Iran financial reforms challenge vs. banking debts
Baku, Azerbaijan, June 11
By Farhad Daneshvar, Dalga Khatinoglu - Trend:
While international monetary bodies have urged for restructuring Iranian banks to help lower real interest rates and stimulate credit to the economy, concerns over the performance of Iran's banking system appear to grow.
The International Monetary Fund (IMF) and World Bank have voiced the need for restructuring the Islamic Republic's banking system as Iran reintegrates into the global economy following the implementation of the Joint Comprehensive Plan of Action (JCPOA) Jan.16.
Reintegration into the global economy requires Iranian monetary officials to plan restructuring the banking system at both, their operational level and their high level of nonperforming loans. The Islamic Parliament Research Centre, earlier this week, after considering the state of the balance sheets, liquidity and banking regulatory in Iran, announced that most of the banks in the country are in a poor situation and are on the verge of bankruptcy.
Downplaying the parliamentary research center's report, Esmaeel Lalehgani, Vice Chairman and Managing Director at Bank Saderat Iran, has said that the country enjoys a strong banking structure and the banking system is not on the verge of bankruptcy.
Esmaeel Lalehgani, however, confirmed that there are some shortcomings in the country's banking system regarding the government's debts, low capital and overdue debts.
Meanwhile, Central bank of Iran (CBI) has earlier announced that there are 7,333 credit institutions in the country of which about 6,000 are unauthorized, disabling the country's regulatory authority, Central Bank of monitoring and regulating a large area of Iran's money market.
According to the CBI, the unauthorized credit institutions hold around 20 percent of the country's liquidity.
In the meantime, Iranian government's debt to the country's banks amounts to about $38.3 billion (1,170 trillion rials converted to USD according to official rate on June 11). On the other hand, the government's debt to the central bank stands at $8.2 billion (250 trillion rials).
The Islamic Parliament Research Centre has also touched upon Iranian government's outstanding debt to the country's banking system suggesting the volume of government's debts increased by five folds in a period of almost five years between March 2010 and the first half of 2015.
The parliamentary body's report, furthermore, notes that the private sector's debt to the banking system in the same period increased by three times.
This is while the central bank earlier speculated that the debtors are very likely to fail to settle about 64% of the total sum (600 trillion rials about $19.6 billion), 84 percent of the total capital of banks.
Coming to banking interest rates in Iran, it is notable that a large part of liquidity goes to deposit account holders.
While higher interest rates inflict harm to the industrial sector, the country's banks on average pay about $134.5 million (4,100 billion rials) to the account holders on daily basis.
Given the high rate of banking interests in Iran, it appears that people tend to keep their assets in deposit accounts, as banking interest rates are higher than the annual income from investment in the country's industrial sector.
According to Valiollah Seif, the governor of Iran's Central Bank, the interbank interest rate in the Islamic Republic of Iran has been set at 17 percent.
Although Iranian bankers in a mid-February meeting decided to cut the annual interest rate by 2 percent from 20 to 18 percent, industrial officials urge for further lowering of interest rates as the rate of return from investment in the country's industrial sector is only eight percent.
Looking at the situation today there are numerous facts that lead monetary officials in Iran to mull over the First Deputy Managing Director of the IMF David Lipton's mid-May call for restructuring the country's banking system.