A parliamentarian has called for fundamental reforms in the banking system, as commercial banks have been allocating more than half of their financial resources for non-banking business.
Under the monetary regulations, lenders are allowed to use maximum 40% of their capital for speculative activity, a move that central bank officials initially hoped would help the stressed banking sector out of trouble.
Banking in Iran has come under rising pressure in recent years after sanctions against the country over its nuclear energy program intensified between 2010 and 2012.
Banks have provided heavy collaterals for their subsidiary companies and this increases the default risk if the subsidiaries fail to repay their debt given the dire economic condition, noted Mousareza Servati, a member of the Majlis Planning and Budgetary Commission.
“Banks have so far had no choice but to continue to run their non-banking business to gain more profit in case one of its subsidiaries fail to repay its debt,” Banker news website quoted the lawmaker as saying on Monday.
Servati pointed to the central bank’s recent decision to ban commercial banks from providing loan guarantees for their affiliates, saying the guarantees could raise the systematic risk of the whole banking system and harm the entire financial system.
Moreover, he said under the law recently approved in the parliament to remove barriers to competitive production and improve the financial system, banks need to decrease their subsidiaries by 70% within three years. “That could help them curb non-banking activities in consequence.” he added.
Servati hoped new directives would help discourage banks’ engagement in running business activities.
The MP also noted that banks have been affected by the massive government debt to banks, currently exceeding 1 quadrillion rials ($33 billion at official exchange rate). They also have 840 trillion rials ($28.3 billion) debt to the central bank while at the same time they have to tackle the bad loans, amounting to 850 trillion rials ($28.7 billion), he said.
“This has made them funnel their funds into markets like housing, trade and car leasing, seeking larger return,” he noted, calling for structural reform in banking system and government’s strategies.
To clear its debt, the government has so far transferred the ownership of its companies to commercial banks. But most of these firms are believed to be unprofitable and the properties are not easily cashable due to complicated legal issues while they are all accounted in banks’ investment list, worsening their lending power.
