Liquidity Trend Bodes Ill for Bank Lending
EghtesadOnline: A look at the balance sheets of Iranian banks and credit institutions shows that their capacity to create money and allocate credit has been significantly influenced by the current state of liquidity and is expected to drop.
The total volume of liquidity was reported by the Central Bank of Iran at about 16.02 quadrillion rials ($136.35 billion) by the end of the fourth month of the current fiscal year on July 22.
However, an analysis by Tehran Chamber of Commerce, Industries, Mines and Agriculture published on its website shows that about 95% of the money supply are in the form of deposits that had either been allocated to manufacturing or non-manufacturing sectors as loans or entrusted to CBI in the form of reserve requirement and surplus reserves, Financial Tribune reported.
"Therefore, these resources cannot be reallocated to businesses," TCCIM said.
This comes as the volume of one-year deposits entrusted to the banks has declined during the period, while short-term deposits increased.
If this trend were to persist, warns TCCIM, it will reduce the power of banks to create more money, consequently declining their lending capability.
When a majority of banks hold payment arrears from the government and non-government sectors and the declining trend of long-term bank deposits has only accelerated, "the money creation and lending ability of the banks will predictably dwindle and a new challenge will be created for the banking sector and other sectors as a consequence".
This is while many banks signed one-year deposit contracts with customers that will mature in the coming days. When they do, the aforesaid conditions can only exacerbate, leaving the banks worse off in supporting manufacturing sectors.
TCCIM proposes "the elimination of bank interests on short-term deposits to prevent a flight of deposits from the banking system or conversion of deposits from long-term to short-term" as a major solution to this problem.
It also points out that several experts have called for an interest rate hike on long-term deposits. To have a maximum effect, the entity calls for considering the simultaneous implementation of both solutions.