Majlis Concedes to MCC Role in Sanctioning Loans

EghtesadOnline: The Money and Credit Council, the top banking and monetary decision making body, will have the final say on loans ordered by the Majlis, Mohammadreza Pourebrahimi, head of the Majlis Economic Commission, told the IRIB news agency on Saturday.

News ID: ۷۸۷۷۵۶

13 March 2022

Controversial mandatory lending has become a hot button issue among lawmakers and banking and economic stakeholders after the legislature obliged banks to lend beyond their financial ability and capacity when debating the March 2022-23 budget bill.

Decisions on compulsory loans must be made by the MCC next year,  the MP said, expressing the hope that assigning the task to the MCC would address central bank concerns about the potential monetary/banking repercussions of such loans.

The government in the initial budget bill had projected mandatory lending by banks at 6,000 trillion rials ($23 billion). However, MPs increased that amount to 13,000 trillion rials ($50 billion), raising serious concerns about its negative impact on banks.

The MPs  backtracking comes a few days after the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei warned them against passing legislation that put banks under unwanted pressure.

The rare caveat came in the follow-up to a letter by the Central Bank of Iran Governor Ali Salehabadi to the Leader in which he expressed concern about the impact of mandatory lending on key economic indices like inflation.

Rise in mandatory lending is linked mainly to the substantial increase in interest-free marriage loans given to newlyweds, lending to low-income households and those in the less privileged regions.

Critics rightly note that the parliament has not specified from where banks should get the new billions for interest-free lending, warning about its inflationary consequences.

Plagued with poor finances, lenders are under pressure as they have to help realize budget targets set by the government and at the same time comply with the CBI restrictions with regard to improving balance sheets.

Salehabadi earlier said that the CBI regularly monitors the expansion of bank balance sheets to curb issuance of money.  The CBI s  precautionary measures  include tight oversight on lending, among other things.

The precautionary policy also includes limits and caps on reserve requirement of banks to penalize dysfunctional banks as part of efforts to  control money issuance.