Banks Face Limits in Boosting Capital

EghtesadOnline: Banks and credit institutions in Iran are facing a myriad of challenges including cumbersome regulations and technical issues to boost capital through revaluation of their assets, a senior banking official said.

News ID: ۷۸۵۰۰۱

09 November 2019

Farhad Hanifi, the Central Bank of Iran’s deputy for supervisory affairs, said the regulator has “some considerations” when it comes to boosting the capital of banks through asset revaluation, IBENA reported.

Elaborating the point, Hanifi said assets to be sold cannot be categorized as long-term assets of banks, and as such, cannot be used by lenders to boost capital, Financial Tribune reported.

“In addition, funds for purchasing the assets have been sourced mainly by buying and selling stocks and the deposits with banks. Thus, revaluating assets and showing capital boost in this manner doesn’t appear to be rational.”

Asset revaluation is an adjustment made in the carrying value of fixed assets by adjusting it upward or downward depending on the fair market value of the assets.

In other words, revaluation can reflect both appreciation and depreciation in the value of a fixed asset, and the reason why assets are revalued includes sale of the asset to another business unit, mergers or buying companies.

Struggling banks have been told to cut their non-banking activities and get rid of excess property to be able to raise capital and expand lending to manufactures and busineses.

Excess property of banks have piled up largely due to impaired loans, bad debts, settlement of huge government debts to banks and bad investments by lenders for several years.

Banks cannot raise capital by revaluation of assets that have come into their ownership due to debtors’ defaults on loans.

According to the CBI official, there may be some changes in the ownership status of this class of assets after debtors reimburse the banks and repay the loans.

Regarding assets that can be used to help boost capital, he pointed the large number of (unneeded) bank branches and costly buildings that have sprung up in many big cities in the past three decades.

Observers say the number of bank offices in Iran is way beyond global standards and selling the extra branches is a feasible way to boost the assets of banks.

According to Abbas Memarnejad, a deputy minister of economy, approximately 10,000 bank branches in Iran are not needed and getting rid of these offices could enable banks to generate 800 trillion rials ($6.9 billion).

CBI data indicates that the there are 21,000 bank branches in the country.

Saleable Assets

Elaborating on assets that can and cannot be sold, Hanifi said banks are not allowed to raise capital by selling assets in which they have invested.

He went on to say that lenders can boost capital through other legal venues, namely collecting overdue debts, accumulated profits and changes in forex rates.

He reiterated the ultimatum to lenders to get rid of their assets by the time the current fiscal year is out (March 2020), saying those who fail to do so will be prosecuted.

Economy Minister Farhad Dejpasand has given an ultimatum to the struggling banks to divest their excess properties by the yearend.

According to media reports, banks have surplus assets worth an estimated 700-1,000 trillion rials. They are obliged to divest 400 trillion rials ($3.5 billion) of the surplus property by next March.

Banks divested 120 trillion rials ($1 billion) in surplus holdings in the last fiscal year (March 2018-19).

The divested companies belonged mainly to three big lenders, namely Bank Saderat, Tejarat Bank, and Bank Mellat.