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EghtesadOnline: The Central Bank of Iran has never approved banks engaging in speculative and non-banking activities, said the CBI’s deputy for supervisory affairs on Thursday.

“From CBI’s point of view, the lenders’ main job is to act as financial intermediaries,” said Farshad Heydari during a televised debate also attended by Parviz Davoudi, an economist and a former vice president in the previous administration.

“This means that after mobilizing the resources, the banks must distribute the funds among businesses and loan applicants,” he was quoted as saying by the website of CBI.

“It has never been legal for banks to indulge in speculative activities and this has neither been endorsed nor condoned by CBI.”

From running multiple affiliate companies to owning sports teams and making big-time real-estate investments, banks have become mired in a myriad of business projects that bear no resemblance to their original mission of channeling funds between lenders and borrowers, according to Financial Tribune.

Banks have recently been the subject of much criticism for endangering people’s savings through their involvement in risky investments.

Heydari stressed that as per the law, the banks are only allowed to use 40% of their capital in non-banking activities.

Considering the fact that the banks’ capital does not account for a significant portion of their resources–2.5-3% at most–he noted that it is not an impressive figure.

“That being said, in some cases, the figure rises beyond the allowed ceiling, going even as far as 60-70% of the banks’ capital, which is obviously illegal,” he said.

The CBI official noted that in response to these violations, the parliament last year passed the Law on Removing Barriers to Production, based on which the banks were given a maximum three-year deadline to reduce their non-banking investments and bring them down to reasonable levels.

“The law was notified on April 20 and in line with the directive issued by the CBI, the banks are required to shed 33% of their excessive properties each year and they have until March 2018 to meet this goal,” he said.

Heydari emphasized that banks that insist on retaining their old habits will be slapped with punitive measures.

He, however, clarified that banks are permitted to enter areas such as brokerage, currency exchange and information technology within their legal boundaries.

Any other operations such as “excessive real-estate involvement” will be treated as an offense, he added.

As to why banks dither on relinquishing their unwanted property, he said the regulator has set a three-year deadline because the recession gripping the market “makes it impossible for the banks to sell their properties as quickly as they should”.

 Liquidity Dilemma and Toxic Loans

Heydari referred to the problem of the banks’ assets being locked in unprofitable schemes and the persistence of cash shortage in production units, saying even with the consistent surge in liquidity, “financing the production units has proved a deep-rooted and ever-present challenge for Iran’s economy”.

The official explained that a look at the country’s economic history makes it evident that manufacturing units have always been dependent on banks  for receiving credits, while lenders have always struggled to meet all their requirements.

“This means that the production units’ liquidity woes and the banks’ shortcomings in bankrolling them are not specific to the past decade or two. Iran’s economy has always been afflicted with this [shortage of cash] and generally speaking, the volume of liquidity required by our production sector has been higher than the financing capabilities of the banking system,” he said.

Heydari spoke of the rise in production units’ hunger for liquidity and working capital in the past few years, tracing the problem to the sudden increase in foreign exchange rates in 2011-13.

The volume of liquidity experienced a surge, rising up to “more than 10 quadrillion rials ($321.8 billion) from the previous 6 quadrillion rials ($193.1 billion), which shows that a significant part of the liquidity in the country is spent on production units”, he said.

“Another portion of liquidity is locked in the form of non-performing loans,” he added.

CBI Central Bank of Iran Iran's Lenders Non-Banking Ventures Farshad Heydari