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Iran's banks struggle with credit shortages - -

By Najmen Bozorgmehr

Iran’s banks struggle with credit shortages

By Najmeh Bozorgmehr in Tehran

Published: November 4 2008 22:59 | Last updated: November 4 2008 22:59

Iran’s banks may have escaped the global financial crisis, largely because of their international isolation, but they are suffering from a different kind of credit crunch.

Squeezed between the populist policies of President Mahmoud Ahmadi-Nejad and international financial sanctions over Iran’s nuclear programme, the country’s 17 state and private banks are struggling with credit shortages that have brought them close to insolvency.

The largest banks – Melli, Saderat and Sepath – have been hit with UN and US sanctions over the past two years, over alleged links with Iran’s nuclear and missile programmes.

But more damaging for the sector has been the government’s policy of encouraging banks to finance short-term projects for the poor at interest rates half or even a third of the inflation rate.

“Banks are fully lent-up after giving loans to people almost for free,” said one banker. “Mr Ahmadi-Nejad believes banks are charity organisations.”

Bankers say their institutions are still viable because they have property which could be sold to prevent bankruptcy. But the scale of their non-performing loans is of increasing concern.

According to unofficial figures, overdue loans have reached IR175,000bn ($17.8bn, €13.6bn, £11bn), an increase of 75 per cent over three years.

Massoud Rad, an economic advisor to Karafarin Bank, said: “Non-performing loans constitute over 20 per cent of the loans given, which could make most banks bankrupt if there was an effective auditing system.”

The government-imposed interest rates for lending to small businesses and the poor is 12 per cent – 2 per cent of which is covered by the government. This contrasts with an inflation rate of 29.4 per cent. The gap between the interest and inflation rates has encouraged borrowers not to repay their debts and to defy the meagre penalties that result.

One banker said: “You can get a loan from a bank at 12 per cent rate or 10 per cent, use it or re-lend all or part of it to other people and charge them from 30 per cent to 50 per cent, which is the lending rate outside the banking system. Why should anyone pay back the loan?”

When he was appointed central bank governor in September last year, Tahmasb Mazaheri adopted measures to curb bank lending to small projects that arguably had no economic feasibility.

It cost him his job after one year in office. His successor, Mahmoud Bahmani, is said to be more flexible. He was quick to promise to lend more money to banks “in a controlled way”.

Mr Mazaheri claimed the government had miscalculated the banks’ lending capacity. About 40 per cent of loans given out ostensibly for projects designed to create jobs had “deviated” from their goal. The government put the figure at just 4 per cent.

Mr Ahmadi-Nejad promised a crackdown on loan offenders. One businessman was arrested for allegedly borrowing IR1,100bn to set up a factory but bought real estate instead and refused to pay back his loan.

The government’s other solution is to borrow IR150,000bn from the Oil Stabilisation Fund, which collects oil windfalls, to pay the government’s debts to the banks. But it is not clear if parliament will approve the move and some MPs have expressed concern about its inflationary impact.



    
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