Banks will probably lower interest rates before the fiscal year is out on March 19, following the recent reduction in interbank rates, the Central Bank of Iran vice-governor said late Saturday.
“The issue is being debated at the CBI's Money and Credit Council and banks are expected to cut deposit rates sooner rather than later,” Ali Akbar Komeijani said in an interview with the state TV.
Banks had earlier announced that they are prepared to cut deposit rates to 18%. However, the CBI preferred to bring the rates down through the interbank market and not through official decree – a disputed norm in the past. The CBI managed to cut interbank lending rates from 29% to 19% at the start of the fiscal year last March.
President Hassan Rouhani said Saturday the high deposit/lending rates are hurting the economy, but rejected the possibility of imposing new rate cuts. “Rates should be lowered through (workable) economic strategy and market mechanisms,” he told a meeting of senior bankers in Tehran.
The MCC lowered the interest rate in April from 22% to 20% to encourage business lending and boost economic activity, arguing that the inflation rate had declined significantly after Rouhani won the presidential election in 2013 on a platform to end the international sanctions, curb the hyperinflation, create jobs and improve the sputtering business climate with the help of decent growth rates.
Komeijani referred to the CBI plan to bring down interest rates to make it compatible with the inflation rate and said, “CBI measures to move toward the climate needed for rate cuts will come into effect in the next six months.”
Banks are mostly offering deposit rates at the authorized 20%, although some violations have been seen, he added.
The official also pointed to the government and CBI bid to lower banks’ reserve requirements ratio first unveiled in October 2015, and said, “This would prompt banks to respect the CBI-mandated rules and regulations.”
Unveiled as a part of the government’s stimulus package, the plan included a cut in banks' reserve requirements, based on their performance and law-abiding behavior. The measure also aimed to help increase liquidity of banks, lower deposit rates and raise the working capital of banks. The measure is also hoped to reduce banks' competition to attract more customers by offering exorbitant deposit rates.
“A total of 51 trillion rials ($1.69 billion) has been released through the cut in banks’ reserve requirements. An estimated 31 trillion rials ($1.27 billion) has been returned to banks and the remaining 20 trillion rials ($662.8 million) has been used to repay a part of their debt to the CBI,” Komeijani said.
Stressed assets and bad debts of banks have been reduced to 950 trillion rials ($31.4 billion), down to 12.5% of their total resources from the previous 18%.
Komeijani pointed to the domestic economy’s overreliance on banks and said, “Banks finance 90% of the country's economy.”
Reflecting on the ballooning soured assets and restructured loans of Iranian lenders, he said, “The government and private firms owe 1.1 quadrillion rials ($36.4 billion) and 950 trillion rials ($31.4 billion) to the banking sector. This has indeed undermined the normal functioning of the banking industry.”
CBI Notice
Meanwhile, on Saturday the CBI issued a directive calling on domestic banks to adhere to the official interest rates.
The directive warns against violating the official rates, stating that “flouting the official interest rates will wreak havoc on all economic sectors and also hurt the social fabric.”
It recalls that "banks are economic players who have a close and comprehensive communication link to the social strata, state organizations and businesses. This (reality) exposes the banking industry to the court of public opinion and makes quickly reveals errors and failures.”
It further adds that the Money and Credit Council as the top monetary policymaking body has authorized certain interest rates which should be watched closely by lenders.
“The decline in inflation rate and the CBI’s efforts in the interbank market to resolve the problem of credit crunch have prepared the way for lowering rates. Thus, a downward trend in interest rates seems certain and inevitable,” the regulator said.
