CBI: No-Nonsense Approach to Banks

In a meeting with senior CBI managers marking Nawrouz -- the Persian New Year -- Salehabadi said changes would impact several sectors. 

“The reforms will focus mainly on financial discipline of lenders and controlling the monetary base,” he was quoted as saying by the CBI public relations website.

He stressed the need for reinventing the government’s financial relations with the CBI, the CBI’s interaction with commercial banks and lenders’ dealings with customers. 

“The reforms are pivoted around revising these relations,” he said, noting that the reform would help lead to “positive developments” in the economy. 

Reorienting the government’s ties to the CBI and banks, the senior official was implying that the Raisi administration should avoid the controversial policies of its predecessors in borrowing from the CBI to cover budget deficits or order banks to lend beyond their ability and capacity. 

Flawed fiscal policies in recent years have resulted in the explosion of money supply and by extension chronic inflation. Recent CBI data show broad money supply increased to 46,241 trillion rials ($174 billion) up until Feb.19 -- 39.7% higher on an annualized basis. 

Academia and economists blame the overexpansion of money supply on the deep economic ills that compel governments to meet part of the budgetary needs by borrowing from the CBI. 

The senior banker underscored the much-needed need to amend the CBI’s relations with banks. The regulator has often called on lenders to stop begging from the CBI to adjust their balance sheets.  It wants banks to have a robust control over deposits and lending and improve their balance sheets.

Targeted Lending

In a talk bank CEOs, the CBI boss issued instructions to, among other things, help “boost domestic production, expand lending, increase employment and support the knowledge economy.”

Salehabadi again told banks to ease the cumbersome process of granting microloans by focusing more on the credibility of customers and less on collateral. 

In addition, lending must be targeted primarily to fund production companies keeping the army of non-productive sectors at bay.  

To this end, CBI has diversified financial instruments and  initiated supply chain finance (SCF) methods to limit direct borrowing from banks and encourage manufacturers to use credit instruments instead.  

The SCF is a set of solutions that aim to lower financing costs by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this paradigm, buyers agree to approve supplier invoices for financing by a bank or other outside financier.

Banks are required to pay special attention to their balance sheets and avoid operations that lead to shortage of liquidity. They are not allowed to ask the CBI for funds unless they can put up “strong collateral” namely gold, bonds and foreign currency.  

The CBI says it has controlled banks’ excessive borrowing from the CBI in the past two years partly via open market operations (OMO). 

The OMO is essentially implemented to control the monetary base and interbank interest rates. Using bonds as collateral to borrow from the CBI is an integral component of this monetary policy. 

In line with measures to restore financial discipline to the banking system, the CBI has imposed tough monetary restrictions on dysfunctional banks as part of efforts to “control money issuance” by banks. 

Economists say overexpansion of broad money is partly thanks to the poor performance of banks. The CBI recently enforced disciplinary measures to control bank balance sheets.  

As per a CBI bylaw, the monthly growth of specialized bank assets must not exceed 2.5% while commercial banks are not allowed to increase assets in their books beyond 2%.