Effective Reserve Requirement at 2.1%

EghtesadOnline: While the average ratio of compliant banks' reserve requirements stood at 10.3% for the previous Iranian year to March 20, 2017, the more important figure is lenders' effective reserve requirement that did not exceed 2.1% during the same period, the head of Central Bank of Iran's Economic Office said.

News ID: ۷۷۷۹۱۲

25 July 2017

Seeking to increase liquidity in the banking sector, lower deposit rates and raise banks' resources, CBI agreed to reduce the ratio of compliant banks' reserve requirements, leading to the 10.3% average ratio.

"The effective reserve requirement ratio is calculated by reducing banks' debts to CBI from their deposited reserve requirement and the low ratio for the previous year shows that CBI has shown banks its utmost cooperation to increase their lending power and resolve monetary market issues," Abolfazl Akrami was also quoted as saying by CBI's official website.

The official noted that CBI considers reserve requirements as a precautionary measure that pursues two major goals: The first goal is to protect banks' depositors in case of a banking crisis or bankruptcy and the second is to control the volume of liquidity in line with monetary policies, Financial Tribune reported.

In April, 2015, the Money and Credit Council–a decision-making body–agreed to cut the reserve requirement ratio by 0.5% to 13% for both private and state-owned commercial banks and credit institutions. The rate, however, remained unchanged at 10% for specialized banks and branches of commercial banks located in free trade zones.

The policy to reduce reserve requirements was supposed to act as an expansionary monetary tool to pump more liquidity into the economy beset by a long and painful recession and boost banks' lending power.

Akrami explained that as per Clause 3 of Article 14 of the Monetary and Banking Law approved in 1972, banks are obligated to deposit between 10% and 30% of their resources, especially those that were absorbed from the people, at the central bank.

"Taking a look at changes in banks' reserve requirements over the years indicates that CBI has been really flexible regarding the matter," he added.

The CBI official noted that in many countries, banks and credit institutions have to keep a portion of their deposits in their central banks as reserve requirements. However, as time passed by, the tendency of using reserve requirements as a disciplinary tool in developed countries waned and central banks focused on precautionary and supervisory indicators like raising the capital adequacy ratio from 8% to 12%.

But since the usual international monetary tools do not comply with Iran's Usury Free Banking Law, CBI uses reserve requirements to control the monetary market and devise bank loan policies.

"CBI has determined the reserve requirement ratio of specialized banks at its lowest legal limit of 10% and the ratio for disciplined commercial banks was also repeatedly cutm which currently stands between 10% and 13%," he said.

"In order to help banks and prevent disturbances in people's daily cash supply, CBI considers 2% of banks' money in ATMs and banks' vaults as reserve requirement."

Akrami noted that CBI, as a governing body and a major monetary policymaker, never uses reserve requirement resources for profit and uses them as a precautionary tool to protect banks' depositors and control the market.