$6.3 Billion Reduction in Iranian Banks' NPLs

Banks have recovered 203 trillion rials ($6.3 billion) of their non-performing loans during the past three years,” said Gholamreza Malekshoar, head of Central Bank of Iran’s Office for Banking Information.  The “achievement” was possible thanks to the collaboration between the judiciary and financial authorities.   

“Non-performing loans in the banking sector stands at 870 trillion rials ($27.1 billion). The recovery of 22% of the amount is highly significant considering the current economic conditions, but it is not enough and more effort is needed for reducing the NPLs,” he said in an interview with Financial Tribune’s sister publication, the weekly Tejarat-e-Farda.

“Banks and debtors reached a settlement on a considerable portion of the bad loans and in some cases debts were recovered with the help of the judiciary,” he noted.    

“The judiciary helped banks receive 70.2 trillion rials ($2.19 billion) of the distressed loans in the last fiscal year (ended in March),” he said. “The [recovery] amount was 61 trillion rials ($1.9 billion) and 70 trillion rials in the two previous years.”

The high and rising stressed assets in recent years have seriously undermined the normal functioning of lenders and other financial intuitions.

Last week, Valiollah Seif, the CBI said the government had managed to reduce non-performing loans of banks from 15% three years ago to 11%.  

The volume is expected to be reduced further to less than 5% in the next fiscal year.

According to Malekshoar the total volume of NPLs in the banking sector has been reduced by 1.2% compared to last year.

The central bank chief says recovering the “heftier loans is a major challenge” for banks in their effort to reduce the sour assets. “However, small loans are usually recovered in a timely manner.”

The CBI holds weekly sessions in the presence of representatives from relevant bodies to take the necessary measures to recover bad loans, Malekshoar said.

“The CBI is strict in dealing with debtors who have no intention of repaying what they owe. But, the CBI will be flexible with debtors willing to repay but are struggling with financial difficulties.”

  In Search of Lost Credit

Last week, Vice President Eshaq Jahangiri said that the government will compel major debtors to settle their debts to banks. He did not say how.

In the past decade, bankers were under strong government pressure to allocate subsidized loans to certain individuals and companies that harmed the procedure of evaluating loan applicants and their credibility. As a result, the volume of non-financial assets started to rise in the banking sector. Recession in the property market made a bad situation worse.

Due to mounting financial pressure on banks and businesses, many borrowers decided not to repay. Some big borrowers even preferred to pay fines for defaulting because taking out new loans would be more costly.

Malekshoar believes that lack of efficient oversight over banks, their  inability to assess applicants’ creditworthiness, and inefficient collateralization of the loans are the main reasons for the surge in  NPLs.

“The CBI has enhanced the mechanism of supervising lenders in recent years. The Banking Overhaul Plan includes [proper] measures for managing bad debts.”

The banking overhaul plan was enacted by President Hassan Rouhani with the aim of reviving the lethargic banking system. The blueprint has been hailed by monetary officials as a giant step in modernizing the outdated banking system and addressing its many challenges.

Having an active presence in the interbank market, lowering law-abiding banks’ capital requirements as an incentive, rating lenders based on performance and keeping a closer watch on troubled banks are among key measures included in the banking overhaul plan for lowering the bulk of troubled assets, according to Peyman Qorbani, the CBI deputy for economic affairs.