The “cautionary policy for controlling the expansion of balance sheets in the banking network” announced by the MCC allows the CBI to take different approaches toward expansion of balance sheets of banks and credit institutions, subject to their mission and financial status, according to a press release published on the CBI’s website.
Accordingly, the CBI will impose tough restrictions on the balance sheets of banks with poor financial performance while well-performing banks will be spared.
Constraints, however, don’t include lenders’ cash holdings, deposit with the CBI, bonds and the likes.
The central bank added that limitations largely target assets with priority given to “foreign assets” and “miscellaneous assets” in the balance sheets.
Struggling with poor balance sheets, mountains of bad debts and inability to recover large numbers of NPLs, Iran’s huge banking industry is regularly criticized for its dysfunctional performance with prominent economists and experts demanding overhaul of the bloated and ailing sector.
The CBI said the plan to improve bank balance sheets is in line with efforts to curb inflation. Earlier last week, the CBI Governor Abdolnasser Hemmati said the regulator is striving to the control inflation by means other than raising interest rates.
"Raising deposit rates is unlikely to deliver in light of the supply crunch [in the currency market], banks’ poor balance sheets and the government’s increasing demand for funds. Under the circumstances the central bank would do better to reduce inflation by using other methods," he said in a note on his Instagram account.
As the going gets tough, the CBI now seems determined to reform the banking bureaucracy long plagued with mismanagement and financial indiscipline.
Some measures to improve the performance banks include bringing order and discipline to unhealthy banks, getting rid of shadow banks, merging banks affiliated to military organizations, correcting the financial structure of banks and restricting their transactions.
Last month the CBI decided to restore banks' reserve requirement to pre-coronavirus levels after it was cut in March to support businesses hurt by the deadly disease.
The central bank set the reserve rate between 10% and 13%, based on lenders' law abidance. The ratio was reduced after the coronavirus spread earlier this year to help provide banks enough resources for supporting businesses.
An estimated 750 trillion rials ($2.7 billion) was paid to struggling businesses impacted by the virus, mainly SMEs hit hard by the pandemic.
Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and liquidity growth. Generally, the CBI reduces the reserve requirement for law-abiding banks from 13 to 10%.