Lending to businesses has rocketed in the past year. Although banks are still suffering from toxic debt, efforts by the central bank seem to have borne some fruit. Not only has lending jumped, but it has also exceeded the central bank’s expectations.
Clients borrowed 3.2 quadrillion rials ($95.2 billion at market exchange rate) from Iran’s commercial lenders during the year that ended March 21. Furthermore, lending jumped by around 35 percent, compared to the previous fiscal year, another winner for the central bank which has been doing its best to raise the lending power of Iran’s banks.
Lending expanded tenfold the three percent estimated GDP growth. But an alarming issue is where the banks got the money for providing these loans. Central bank officials say a large chunk of the money came from the resources borrowed from the central bank. Meaning lenders are forgoing reserve requirements and are getting indebted to the central bank. This poses a risk to the banking system as the borrowing banks would not be able to manage a run on the banks, especially when considering most are in a poor financial state.
At the onset of the last fiscal year, the central bank’s target for commercial lending was 2.4 quadrillion rials. Later in summer, the bank’s governor, Valiollah Seif, said the target had been revised to 2.8 quadrillion rials. That target has now been exceeded by 400 trillion rials.
The problem with the increased lending is that it could upset the fragile downtrend of inflation, something the central bank has worked hard to bring down to below 20 percent for the last fiscal year, compared to a startling 35.7 percent the year before. An increase in inflationary pressures would undo all the new administration has done so far to reverse the damages of the two year recession form spring 2012 to winter 2013.
Iranian banks have traditionally been used as a source of project financing, as Iran has not had a corporate bond market or a functional equity market. The government is trying to change this model, via expanding capital markets and changing lending priorities. But, central bank data shows a change in lending practices. Nearly 60 percent of last year’s lending went companies who needed working capital, a change pushed through by the central bank.
The increased lending coupled with decreasing inflation is partially behind the return of Iran’s economy to growth. But the central bank needs to keep a close eye on inflation, create a systematic plan to reduce toxic debt the banks are contending with, and change lending practices by bringing the entire monetary system under its supervision. For now the bank is headed in the right direction, but the road is dark and full of terror.
