Reasons for bad loan cases piling up in Iran

Photo: Reasons for bad loan cases piling up in Iran / Economy news

Azerbaijan, Baku, Dec. 7 /Trend/

Trend Commentator Tamkin Jafarov

Today, Iran's banking system, day by day is sinking in bad loans, that seem to continue to pile up, as the time goes on.

The "Ticarete Farda" newspaper recently reported that after Mahmoud Ahmadinejad became president in 2005, the amount of bad loans rose by $57 billion in the last 7,5 years.

The newspaper compared the huge difference, as the same 7 percent increase in the outstanding receivables amount Iranian banking system witnessed only in 76 years previously.

"Ticarete Farda" reported that during the last Iranian year (March 2011-March 2012), the amount of outstanding receivables increased by 19 percent.

Iran's parliament last year issued a report on the reasons of increased number of bad loans to Iranian banks. According to a report, the problems with bad loans exist both inside and outside of Iran's banking system.

Regarding the problems inside the banking system of Iran, one of them is that the banking system is granting withdrawals of sums of money to government for establishing a quick impact business projects.

Quick Impact Projects (QIPs) are short-term, small-scale initiatives designed to deliver an immediate impact and make a critical contribution to stabilization.

Khabar Online website recently brought up Iranian Central Banks' statistics, reporting in November, that government's debt to the banking system has seen a sharp increase in the last three years, as the mount reached $38,3 billion (by the official USD rate in Iran) of the before mentioned $57 billion.

Khabar online reported that since June of 2008 to June 2009, government's debt has risen by $5 billion, and later somewhere in 2011-2012 it has already increased by $12 billion.

Other "inside problems" include the willingness of Iranian banks to grant long-term loans from short-term deposits, and inability to monitor and manage the given loans on the previous year transaction archives.

Speaking of the factors that affect Iran's banking system from the outside, one of the major ones is the impact of international sanctions on Iran's economy and banking sector.

Minor Iranian banks are also in debt to Iran's Central Bank, as it has reached 370 trillion rials (some $30 billion) in the first quarter of the past calendar year.

Debts of commercial banks and specialized banks amounted to 136 trillion rials and 239 trillion rials, respectively.

The total debts of banks to the central bank hit 168 trillion rials, 231 trillion rials and 135 trillion rials respectively in three to five years ago.

At the start of 2012, the U.S. and its European allies imposed sanctions on Iran's oil and financial sectors with the goal of preventing other countries from purchasing Iranian oil and conducting transactions with the Central Bank of Iran.

On October 15, the EU foreign ministers reached an agreement on imposing another round of sanctions on Iran.

The embargoes followed suspicions that Iran is pursuing non-civilian objectives in its nuclear energy program, which Tehran has strongly rejected.

Iran argues that as a signatory to Non-Proliferation Treaty and a member of International Atomic Energy Agency, it is entitled to develop and acquire nuclear technology for peaceful purposes.

Because of international sanctions, Iranian banks have problems with opening a letter of credit, which is another reason for people and companies being late on paying their debts.

Letters of credit are often used in international transactions to ensure that payment will be received. The bank also acts on behalf of the buyer (holder of a letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

Other outside problems include inflation volatility, currency exchange rate fluctuations, domestic and international economic and political developments, and the other factors.

According to Iranian media outlets, there currently are some 7,2 million cases related to bad loans in Iran. This shows, that the bad loans are one of the most alarming problems that Iran is currently facing.

Iran's Minister of Industry, Trade and Mines Mehdi Ghazanfari said in November that the current situation in the country is a signal that Iran's Central Bank is not able to fully meet the country's requirements in currency.

In the last couple years, Iran has implemented selling bonds and stock futures to people, in order to secure the investment flow into the country.

S. Isayev contributed to this report.

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