NPLs Improve on Quarterly Basis

EghtesadOnline: Non-performing loans of Iranian banks and credit institutions were worth 1,770 trillion rials ($7 billion) by the end of the second quarter of the current fiscal year (Sept. 21), the latest data published by the Central Bank of Iran show.

News ID: ۷۸۶۰۳۴

17 February 2021

Compared to the March-June quarter, the figure was 15% lower but on an annualized basis it was 4% higher, Tehran Chamber of Commerce, Industries, Mines and Agriculture said in an analytical report, citing CBI's data.

NPLs had been rising steadily over the past two years, from 1,510 trillion rials ($6 billion) in the last quarter of the fiscal 2019-20 (January-March) to a whopping 2,090 trillion rials ($8.3 billion) in the next quarter.

Hence, the pause in growth of bad loans in Q2 indicates CBI's success in accosting big loan defaulters in recent months.

According to the TCCIM report, the decline mostly pertains to bad loans paid in rial, as the NPL ratio for foreign currency loans had increased during the period.

The NPL ratio was 8.7% in Q2, which was 1.8 percentage point lower than the previous quarter. It was down 3.3% in the six months since the beginning of the fiscal year in March.

The amount of nonperforming loans in a bank's loan portfolio to the total amount of its outstanding loans denotes the NPL ratio. The ratio measures the effectiveness of a bank in recovering its loans.

A bank loan is normally classified as nonperforming when payments of principal and interest are 90 days or more past due, or when future payments are not expected to be received in full.

This ratio in the present report pertains to both rial and foreign currency loans. It was 12.8% for loans granted in foreign currency, posting a 20.8% increase in the course of six months. The ratio for loans paid in rial was 7.8%, down 9.3% in the first half of the year.

The NPL ratio of Iranian banks is high compared to many developing and developed countries where it is mostly in single digits and usually below 5%.

A look at the NPL ratio of countries across the globe published by the World Bank indicates that in 2019 it was 2.5% in France, 0.9% in the United States, 3.8% in Poland and 3.1% in Brazil. Turkey, Pakistan and Afghanistan registered a respective NPL ratio of 5%, 8.6% and 8.9% in 2019.

The role of Iran’s banking sector in financing the struggling economy (as the capital market is not capable of playing a bigger role), due to their limited resources, have contributed to the high volume of NPLs.

Fighting Big Loan Defaulters

In December, Governor of the Central Bank of Iran Abdolnasser Hemmati said big bank loan defaulters have repaid 30% of their arrears, adding that 11 major debtors owe 900 trillion rials ($3.6 billion).

The high NPL ratio in the country has hurt the balance sheets of banks and forced many to stop lending, despite the chronic need of businesses to borrow.

Some defaulters tend to hide behind the guise of entrepreneurs to avoid or delay the fulfillment of their financial commitments, arguing that the repayment of debts would lead to business closure and retrenchment of workers.

As per the CBI report, total loans exceeded 24,196.2 trillion rials ($96.8 billion) in the month ending Oct. 21, indicating a 42.8% year-on-year growth. Loans grew by 4,840.4 trillion rials ($20.3 billion) or 25% during the first seven months of the current fiscal year (March 20-Oct. 21).

As always, Tehran Province took first place by surpassing 15,575.3 trillion rials ($64.9b). At the bottom end was Kohgilouyeh-Boyerahmad Province with 82.9 trillion rials ($345.41 million) in outstanding loans.