The rare caveat came in a follow-up to the letter by Governor of Central Bank of Iran Ali Salehabadi to the Leader in which he expressed concern about the negative effects of mandatory lending by banks on key economic indices, namely inflation.
Majlis Speaker Mohammad Baqer Qalibaf communicated the Leader’s warning to the chamber on Monday, the CBI website reported.
The parliament has come under strong criticism recently for passing laws that compel banks to lend in the framework of the 2022-23 budget.
Such orders are seen in Note 16 of the budget bill, which obliges the state, private and non-banking credit institutions to allocate big segment of their resources as interest-free loans to various sectors.
“There are [clear] mandates for banks in Note 16 of the budget bill that engender funding obligations on banks up two twice the amount in fiscal 2021-22,” Qalibaf told the chamber citing details of Salehabadi’s letter to the Leader.
“The Leader in a written letter to the Majlis warned about the burdensome directives to banks. Though, the warning addresses both the Majlis and the government,” the MP said.
Referring to the detrimental impact of the added financial burden on banks, he recalled the unending rise in prices of goods and services arising in part from monetary conditions created by banks.
Pursuant to the Leader’s letter, the speaker asked members of the Majlis Joint Commission, who are in charge of reviewing the proposed budget, to reconsider Note 16.
Economy Ministry Ehsan Khandouzi expressed similar concerns in a note posted on his social media account, warning that the Majlis decision to expand lending can and will undermine the government’s anti-inflationary program.
“Imposing additional 10,000 trillion rials [$37 billion] in mandatory lending on banks already struggling with weak balance sheets either means that the budgetary projections are not supposed to be realized, or if realized, will add to the banking problems,” he wrote on the twitter.
The rise in mandatory lending is linked mainly to the substantial increase in interest-free marriage loans to newlyweds and employment loans to low-income households and those living in less privileged regions.
Critics understandably note that the parliament has not specified from where banks should get money for interest-free lending, warning about its inflationary consequences.
Double Trouble
Saddled with mismanagement and declining profits, banks are under pressure as they have to help realize the government’s budget targets and comply with CBI restrictions to improve their balance sheets.
In a talk with state TV on Sunday, Salehabadi, the CBI boss, said that the regulator closely monitors bank balance sheets to curb issuance of money by lenders. The CBI’s “precautionary measures” include tight oversight on lending.
Precautionary policies allow the CBI to take different approaches toward the expansion of bank balance sheets, subject to their mission and financial status.
Accordingly, the CBI imposes tough restrictions on dysfunctional banks. Constraints, however, don’t include their cash holdings, deposits with the CBI, bonds and the likes.
As per regulations recently approved by the Money and Credit Council, the top banking and decision-making body, the monthly growth of specialized lenders’ assets must not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets in their books beyond 2%.
The precautionary policy also includes limits and caps on bank reserve requirements to penalize financially inefficient banks as part of efforts to “control money issuance”.
The latter policy has drawn strong criticism from top private sector figures because it has further restrained lending to production companies in need.
Earlier in the week, Gholamhossein Shafei, head of the Iran Chamber of Commerce Industries Mining and Agriculture Iran (ICCIMA), in a letter to banking and industry policy and decision makers, said new banking restrictions have hurt funding to manufactures, and demanded an end to such unwanted and unhelpful measures.