Lawmakers, Bank CEOs Will Discuss Interest Rate Cuts

EghtesadOnline: A top parliamentary economic commission will soon hold a joint session with CEOs of banks to brainstorm and decide new bank interest rates, announced the head of the commission.

News ID: ۷۴۳۱۱۹

01 August 2017

"The government and the parliament are striving to reduce bank interest rates since doing so is an unavoidable necessity for the Iranian economy. That's why a joint session will be held between Majlis Economic Commission and the chief executives of state-owned banks next week," Mohammad Reza Pour-Ebrahimi told ICANA, the official news outlet of the parliament.

According to Pour-Ebrahimi, the meeting’s objective will be to “come to an agreement on ways of decreasing the interest rates for deposits”.

Noting that businesses cannot repay their loans with interest rates that at times go up to 30%, the official stressed that the banks should not pay interests of up to 25% on deposits, as some have done, Financial Tribune reported.

“That’s why deposit rates must come down and have been prioritized, while the next step will be to decrease the interest rates on loans,” he added.

The commission chief pointed out that by bringing the deposit rates down, “we could shrink the interests on loans to 16% and then move to gradually bring them down further”.

At present, as per an agreement between the CEOs of banks and a subsequent directive by the Money and Credit Council last year, deposit rates have been officially set at 15% while interest rates stand at 18%. However, various factors such as the credit crunch in the banking system have forced lenders to operate at much higher rates.

Commenting on the adverse effects of high rates, Pour-Ebrahimi said it is “meaningless” to have deposit rates of 20% and interest rates of 25-30% when the inflation rate circles around 10%.

“This puts pressures on manufacturers from two sides as they are prohibited from increasing their prices because of price-suppressing government policies to combat inflation while they have to pay high interests on their loans at the same time,” he added.

As the MP said, it would be to the detriment of the nation, should the inflation rates rise, so decreasing the interest rates is the only way to go.

However, the government has so far been unable to meaningfully bring them down and has faced “vacuums” which Pour-Ebrahimi links to the operations of illegal credit institutions in the informal money market.

In the past few months, Pour-Ebrahimi has spearheaded an unprecedented entry of the parliament to the longstanding case of illegal credit institutions that spawned during the tenure of the former administration.

While the Central Bank of Iran has promised that no trace of shadow banks will be left in the market by the end of the current fiscal year in March 2018, the commission has said it might invoke an article of the law to make the central bank accountable to the judiciary.

Uncertified credit institutions used to command at least 25% of the country’s liquidity, as thousands of people had been attracted to their high interest rates and had made deposits with them.

However, CBI Governor Valiollah Seif announced in late June that their share of the liquidity has dropped below 10%.

Coordination for Rate Cuts

A member of the board of directors of the Tehran Chamber of Commerce, Industries, Mines and Agriculture noted that MCC and the central bank alone do not have the power to decrease the rates themselves and the dilemma requires teamwork.

“MCC is not capable of exerting oversight on the implementation of its directives, so to reduce the interest rates, the Ministry of Economic Affairs and Finance, the Ministry of Industries, Mining and Trade and the parliament must cooperate with CBI,” Hamed Vahedi also told IBENA.

“The banking system was significantly limited as a result of sanctions for years, creating a severe indebtedness of state-owned and private sectors to banks.”

The official noted that lenders are still battling the repercussions of what was done by the former government, namely a hefty credit crunch and the piling up of non-performing loans.

“If the central bank is given greater independence, many of the problems in the banking system will be alleviated,” Vahedi concluded.