MRC Finds Flaws in Banks

EghtesadOnline: The Majlis Research Center has looked into the performance of banks in the first quarter of the current fiscal year (March 20- June 21).

News ID: ۷۵۱۶۹۲

12 December 2020

It covers, among other things, issues related to transparency and disclosure of financial information, credit risks, profits and   the mountain of non-performing loans.

Regarding financial conduct, the parliamentary think-tank said the capital account of banks and credit institutions was negative at -620 trillion rials ($2.4 billion) in Q1 reflecting weak balance sheets.

Capital account keeps track of net change in assets and liabilities in a year. Flows in and out of the capital account represent changes in asset value through investments, loans and property value.

"Such volatility in balance of payments is unprecedented". All banks, however, were not found to be deep into the red.

Only specialized state lenders had positive capital account balances. With 700 trillion rials ($2.8b) in the red non-government banks had the biggest share in weak balance sheets.

In particular, the think tank singled out Sarmayeh Bank, Shahr Bank, Iran Zamin Bank and Post Bank of Iran as lenders with the biggest negative balance sheets and "whose assets are less than their debts".

Banks performed poorly in reducing dependence on the CBI for credit. Bucking a one-year declining trend, banks' debt to the CBI grew by 25 trillion rials ($100 million) in Q1. This was despite the fact that in the same period most banks had claimed that they had sufficient liquidity.

MRC said some "unhealthy" banks who didn’t access the interbank market are accountable for the increase in lenders debt to the CBI. "When in need of liquidity, they have no option but to borrow from the CBI even if other banks had excess liquidity," the MRC's report read.

Transparency

The prominent research center highlighted the "untenable status" of banks in terms of transparency and disseminating information.

It pointed to the role of transparency in preventing lenders from engaging in "risky activities". "Disclosing information increase the cost of violating rules.”

Banks with weak financial performance and those that are not listed with the stock market largely refused to open their books.

As per rules, lenders listed on the stock market are obliged to regularly publish information about their companies at Codal website, an information platform for publishing key stock market data and listed companies.

According to the MRC, total non-performing loans of banks and credit institutions amounted to 2,130 trillion rials ($8.5b) at the end of Q1, up 19.5% compared to the previous quarter.

NPL ratio was 12.7% in Q1 or 1 percentage point higher than the previous quarter. NPL ratio, is the ratio of the amount of nonperforming loans in a bank's loan portfolio to the total amount of its outstanding loans. The ratio measures the effectiveness of a bank in repayment on its loans.

The NPL ratio in Iran is way higher than the global average where it is mostly in single digits and usually around 4%.

Ambiguity

With regard to profit-making, the MRC pointed to the lack of unambiguous reporting about lenders' business deals to the CBI. It used reports published on the Codal website to analyze performance or the lack of it.

Banks revenue from interest on loans is considered the main income source. However, revenue from granting loans was not enough to offset other expenses such as paying interest on customers' deposits and other financial expenses.  As a result, banks piled up losses to the tune of 59 trillion rials ($230m) in Q1.

Iran’s economy suffered from one of the most staggering amounts in money supply expansion in Q1. Broad money supply reached 26,571.7 trillion rials ($106 billion) by June 21, indicating 34.2% growth compared to the same period last year. On a quarterly basis it grew by 7.5%.

The share of money (M1) was 5,020 trillion rials ($20b) by June 21, indicating 61.5% growth on year-on-year basis. M1 also increased by 17.5% in Q1.

The monetary base grew by 8.6% in the three months ending June 21, the highest in the past 10 years. MRC said this setback  was due mainly to increase in the net value of government debt to the CBI and net value of the CBI's foreign assets.

Total assets of banks, including foreign assets plus government and non-government debt to lenders, reached 56,294.7 trillion rials by the end the Q1, up 29.3% compared to the same period a year before.

Banks had more than 12,586.4 trillion rials in foreign assets, indicating 36.1% growth on year-on-year basis. Assets grew 8.7% in Q1.