ICCIMA Says CBI Policies Are Hurting Production

In letters to the governor of Central Bank of Iran and the ministers of economy and industries, Gholamhossein Shafei said that the CBI’s disproportionate protections imposed on banks must end sooner rather than later, the chamber website reported. 

He was referring to a decision by the Money and Credit Council, the top banking and decision-making body, in December 2020, and a subsequent CBI bylaw, to enforce “precautionary measures to control the expansion of bank balance sheets and minimize banking risks”. 

The bylaw was in limbo for a year but it was put into force by the CBI in December. 

“Since enforcement of the bylaw, banks have either stopped lending to production companies or significantly cut lending.”

The loans, Shafei stressed, are simply not adequate to meet the high and rising financial needs of businesses under the present difficult economic conditions and runaway inflation. He recalled that on the eve of the Nowruz, the Iranian New Year, next month, companies must also procure extra funds to pay the annual bonus. 

Citing heads of special commissions within ICCIMA, he said the issue is a shared concern of most businesses and “all demand an early end” to the unhelpful restrictions imposed by the CBI on bank loans.    

Shafei said that the banking regulator has been asked to make changes in banking policies or at the least suspend the new limits for two months to minimize the harm to business units.  

Precautionary Measures  

The MCC’s precautionary policy allows the CBI to take several approaches toward the expansion of balance sheets of banks and credit institutions, subject to their mission and financial status. 

Accordingly, the CBI can and does impose tough restrictions on the balance sheets of lenders with poor financial performance while well-performing banks are unaffected. 

Restrictions, however, don’t include lenders’ cash holdings, deposit with the CBI, bonds and the likes.  

As per the CBI bylaw, the monthly growth of specialized lenders’ assets should not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets in their balance sheets beyond 2%. 

As per MCC regulations, bank balance sheets are subject to regular monitoring. However, controls do not include all items in the balance sheets. 

The regulator remains sensitive to any abrupt increase in balance sheets resulting from investment in non-bank activities, increase in bank spending, expanding branches or buying fixed assets.

On the flip side, the regulator says it is positive about the increase in the balance sheets resulting from capital increase, buying government bonds, cash reserves and the likes.  The exemption is because they have little or no impact on the money multiplier, which measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.

CBI policy includes limits and caps on reserve requirement of banks to penalize dysfunctional banks as part of efforts to “control money issuance”. 

Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve ratio of banks. 

The central bank can set the rate between 10% and 13%, based on bank law abidance. This means that the regulator reduces the reserve requirement for disciplined banks from 13 to 10%, but there are no cuts for unruly banks. 

In short, the cut in reserve requirements is one disciplinary tool to control lenders.  Until recently, the reserve requirement for majority of banks was below 10%.   

Stringent controls over loans are with the apparent aim of reducing the bulk of bad loans and help banks recover NPLs. Thanks to poor banking supervision, the NPL ratio of Iranian banks is higher compared to many developing and developed countries. 

High NPL ratio has hurt the balance sheets of many banks and forced many to stop lending, despite the chronic funding needs of small businesses, in particular after the coronavirus battered the economy and hit SMEs hard since 2019.