CBI: Shadow Banks on the Way Out

Illegal credit institutions that mushroomed during the tenure of the former administration and whose malevolent effects continue to dog the country’s financial system are on their way out, the governor of the Central Bank of Iran announced.  

“With the agreements reached with Tejarat Bank, Bank Ayandeh and Melal Credit Institution, they have respectively agreed to manage the assets and debts of (uncertified) Alborz Iranian, Afzal Tous and Vahdat Arman credit institutions,” Valiollah Seif was quoted as saying by CBI’s official news website.

According to the CBI governor, the volume of assets and debts of these institutions is being assessed and compensating shortfalls will be the responsibility of the founders and officials of these companies.

Earlier, in response to increasing pressure from the parliament, angry depositors and the media, Seif and other top CBI officials had promised that no trace of the shadow banks would be left in the market by the end of the current fiscal year in March 2018.

The illegal credit institutions used to hold more than a quarter of the country’s liquidity that has now been brought down to below 10%.

 Changes to Bankruptcy Law

The CBI chief has called for revising articles of Trade Law related to bankruptcy with the goal of reducing the non-performing loans of banking system.

“The parliament must reform the Trade Law and the judiciary must increase its cooperation with CBI in regards with issuing bankruptcy rulings for debtors to the banking system so that they do not take advantage of the bankruptcy option to dodge their debt repayments,” he said.

“These measures, coupled with creating a formidable framework for the allocation of loans by banks, would work in line with preventing the formation of future bad debts.”

At present, a significant portion of the lenders’ resources have been locked in the form of NPLs, as hundreds of thousands of people and businesses were allowed to borrow almost without any form of concrete supervision during the tenure of former successive governments.

This has prompted the incumbent administration to introduce a loan penalty waiver scheme in several phases that is making progress, but is far from recovering a meaningful portion of NPLs.

Seif, who was speaking at a joint event with chief executives of banks and representatives of the parliament and the judiciary held for the purpose of fighting NPLs, advised the CEOs to focus on turning their assets into liquidity.

“A lack of attention to this principle would lead to no result other than the formation of a bubble in the balance sheets of banks,” he added.

Ezzatollah Yousefian Molla, a lawmaker and member of the Office for Combating Economic Corruption, referred to the progress made in reducing non-performing loans, saying their ratio has declined from 14% to 11%.

“The important part is that a majority of the debts have been recovered through negotiations and no use of force had been necessary,” he said.

The MP echoed Seif’s view by saying that with the elimination of faulty regulations on bankruptcy declaration and in cooperation with the central bank, the ratio of NPLs will continue to fall and reach a minimum within two years.

Peyman Nouri, the economic deputy for the country’s prosecutor general, commended the banking system for its active role in the past few years, saying that in spite of rumors and criticisms against the lenders, they still provide more than 90% of the credit required by production units.

He stressed that “bank debtors” who are unable to repay their debts in full as a result of genuine bankruptcy and “bank offenders” who look to bypass the law using loopholes and pretend to be bankrupt must be treated differently. Nouri supported further changes in Trade Law, saying that a number of measures have been taken so far that have reduced fake bankruptcies.

At the end, the central bank presented its report on the damaging effects of major bankruptcy cases for the banking system and it was decreed that similar meetings should be held more frequently.

It was decided that a bill be devised with the goal of amending the Trade Law such that before any ruling is passed regarding a bankruptcy, the banking system should be notified and would have the right to object to the eventual outcome.