According to IBENA, the news service affiliated to the CBU, private banks and credit institutions account for 1,211 trillion rials ($9.3 billion) of the total debt. State-owned specialized lenders owe the regulator 636 trillion rials ($4.8 billion).
The debts include the principal and interest on credit lines, overdrafts and CBI deposits with banks, Financial Tribune reported.
Lenders' overdraft alone accounts for half of the total volume of their debts -- 1,008 trillion rials ($7.75 billion) of which 967 trillion ($7.43 billion) is the share of private banks and credit institutions.
State-run specialized banks and commercial lenders were in arrears to the tune of 636 trillion rials and 199 trillion rials, respectively, by Nov.21.
Credit lines are the other source of banks’ debts to the CBI, the report said, adding 967 trillion rials ($7 billion) to the total debts. Credit given to the controversial Mehr Housing Project by the previous administration amounts to 522 trillion rials ($4 billion), or one-fourth of the banks’ debts to the CBI.
The Mehr housing scheme is a hugely controversial plan initiated by the former government to build low-cost homes for the poor and vulnerable. It has been widely criticized for its unusually high cost, poor management, low-quality building material and remote locations.
Independent observers and economic experts blamed the project for injecting unusually large amounts of cash into the market resulting in a whopping 40% inflation plus the government’s massive borrowing from the CBI.
Managing overdrafts is one of the crucial duties of banks to discipline their practices and curb instability of the financial system.
Debts of banks to the central bank have been rising at an alarming rate in recent years and the issue has become a major challenge because bad debts and stressed assets have become a major factor behind the ballooning liquidity, galloping inflation and the inability and unwillingness of banks to lend to struggling businesses.
Lender’s debts to the CBI increased by more than 25% compared to the previous year. Outstanding debts were 1581.3 trillion rials ($12.1 billion) as of November 21, 2018.
With lenders’ increasing borrowing from the CBI becoming chronic for the banking sector, the government was apparently forced to step up efforts in recent months to boost the financial discipline of banks and credit institutions.
As a key step toward regulating the interbank market and reducing lenders’ dependence on the CBI, the regulator launched the highly-touted open market operation on Saturday.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
It is largely used by the monetary authorities to regulate the cost and availability of credit in the banking industry and influence the level of money supply. Within this framework banks can hold bonds as collateral to borrow from the CBI.