Reducing the capital adequacy of banks will help boost the lending power of banks rather than increasing their toxic assets, says the CEO of Eghtesad Novin Bank.
“Injecting money into businesses will boost manufacturing, create jobs, reduce bank expenses and encourage them to uphold rules and regulations,” Hussein Motamedi said in an interview with the Persian-language economic weekly Tejarat-e-Farda, a sister publication of the Financial Tribune.
The government recommended the Central Bank of Iran cut reserve requirements of law-abiding banks by up to 3%, in a bid to boost lending, which has contracted in recent years due to a variety of reasons, namely the mountain of soured assets. The initiative was initially publicized in the government’s stimulus package unveiled on October 18.
Elaborating on the potential inflationary impact of the move he said, “It would not abruptly stoke inflation, but can slow down the process of disinflation initiated by the administration.
Injecting liquidity into the “deserving sectors” would have less inflationary effects, as it would boost production and patrols, the private banker said.
Over the past two years, banks have been providing businesses with short-term loans to help improve their working capital and offer better services. “Hence, injecting more capital into the banking sector would not necessarily be a waste of resources.”
“Market and regulatory pressures pushed banks to invest in risky businesses,” he admitted. “Lack of efficient supervision on banks combined with the extended recession in the housing market led to an increase in the stressed assets.”
An estimated 50%-60% of loans are secured against real estate, according to the banker.
Meeting Obligations
In assessing the performance of banks, the CBI monitors their deposit rates, the quality of their cooperation with CBI inspectors and their transparency levels.
However, as a private lender, Motamedi is skeptical about the fairness of CB assessment mechanism. “The CBI should first define the exact weight of each criterion, letting banks know to what extent factors like deposit rates impact its evaluation.”
“In trying to achieve its declared goals, the CBI should be more transparent. This can be turned into a ‘win-win game’ if the banking industry and CBI manage to reach a mutual understanding,” he emphasized.
Motamedi urged the central bank to employ “better tools” in dealing with the key banking sector – levers that “empower the regulator to manage the informal money markets.”
“Law-abiding banks expect the CBI to meet its promises, and if it fails it cannot and should not expect banks’ acquiescence in implementing future policies,” he warned.
Revision
Motamedi urged the CBI to revise monetary and fiscal policies, saying that the present law is half a century old.
According to current regulations, the central bank holds between 10%-30% of banks’ deposits which is a tool for implementing the CBI’s monetary policies as well as protecting customers should the banks fail and falter.
