World Economy

Banking Industry Told to Wake Up

Banking Industry Told to Wake UpBanking Industry Told to Wake Up

As part of the government initiative to help end the economic recession, the minister of industry, mine and trade, Mohammadreza Nematzadeh in a recent meeting with senior bankers made some proposals that should produce results in the short-term. He called on the banks and lending institutions to reduce interest rates on loans extended to non-oil exporters to 6 percent, cut the minimum deposits banks are obliged to hold as per law, and take effective action to recover the $13 billion in forex loans to a variety of big and small enterprises over the past decade.

The proposals indeed could not come at a worse time! As things stand now, production units, miscellaneous manufacturers and exporters are already facing a litany of hurdles when it comes to acquiring loans even at the current high interest rates. By the same token, it has become increasingly difficult, and in some cases impossible, for manufacturers to repay loans they received in hard currency simply because of the huge depreciation of the rial against major foreign currencies, dwindling production, rising costs and overheads emanating from, but not limited to, the western sanctions. Iran is under punitive sanctions because of its nuclear program that the

US and its allies claim is geared to military use. Tehran strongly denies the charge and insists the program is peaceful.

The economic problems of recent years, worsened by the unjust sanctions, have made a bad situation worse by undermining the capacity and potential of manufacturing units. The authorities have time and again warned that most manufacturing units are running at hardly 30-40 percent of their installed capacity, which by extension has led to layoffs and expanded the dole queues. Whether or not implementing the proposals made by the industry minister would help ease end recession, while reducing the pain and suffering of manufacturers and exporters is open to debate. In an article published in the Persian language daily Donya-e-Eghtesad the analysts shared their views on the issue.

  Futile Efforts

Masud Golshirazi, head of the investment and finance commission at the Iran Chamber of Commerce, noted that years of efforts for recovering the loans given during the previous governments from national foreign currency reserves to manufacturers had failed to produce the desired results.  "As per the provisions in the current year's (ends March 2015) budget, the government was mandated to finalize this issue within two months…However as we prepare to wrap up the year there seems to be no forward movement."

Regarding the proposed six percent interest rate on loans to non-oil exporters, he recalled that the current rates offered to both manufacturers and exporters are at or near 21 percent, "with even these high interest rates, loans are hard to obtain."

Head of the investment and finance commission of Tehran's Chamber of Commerce, Muhammad Mehdi Raeiszadeh said meetings on repayment of hard currency loans to the private sector, which has been scheduled for late this month, is a demand also of the debtors. "If the sessions produce the desired outcome, the outstanding amounts will be returned to the banks within six months for investments in other production ventures."

Regarding the need for reducing the minimum deposits in banks, he said the banks on average hold 13.5 percent of the deposits (savings, current a/c, fixed deposit…) "If this volume is reduced, more funds could be made available for production units and businesses."

The chamber official welcomed calls for cutting interest rates on export loans, noting that since most countries offer low interest loans to promote exporters, the move would help create an opportunity for Iranian exporters to better assert themselves in the increasingly tight and competitive global market. "However, the differences in interest rates should be reimbursed by the government."

Deputy head of the industry commission at Iran's Chamber of Commerce, Mostafa Ronasi also supported the said proposal as "constructive" that could help augment overseas business and create renewed interest in the export sector that for long has taken a back seat for a variety of reasons, not the least of which is the poor quality of support from state banks. Citing the oft disregard of rules and regulations by many banks, he urged the government to draft workable and effective rules in collaboration with the banks to ensure timely and efficient implementation.