Central Bank of Iran Demands: Balancing Act of Banks

In a note on his social media account on Saturday, Abdolnasser Hemmati enumerated measures to improve the performance of the ailing and lethargic banking system. 

Bringing order and discipline to “unhealthy banks”, getting rid of shadow banks, merging banks affiliated to the military, correcting the financial structure of banks and placing restrictions on bank transactions are the key measures, he said.

Iran’s banking industry has long been suffering, among other things, from poor balance sheets, capital inadequacy, inability to recover large numbers of NPLs, arcane rules, and dubious operations of illegal credit institutions that have taken a toll on the economy for years. 

Elaborating on measures adopted during his tenure, Hemmati pointed to change in the management structure of failed banks as one of the key steps to discipline inefficient banks with unhealthy balance sheets. 

In this regard, the iron-grip of major shareholders and vested interests on the operation of lenders has been curbed, he said, adding that the regulator significantly restricted banks’ over-borrowing from the CBI. 

The regulator announced rules in summer 2019 based on which no legal or natural entity can own more than 33% of the total shares of a bank. 

Hemmati pointed to revised rules and regulations based on which the eligibility and qualification of managers are determined. 

To address the problem of shadow banks, the central bank set up a “supervising board” to stop their operation and decide on their liquidation. 

In the absence of efficient oversight, unregulated credit institutions grabbed large portions of the total liquidity among the public by offering unusually interest. As time passed by many such institutions went bust creating huge a dilemma for the government and depositors lured by the tempting interest rates. 

Mohammad Baqer Nobakht, head of the Plan and Budget Organization, said earlier that the government so far has paid 360 trillion rials ($1.6 billion) to compensate losses created by the fraudulent ways of shadow banks and unruly lenders.

Mergers 

The central bank took a rather bold initiative last year to merge five dysfunctional banks and credit institutions of the military with the state-owned Bank Sepah. Hemmati said the plan is moving ahead in coordination with General Staff of the Armed Forces and is in the final phase. 

The megamerger was announced in March 2019 and includes Ansar Bank, Bank Hekamat Iranian, Mehr Eqtesad Bank, Ghavamin Bank, and Kosar Credit Institution. So far Mehr Eghtesad Bank and Bank Hekamat have officially merged. 

Moreover, the CBI took a novel approach to monetary policymaking to control lenders’ over-borrowing from the CBI. By implementing open market operation, the regulator conditioned lending to banks and credit institutions to their  collateral with the CBI. 

OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply. 

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

Regarding the financial structure of banks, the regulator has obliged lenders to recapitalize via revaluation of their assets and share premium for companies listed on the stock market. 

Lenders are also asked to expedite the sale of their non-financial assets.   Banks and credit institutions are estimated to own 1,000 trillion rials ($4.5b) worth of non-financial assets, which have piled up over years largely due to impaired loans, bad debts, settlement of government debts to banks, closure of branches and failed investments. 

To improve transparency and anti-money laundering rules, the CBI has imposed limits on bank transactions. The regulator has compartmentalized individual and business accounts. As an example, in February it required individual customers to provide documents showing the reason for transactions above 2 billion rials ($9,100).  

Legal entities having business accounts are obliged to present verifiable documents regarding the need and purpose of transactions above 10 billion rials ($45,500).