Cost of Money Declines 1.5% in Iran

EghtesadOnline: The cost of money has declined up to 1.5% following a government decision to scrap the overnight interest rate policy on deposits in January, head of the Association of Private Banks and Credit Institutions said.

News ID: ۷۴۸۱۱۷

10 August 2019

Kourosh Parvizian, also chief of Parsian Bank, said lenders are trying to further reduce the cost.

He spoke of a proposed package by lenders to the CBI that helps lenders cut the costs.

“The Central Bank of Iran is mulling a plan to reduce legal reserves of lenders,” Fars News Agency quoted him as saying.

The legal deposit ratio currently varies from 10% to 12% for most banks, Financial Tribune reported.

Cost of money it is the rate of interest or dividend payment on borrowed capital. Cost of money changes with variance in interest rates, and is used to gauge the opportunity costs involved in the potential investment of that money in securities or other assets.

Legal reserves are the minimum amount of money that financial institutions (banks, credit unions and insurance companies) are required by law to keep as security, usually with central banks. It cannot be used to pay depositors.

According to a recent CBI report, banks and credit institutions had a total of 20,825 trillion rials ($173 billion) in deposits at the end of the first calendar month to April 20.

The figure indicates 24.2% growth compared to the same period last year (March 21- April 20, 2018) and 0.7% increase compared to the end of the previous fiscal year (March 20, 2019).

Parvizian said lenders are struggling to reduce the ratio due to costs involved in parking large deposits in banks.

Apart from cost of money, lenders have also to bear the cost of deposit insurance, he added.

The banker reiterated that lenders abide by CBI rules, particularly rules pertaining to interest rates.

“In line with CBI policy, lenders pay 20% in interest on [long-term] deposits,” he said.

Last December, the Money and Credit Council - a CBI-affiliated major decision-making body - approved a rule that obliged banks and credit institutions to pay interest on deposits on a monthly basis with minimum balance in a month as base.

The rule says that interest rates per se are unchanged and only the mechanism has shifted from overnight to monthly.

It emphasizes that the minimum balance in a month will be the basis for calculating interest – an issue opponents of the rule say is discouraging and a major drawback.

In the past, banks calculated the overnight interest for the average amount in short-term accounts and paid customers at the end of the month.

Impact on Markets

The move was partly in line with CBI efforts to curb speculative activities that hurt the forex market last summer. It was also enforced, in part, to decrease the lenders’ costs.

In addition, the CBI pursued the aim of prolonging the duration money is kept with banks by encouraging depositors to turn their short-term accounts into long-term deposits. By extension, this would help in curbing the liquidity explosion that has become a fixed and troubling feature of the economy struggling for more reasons than one.

A quick glance at one past measure should help better understand the impact of the CBI rule on markets and the harmful speculation by investors.

In the past, customers used to park money in short-term accounts which yielded double benefit. Not only would their capital not be blocked (as was seen in some yearly accounts), they could withdraw money at their wish and whim and earn interest on the remainder of the deposit(s).

Under the circumstances, opportunists and avaricious currency dealers used to withdrew money from their short-term accounts and inject it into the volatile forex market, especially when the temptations of making a quick buck were high.