MCC Okays Bond Issuance by Banks

EghtesadOnline: The Money and Credit Council, the top banking and monetary decision-making body, gave banks the go-ahead to issue bonds to meet their financial needs.

News ID: ۷۸۷۶۳۰

15 January 2022

According to a press release posted on the Central Bank of Iran website, lenders can issue bonds of their own and offer it in the secondary market.

Bond issuance by banks and credit institutions is subject to CBI approval. Up until now, lenders were not allowed to issue bonds and the bond market was dominated by the government. A limited number of big state-controlled listed companies were also allowed to issue bonds after putting robust collateral.

Allowing lenders to issue bonds gives them leeway to secure funds when facing a liquidity crunch. When in dire need of liquidity, lenders usually borrow from each other via the interbank market or CBI.

The latest decision apparently should help the CBI optimize the monetary policy of open market operations, which to a large extent is reliant on bonds.

The CBI launched the OMO in January 2020 to control lenders’ rampant borrowing from the CBI and regulate interest rates in the interbank market.

In the OMO framework, central banks buy bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  In this framework banks can hold bonds as collateral to borrow from the CBI.

Observers say the bond market needs more space for the OMO to deliver the desired results. To expand the bond market and ease access of lenders to government bonds, the CBI launched bond auctions in May 2020.

Bond auctions helped the government plug gaping holes in the fiscal budget by raising money from the interbank market without the need to borrow from the CBI and running the risk of increasing the money supply.

Last year the MCC obliged banks to allocate a segment of their resources to bonds. Based on the MCC rule, lenders must allocate at least 3% of their money to bonds.