Instead of borrowing from the CBI, Abdolnasser Hemmati said lenders have been meeting a big portion of their need for liquidity from the interbank market.
“Very promising news indeed. Lenders in recent months have sourced their short-term needs for liquidity mainly from the interbank market,” Hemmati wrote in an Instagram post on Tuesday.
Interbank market is a market in which banks lend to one another for a fixed term. Most interbank loans are for maturities of one week or less, the majority being overnight, according to Financial Tribune.
The government has stepped up efforts in recent months to boost financial discipline of banks and credit institutions. As a key step toward regulating interbank market and reducing lenders’ dependence on the CBI, the regulator has made concerted efforts to start the open market operation over the past year.
Bank officials say the grounds are in place for setting up the long-awaited OMO mechanism. In the same vein, a special committee has been set up to handle executive affairs of the key monetary measure.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
Within this framework, central banks can buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. By the same token, selling government bonds reduces the base money and raises interbank rates.
It constitutes a key instrument of monetary policy under the market based system of monetary management. Essentially, it is used by monetary authorities to regulate the cost and availability of credit in the banking system and thus influence the level of money supply.
Apart from controlling the borrowing of banks from the CBI, the policy is touted for its role in regulating interest rates and curbing inflation.
Big Leap
A look at interbank deals in the past fiscal year (March 2018-19) indicates that the value of interbank market transactions reached 107,149 trillion rials ($878 billion), or 67% growth compared to a year ago.
Interest rates for interbank lending averaged 19.47% in the previous year, up 5% compared to a year before.
A total of 40,663 deals were handled in the interbank market during the reviewed period compared to 38,101 deals a year before, indicating 6.7% rise.
State lenders in the past often approached the CBI for meeting their financial needs. However, data show a higher inclination of state-owned banks to borrow from other banks in the interbank market last year.
Private Banks held the lion’s share of loans from other lenders borrowing 61,000 trillion rials ($500 billion) from other lenders, or 57% of the total money borrowed.
Likewise, the value of loans by state-owned lenders rose from 8,780 trillion rials in 2017-18 to 23,000 trillion rials in the past fiscal year to account for 19% of the total borrowing.
Iran’s interbank market was established in July 2008 with the aim of strengthening the management of liquidity held by banks, facilitating short-term lending among banks, maintaining monetary discipline and improving the implementation of monetary policies of the regulator.
The CBI is in charge of organizing and supervising the market and when necessary intervenes to maintain optimal interbank interest rates.