Economy, Business And Markets

Banks Once Bitten, Twice Shy

Banks Once Bitten, Twice ShyBanks Once Bitten, Twice Shy

A former official with the Central Bank of Iran argues that commercial banks were forced during the previous administration to invest in non-profitable projects and are now more cautious with their money.  

“A large part of banks’ financial resources were channeled towards non-profitable projects due to the mandates of the central bank,” Ahmad Mojtahed, former head of CBI’s Monetary and Banking Research Center, said in an interview with IRNA. Lenders provided national capital projects with massive loans over the past few years as encouraged by CBI directives.

The economy has witnessed many ups and downs in recent years. For instance, loan and deposit interest rates are now set by the Money and Credit Council, and commercial banks are forced to comply. The considerable increase in deposit interest rates make the banks to invest in the projects which were not necessarily so profitable, the official said. “But the banks had no option but to give to big businesses in hopes of profits that would cover their obligations to depositors.”

The devaluation of the rial against all major currency and the increased amounts of non-performing loans have also affected lenders’ course of action.

For maintaining their reserves in the face of increasing inflation and in order to be able to pay stakeholders’ interests and cover banking expenses, lenders have been left with no option but to invest in controversial projects, Mojtahed said.

The banking expert clarified that although one of the foremost duties of the banks is to attract investment and route the assets towards increasing production, “lenders have been reluctant to do so as previous experiences in such projects have been unsuccessful: not only has investment not yielded profits their assets have got blocked within incomplete projects.”  

Given the stagnant economy, many enterprises, which have received loans, have now failed to repay, affecting banks’ ability to provide individuals and small businesses with financial assistance.