Arrears to the CBI reached 1,113.9 trillion rials ($7.3 billion based on Monday’s exchange rates) indicating a 19.4% drop during a nine months since the end of the fiscal year in March 2019, according to Financial Tribune.
The drop is mainly related to debts of non-government banks and credit institutions as data indicates growth in debts of state-owned banks, according to a report published on the CBI website.
Commercial banks’ debts to CBI posted 22.3% and 48.6% growth YOY and compared to the end of the last fiscal year, respectively. Three state-owned commercial banks, namely Bank Melli Iran, Bank Sepah and Post Bank, owed 43.4 trillion rials ($285.5 million) to the CBI by Dec. 21.
Debts of specialized banks to CBI amounted to 469.5 trillion rials ($3billion) at the end of the third quarter, down 4% annually and 1.7% decline compared to the last yearend.
Bank Maskan (main housing lender), Export Development Bank of Iran, Bank of Mine and Industry, Cooperatives Development Bank and Bank Keshavarzi (main agro bank) are the five specialized banks in Iran.
Private Banks Curb Debts
The report indicated that CBI claims on private banks and credit institutions by the end of Q3 registered a remarkable drop of 38.2% in one year. Private lenders arrears to CBI stood at 601 trillion rials ($4 billion), indicating a 31.3% decrease compared to the end of last fiscal year.
Senior bankers, including the CBI boss Abdolnasser Hemmati, have often called for cutting banks’ borrowing as part of measures to discipline the struggling banking sector and lessen it mountain of bad loans.
Hemmati recently revealed that lenders have been sourcing a big portion of their liquidity from the interbank market, instead of borrowing from the central bank.
Banks lend to one another for a fixed term in the interbank market. Most interbank loans are for maturities of one week or less, the majority being overnight.
A look at interbank deals in the past financial year (March 2018-19) indicates that the value of interbank market transactions reached 107,149 trillion rials ($708 billion) to register 67% growth compared to a year ago.
Rates for interbank lending averaged 19.47% in the previous year, up 5% compared to the year before.
A total of 40,663 deals were conducted in Iran’s interbank market during the period compared to 38,101 deals a year ago, indicating 6.7% rise.
Role of OMO
The CBI recently launched the Open Market Operation as a major step toward regulating the interbank market and reducing lenders’ dependence on the CBI.
The new interbank mechanism enables lenders to manage their need for liquidity or offer their surplus liquidity in the interbank market.
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 influence the level of money supply.
In addition, within the framework, banks can hold bonds as collateral to borrow from the CBI.
The CBI has asked lenders to allocate a portion of their assets to trading in bonds. “On the basis of a new framework, the CBI manages liquidity of banks and non-bank credit institutions based on Islamic bonds. As such, these financial institutions need to allocate a portion of their assets to [buying] bonds,” the CBI said.