EghtesadOnline: Central Bank of Iran data shows despite decline in growth of sight deposits, depositors are keen about keeping their money in banks so long as term interest rates on deposits and sight deposits are attractive.
Total term deposits reached 29,792.1 trillion rials ($119 billion) by end of the first quarter on June 21, rising 38.2% on the same quarter last year.
The volume increased by 1,940 trillion rials ($7.7b) or 7% in the three Iranian months, according to data published on the CBI’s website.
Sight deposits recorded higher annual growth, reaching 6,546 trillion rials ($26b) in Q1 to post 47.4% rise over 12 months. On a quarterly basis, it jumped 6% or 372.3 trillion rials ($1.5b).
Sight deposits grew faster compared to term deposits in the previous quarter. However juxtaposing two sets of data reveals that growth in sight deposits lost momentum compared to the annual 68.6% registered in the previous quarter. It was also down from 77% seen in Oct.-Dec. quarter.
While growth in sight deposits slowed, the speed with which sight deposits grow, as compared to the pace of term deposits, is still a concern as "hot money" may continue to pose a threat to the fragile financial markets.
The fact that sight deposits outpaced long-term deposits in fact reflects the people’s reluctance to park their money in banks for extended periods as they see consumer and other prices rise higher than the interest banks offer.
It is also seen as a sign that long-term deposits are less attractive than sight deposits as the latter is accessible to depositors without hassles.
The CBI report classified term deposits into long-term and short-term. Accordingly, long-term investment deposits accounted for 16,045 trillion rials ($64b) of the total, nearly 34% higher than the year ago. Short-term deposits grew 41.7% last year to 10,709 trillion rials ($42.8b) by June 21.
The total amount of Qarzol-Hassaneh (interest-free) deposits also increased by 48.9% year-on-year to reach 2,292.3 trillion rials ($9.1b). This is while housing saving accounts declined 20.3% during the 12 months under review to reach 47.8 trillion rials.
The rising pattern in bank deposits is the result of the general increase in broad money supply. According to the recent CB numbers, broad money supply reached 37,054 trillion rials ($148b) ending Q1, rising 6.6%
This increased by 39.4% in 12 months, up 5.2 percentage points compared to the annualized 34.2% growth in the corresponding quarter last year.
Low Interest Rates
High volume of sight deposits carries the risk of volatility in asset markets particularly when interest rates are much lower than inflation and investment in financial markets is more rewarding.Sharp increase in sight deposits resulted in excessive flow of liquidity into the stock market during March-August 2020 followed by the unsurprising exodus to the currency and gold markets.
Observers blame low interest rates for the falling term deposits. Despite calls for raising interest rates, it seems CBI policymakers are in a quandary given its impact on the capital market and sensitivity of the stock market to similar moves.
The CBI argues that raising interest rates could lead to capital outflow from the bourse to banks, which apparently increases the cost of money for banks, many of which are struggling to balance their books studded with bad loans and failed investments.
As per law, the interest rate for one-year maturity deposits is 16%. In addition, banks pay a maximum 18% on two-year deposits. Likewise, interest on short-term deposits with 3-month maturity is 12%.
The highest interest paid for 2-year deposit contracts is still below the annual inflation rates. According to the Statistical Center of Iran, average goods and services Consumer Price Index in the 12 months ending July 22, which marks the end of the fourth Iranian month of fiscal 2021-22, shot up by 44.2% compared to the corresponding period the year before. SCI reported the average annual inflation rate for the preceding Iranian month ending June 21 at 43%.