Economy Minister Warns Banks on Interest Rates

EghtesadOnline: In a meeting with CEOs of state-owned banks on Tuesday the Economy Minister Ehsan Khandouzi instructed them not to arbitrarily raise lending rates.

News ID: ۷۸۷۵۲۹

29 December 2021

Khandouzi said the rates lenders charge on loans must not exceed the ceilings set by the Money and Credit Council, the top banking and monetary decision-making body in Iran.

In a talk with the press on the sidelines of the meeting, he  said the banks must refund the extra interest they have taken. “Lenders are obliged to refund the interest charged over and above rates decided by the MCC,” he was quoted as saying by the ministry’s news agency shada.ir.

“Refunding the extra amount(s) would help manufactures who have taken out loans,” he said. “State lenders have to refund the excess money taken from customers this year and the preceding years,” he said without elaboration.

Banks must abide by this decision and inspectors from the CBI and the Economy Ministry will oversee the process, he added.

The maximum interest rate on bank loans is 18%. However, recent reports have it that many banks charge higher rates.

This was due largely to ambiguities in loan contracts and lender’s using (abusing) loopholes to their own benefit, which leads to compound interest rates explicitly prohibited as per sharia laws.

In similar measures earlier, the CBI required banks to uphold openness and transparency and provide full details of loan contracts to their clients.

Compound interest is interest calculated on the principal amount, which also includes all the accumulated interest of previous periods of a deposit or loan.

Loan agreements must be easily accessible to guarantors and mortgagors, and include complete data about repayment guarantees, installments, evaluation of mortgage, granted deferrals, and the like.

Economists and financial experts say the new rules will create a strong obligation on banks and curb dubious procedures through which banks demand compound interest.

Lenders have also been banned from offering interest rates to depositors beyond the caps set by the regulator. The CBI in a bylaw earlier in the week instructed banks and credit institutions to observe regulations and avoid paying higher rates on deposits.

According to the bylaw, banks must not pay more than 10%-18% on term deposits.

“However, investigations show that some banks and credit institutions pay higher interest on individual deposits,  particularly on [big] amounts held by investment funds,” the CBI said.

Banks have indulged in offering higher interest apparently to lure customers and attract big money. The MCC has set the maximum interest at 18% for two-year deposits contracts. The rate is normally lower for short-term deposits.