Central Bank of Iran Ties Lending to Rating Report

EghtesadOnline: In a directive to banks and credit institutions, the Central Bank of Iran has obliged borrowers to submit credit rating reports from relevant rating companies.

News ID: ۷۴۸۵۴۳

25 September 2019

As per the bylaw, lenders must accept the rating letters issued only by a CBI-authorized company.

Regarding the financial strength of rating companies, the CBI has set a minimum capital of 500 billion rials.

The measure is said to be in line with the regulator’s oft-mentioned plan to reform the banking sector. As such, the latest move will likely tighten conditions on borrowers to receive loans, Financial Tribune reported.

Despite the new responsibility on borrowers to submit credibility verification for loans, the CBI still holds lenders accountable for ensuring the eligibility and qualifications of loan applicants.

The measure should partly appease public concerns about some banks’ visible negligence toward sufficient credibility checks and demanding collateral before lending unusually large amounts to tycoons and people with high connections.

In the absence of robust banking oversight, some banks have reportedly paid hefty loans in recent years without proper checks, controls and collateral, an issue that has led to the ever-growing mountain of bad debts and crippled bank credits to businesses in need.

Army of Defaulters

The issue has gained traction as an increasing number of big borrowers defaulting on their debt have led to the emergence of sick banks and accumulation of billions of dollars in impaired loans over the past three decades.

The unprecedented bad loans are largely due to nepotism, fraud, mismanagement and lack of oversight vis-à-vis lending institutions, private and state-owned.

In a similar move, the Majlis Economic Commission in August announced a plan to uphold long-awaited transparency in the lethargic banking system.

Elias Hazrati, chairman of the commission, said MPs are working on a bill that will (if approved) allow the people to have access to sensitive data about processes involved in granting big loans.

“It will focus mainly on bank loans, forestall distortion of banking resources and dismantle corruption,” IBENA quoted the lawmaker as saying.

The promised plan makes it possible for the people to monitor all the processes involved in lending big money, namely the actual amounts paid and reason(s) for borrowing.

Non-performing loans are one of the main problems undermining the dysfunctional banking industry that has choked off credit to struggling manufactures and commercial companies.

A report by the Majlis Research Center, an influential parliamentary think tank, in May 2018  said about 60% of the total volume of NPLs will "unlikely be cleared", which is the worst kind of bad loans.