Iran Banks Scrap Overnight Interest Rates

EghtesadOnline: A new decision approved by the Money and Credit Council obliges banks and credit institutions to pay interest on deposits on a monthly basis, calculating the minimum balance in a month as the basis.

News ID: ۷۸۴۴۲۱

24 December 2018

The Central Bank of Iran sent a directive to banks and credit institutions outlining the details of the decision. It stipulates that the decision will come into force on Jan. 21 and asks lenders to notify customers.

The new rule notes that interest rates per se remain unchanged but only the mechanism has changed from overnight to monthly basis.  It refers to previous bylaws according to which the maximum interest rate for short-term ordinary deposits was 10% and the same will be paid monthly come Jan. 21.

It emphasizes that the minimum balance in a month will be the basis for calculating the interest – a point opponents of the new regulation say is a drawback, Financial Tribune reported.

In the previous procedure banks calculated the overnight interest for the average amount deposited as short-term accounts and paid it to customers at the end of the month.

Banking experts say the MCC and CBI are endeavoring to change the nature of short-term deposits

It merits mention that banks have paid overnight interest rates  for at least two years and calculating interest on a monthly basis goes back to rules in the distant past.

According to IBENA, banking experts say the MCC and CBI are endeavoring to change the nature of short-term deposits. Overnight interest rates actually mean long-term deposits turn into short-term accounts that are not kept long enough with banks. The interpretation this is that the interest that banks pay on such deposits is simply unjustified

Mohammad Reza Jamshidi, head of the Association of Private Banks and Credit Institution, says the move stabilizes interest calculation procedures for short-term deposits.  “This is also to the benefit of banks because they are not required to pay more than 10% interest,” he told IBENA.

He pointed to the bitter rivalry among banks and said “bankers have so far calculated interest on the balance of their customers’ accounts and arbitrarily offer assorted  rates.”

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

“In past procedures, banks calculated interest for a balance after a minimum 10 days. Now we hope they will  abide by the new procedure as this will help entail stability in paying interest on short-term deposits.”

He said by this measure the duration a sum of money is with the bank will become longer and the exploding size of liquidity seen over the years will shrink.

Money Migration

“When forex rates fluctuate heavily, money migrates from short-term bank accounts to the currency market”, an issue which Tasnim News Agency claims was the driving force behind the MCC’s latest decision.

It says the decision was approved by MCC with the aim of  reducing the wide-spread speculation business in parallel markets.

Asked if this rule would not unleash a run on the banks, Jamshidi said when a unified procedure is in place, it is reasonable to say no money will move from one bank to another.

He says other markets are unlikely to attract investors due to their low margin capacity, including those where money customarily prefers, such as housing, car, currency and capital markets.

“Thanks to CBI measures, currency rates have declined making the forex market much less attractive for investors.”

He said the housing sector, as a potential market which may attract liquidity resulting from withdrawals from banks, is facing stagnation which “has no more capacity to absorb capital.”

As for the chaotic auto market, he said it too has lost appeal simply because automakers have been respecting their commitments and contracts mostly in the breach.

The capital market could well be a good potential market for money flowing out from banks, but it is also grappling with its own pile of problems that is obviously keeping investors at arm’s length.