How Rate Gaps At Iranian Banks Are Deterring Productive Investment In The Country 1

Rate gaps at Iranian banks are deterring investment

Frontera recently had a discussion on the Iranian banking crisis with Behrad Ebrahimi, Head of Equity at Agah Group. While discussing the current state of affairs, Behrad emphasized how rate gaps in Iranian banks are one of the biggest fundamental deterrents of productive investment in the country.

During the tenor of the previous administration (2005-2013), inflation was so high that the government mandated for the borrowing rate to be lower than the inflation rate. Consequently, banks didn’t have any margins with which to profit.

As an example, in 2013, the inflation rate was over 30% and the central bank was forcing banks to loan at near 15%, so typical lending and borrowing seized to be profitable. The only course of action for banks was to engage in other financial services in order maintain profitability.

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The current banking crisis

When Hassan Rouhani took office as the President of Iran in 2013, he brought inflation under control (currently at 9%). However, by then most banking sector assets were already locked into relatively illiquid investments across the capital markets (GULF) (MES) in different industries. The deposit rate is currently 10-14% on short-term deposits and 15-18% on 1-year deposits. So the gap between the borrowing rate and the 10.2% inflation rate is still attracting depositors and deterring money from being deployed into any kind of economic activities or businesses in Iran. Meanwhile, banks have arrived at the point where NPLs are out of hand and have no money left to lend as it’s all locked up in illiquid assets.

Alternative rescue plans

In terms of alternative plans that could rescue the Iranian economy from entering a true crisis, Behrad argued that “Practically speaking, the borrowing rate could not become lower. Therefore, the country should divide banks’ assets into two levels, the healthy and the toxic. Toxic assets would be transferred to an account to become a subsidiary of the bank group (to be established).

If this scenario were to happen, the next steps would then be for the CBI to come forward and take over the troubled subsidiary balance sheets. However, since it remains unsure whether the central bank has the intent or even the reserves to act as such, a better alternative would be capitalization from outside investors. In this scenario, foreign investments into the Iranian banking sector could be put into play and resolve the entire cash crisis.

A third alternative would be that the central bank prints new money, which would lift the inflation rate up again. However, this is completely against the current policy adopted by the current administration.

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