By Mahdi Goodarzi & Alireza Hojjatnia
Debt Market to play role in banks restructuring!
Iran central bank has recently gave birth to a plan reforming the banking sector structure. There is no doubt that it will be the most effective of Rohani’s administration rulings. A reform that if adequately being executed, it would lead to a paved path through economic growth and make the bed for an international re-entry.
This paper is to consider only the first phase of Iran banking and financial system amendment. The program will address the following headlines under the CBI’s eye:
A quick review of traveled route, led the system to where it stands now over the recent year, is not unpleasant. Frozen and toxic assets has been always poisoned Iran’s banking sector. Cash assets replaced with fixed ones either by estate investments or receiving real estate backed collateral. Housing boost of 2011 to 2013 and an optimism bias towards, made them athirst against the growth. Then the bubble burst, left banks with loads of properties not only raised in price rather got devalued at points.
Eventually the fever abated and constructions went down. Banks remained with a huge pile of non-liquidated and frozen assets. Not to mention government inability to settle its liabilities made the case even worse. Credit Crunch was what they faced then and still are struggling to overcome. Accumulated arrears, decreased profitability and restraints on inter-bank interactions were to blame for reduced access to funds and high cost of financing. As a result the recession fueled.
Absence of proper supervision, weakness in corporate governance and lack of risk assessment were among reasons leading sector to the current situation. Now the question is how to exit form this bottleneck.
CBI took a series of decisive measures addressing the mentioned. Monitoring dividend payments, requiring banks to prepare IFRS based financial statements, adjusting NPL reserves, increasing capital adequacy provisions and reviewing services fees are the bold of which, herald a transition to better days.
The next item on the list would be the liquidity deficit leading the banks to bear more risk if not properly addressed. The only outcome from indiscriminate use of central bank’s credit lines or destructive competition on attracting deposits is a higher cost for financing. In the current economic climate manufacturing sector is basically unable to absorb necessary facilities, therefore banks are doomed to generate cash flow in other ways. Needless to say, the unfit conditions on their current balance sheets, so close to amending relations with foreign counterparts, can seriously cause irreparable damages to the nation’s banking industry.
The administration eyed treasury bonds to compensate existing debts to private sector on 2016/17 budget bill. The total amount reaches to IRR 100,000 bn, just a thin ice shy from 10% of total banks assets. The government aimed to make liabilities liquidity pace faster. Issuing Sukuks and leaving fixed assets behind banks’ balance sheets by transferring them to intermediary SPVs acting as debt publishers, is another solution under consideration.
Considering the facts mentioned along with state’s budget capacities, the depression over real state sector and the profound gap between market value and cost of banks frozen assets, utilizing debt market talents seems to be the only way out form the current sinkhole.
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