applied instantly to sight deposits and any other deposit which earns interest on a daily basis as of Monday 22 December.

Dealing With Infringements

Any violation on offered interest rates will be dealt with by the central bank.

Lenders who breach the interest rate decision will first receive a written warning from the CBI. This will be followed by fines. If the institution continues its activities, temporary suspension of some of the bank's activities is possible and the institution will not receive a new license for providing financial services. Also, violators will be partially cut-off from the banking system.

In more severe infringements, the CBI will take action against those responsible. Permanent or temporary suspension of the institution's board and CEO from activity is possible. Also, dividend payments to shareholders will be banned.

Furthermore, the names of the violators will be released in the public media. The central bank governor had previously signaled he would do so, but no action has been taken so far to that effect.

Also, offering any financial services to unauthorized financial institutions – including credit institutions, cooperative credit unions, leasing firms, bureaus de change and other financial firms which do not have a charter from the CBI – is prohibited.