Iran's CB to Control Lending to Curb Money Supply

EghtesadOnline: The Central Bank of Iran said its next step toward controlling broad money will be robust monitoring of lending by banks.

News ID: ۷۸۷۳۶۹

04 December 2021

The regulator wants to tap existing electronic platforms to control lending, namely the “Centralized Database for Loans and Commitments” known by its Persian acronym Samat, an informed CBI official told the semi-official Fars News Agency.

“One CBI measure is to start online control on money issuance by banks via Samat,” the unnamed source said. “By doing so, the Samat system will electronically block lenders from processing and registering loan applications beyond the ceiling set by the regulator”.

Banks must get a special code from the CBI-affiliated Samat before paying loans. This will give the CBI access to information on guarantors, collateral and credibility of those applying for loans.

The database will be accessible to all bank branches across the country and the regulator has banned lenders from giving  loans to applicants with bad credit records logged in Samat.

In the past two years and with the monumental growth in broad money, the CBI has taken measures to improve oversight of banks and augment transparency to curb the harmful growth in money supply.

“Effective oversight of banks is online in its entirety. We have moved from posterior to prior supervision.”

Money creation by three banks which were previously put on alert by the CBI has now come under control and is almost zero, the unidentified official added.  He did not name the three banks.

Stringent control over loans is expected to reduce the bulk of bad loans and help banks recover NPLs. Thanks to poor banking supervision, the NPL ratio of Iranian banks is higher compared to many developing and developed countries.

High NPL ratio has hurt the balance sheets of many banks and forced many to stop lending, despite the chronic funding needs of small businesses, in particular after the coronavirus battered the economy and hit SMEs hard.

NPL of Iranian banks and credit institutions reached 2,250 trillion rials ($7.7 billion) by the end of the first quarter of the current fiscal year (June 21), according to CBI data. Compared to the January-March quarter, NPLs shot up 20% or 3.7% higher on an annualized basis.

*** Reserve Requirement Restrictions

The CBI also has imposed tougher monetary restrictions on some financially-incompetent banks by increasing their reserve requirements.

Last month it increased the reserve requirements of five banks by 13% because they “didn’t abide by rules that govern the balance sheets of banks.

Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve requirement ratio of banks.

The central bank is allowed to set the rate between 10% and 13%, based on lenders' law abidance. This means that the regulator can cut the reserve requirement for disciplined banks from 13 to 10%. In short, the cuts are disciplinary mechanisms to keep the lenders in line.  Until recently, the reserve requirement for most banks was below 10%.

CBI data show broad money surged 42.8% in the 12 months to Oct. 22. Broad money was in the region of 42,275 trillion rials ($150 billion) up 21.6% in the first seven months of current fiscal year.