The ratio of NPLs to total loans declined 6.8% by end of H1, down 0.3 percentage points compared to the end of Q1 on June 22.
Data seen on the CBI website suggest that the ratio declined by 21.8% compared to the corresponding period last year when it stood at 8.7%.
NPL ratio is the ratio of the amount of nonperforming loans in a loan portfolio of banks to the total amount of outstanding loans the banks hold. The ratio measures the effectiveness of a bank in receiving repayments on its loans.
With total outstanding loans at 34,554.1 trillion rials ($123.5 billion) on Sept. 22 and the NPL ratio at 6.8%, total bad loans were estimated at 2,349 trillion rials ($8.3b) by the end of H1.
A bank loan is normally classified as nonperforming when payments of principal and interest are 90 days or more past due, or when future payments are not expected to be received in full.
The ratio in the report relates to both rial and forex loans. Data suggested forex loan defaulters accounted for a bigger segment of total NPL ratio and lenders were relatively more successful in reducing the rial NPL.
The ratio was 10.7% for loans borrowed in foreign currency, posting a 16.4% decline compared to the similar period a year before. However, in the course of six months since March the forex NPL rose 21.6%.
The ratio was lower at 5.7% for rial loans, declining 26.9% compared with rial NPLs a year before and 8.1% lower than the figure reported in March 2021.
Challenge of Forex Loans
Decline in overall NPL ratio mostly was due to bad loans in the national currency and forex loans dominated the NPL ratio.
It appears that forex loan defaulters failed to meet their commitments due to a combination of factors, namely the prohibitive rise in currency rates, the US economic blockade and rising production costs.
Forex loans are normally drawn from the National Development Fund of Iran to private sector borrowers given by commercial banks.
Earlier in the week, Alireza Mirmohammad-Sadeqi, the NDFI’s banking and credit deputy said the main challenge facing the fund is the difficulty in reimbursing loans, particularly forex loans.
“Majority of the foreign currency loans are given to forex-earning industries, such as those active in the oil and gas and transportation sectors, power plants, steel plants and water transfer projects,” Mirmohammad-Sadeqi was quoted as saying by the NDFI website.
Overall decline in the growth of bad loans indicates the relative success of the CBI and other supervisory bodies in recovering bad debts.
High NPL ratios have hurt the balance sheets of banks and forced them to suspend lending, despite the chronic need of businesses. For this and other drawbacks (lack of transparency and collateral in granting big loans) most banks have often been castigated by economic experts and business leaders.
NPLs of Iranian banks are often higher compared to their peers in the developing and developed world where it is mostly in single digits and usually below 5%.
A look at the NPL ratio of countries across the globe published by the World Bank indicates that in 2019 it was 2.5% in France, 0.9% in the US, 3.8% Poland and 3.1% Brazil. Turkey, Pakistan and Afghanistan registered 5%, 8.6% and 8.9%, respectively, in 2019.