Bad Loans Jump 20% to $8b

EghtesadOnline: Non-performing loans (NPLs) of Iranian banks and credit institutions reached 2,250 trillion rials ($8.3 billion) by the end of the first quarter of the current fiscal year (June 21), the Central Bank of Iran said.

News ID: ۷۸۷۲۶۲

06 November 2021

Compared to the January-March quarter, NPLs shot up by 20%. It was 3.7% higher on an annualized basis, the Tehran Chamber of Commerce, Industries, Mines and Agriculture said, citing CBI data.

Tracking banking data in the past three years, TCCIM said the NPL growth has been uneven but on the whole is of the ascending order.

NPLs were logged at 1,510 trillion rials ($5.5b) in early 2019, before rising to 1,740 trillion rials ($6.4b) in June 2019 and to 2,170 trillion rials ($8b) as of June 2020.

NPLs include bad loans given both in foreign exchange and in rials. Data show the default on reimbursing forex loans was the main reason behind the high and rising NPLs.

This highlights the fact that loan defaulters, who borrowed foreign currency from banks, failed to meet their commitments due to the prohibitive rise in forex rates, the US economic blockade and rapidly rising production costs.

The NPL ratio was 7.1% in Q1, which was 6% higher than the previous quarter. It was, however, 3.4 percentage points lower compared with the first quarter of last year.

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.

The ratio was 10.1% for loans granted in foreign currency -- up 14.8% on the previous quarter. The ratio for rial loans was 6.1%, down 1.6% in the first the three months.

Harming Balance Sheets

High NPL ratios have further hurt the balance sheets of banks and forced them to suspend lending, despite the chronic need of businesses to borrow.

For this and other drawbacks (lack of transparency and collateral) most banks are often censured by prominent economic experts, business leaders and the public at large.

In many cases, banks have granted loans without rating the customers’ eligibility and credibility and in the absence of robust supervision plus lack of a banking data network.

The CBI has said it will soon enforce stricter oversight over lending using innovative IT tools.

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%.