Economy, Business And Markets

New Solutions to Help Recover NPLs

New Solutions to Help Recover NPLsNew Solutions to Help Recover NPLs

Parliamentarians have offered a new mechanism through which commercial banks and credit institutions would be able to recover their rising non-performing loans (NPLs).

On Tuesday, Majlis deputies held a session reviewing a bill that seeks to remove obstacles hindering production in Iran and provide financing for manufacturing units. They approved a note indicating that the banks will be required to proceed according to either of the following methods to recover part of their NPLs, which is estimated at 820 trillion rials ($30 billion at official exchange rate), though some unofficial reports suggest that the sum is twice the officially estimated amount.

First, on request of debtors, and with the assistance of Iran Fara Bourse or an official judiciary expert, lenders which have provided loans are allowed to set prices for the debtor’s assets. Portions of the assets can then be put to auction to recover the debts, IRNA reported.

If the first solution does not prove viable, banks and credit institutions can then settle the debts, through certain procedures, selling off portions of the insolvent’s collateral.  

 Surging Amounts

Debts held by the private sector to the banking system have escalated by 53% during the past two years: the amounts of loans provided to the private sector have surged by 2 quadrillion rials ($74 billion) and reached 5.41 quadrillion rials ($200 billion), according to the Central Bank of Iran (CBI).

Government debt to the banking sector has also grown by 7% standing at 920 trillion rials ($34 billion) during the first six months of the fiscal year (March 21-September 22). State-owned companies owe 20 trillion rials of the total amounts and the rest is owed by the government itself.

Discrepancies are widespread in the banking system regarding the amount. One such case surfaced in May, when the minister of economic affairs and finance, Ali Tayebnia, announced that the amount of commercial banks’ NPLs is 1.5 quadrillion rials: nearly double the amount reported by CBI deputy governor in the same month; the statement was however later retracted by the minister and the announced amount reduced to 80 trillion rials.

Top presidential Advisor Akbar Torkan commented in August that the actual amount for bank NPLs is double the official number and stands at roughly 1.64 quadrillion rials.

In addition to rescheduling due dates on loans to make records healthier, “lenders give debtors new loans with which they can repay the previous loan,” said Torkan adding that if this legal loophole was invalidated, the loans would have to be written off as losses.

Even if the least of the estimates is factual, it could still create havoc within the financial system.

As losses incurred will surpass the value of banks’ capitals and lenders will be left with no option but to file for bankruptcy.