Iranian banks must commit to increasing their capital and reaching a capital adequacy ratio of at least 8%, says a deputy economy minister.

"A minimum capital adequacy of 8% and reaching a capital adequacy of 12% must be pursued by the banks," Hossein Qazavi was quoted as saying by banker.ir.

"Privately-owned banks must improve their capital adequacy by selling their stocks and increasing the capital of state-owned banks should be the function of the government."

The deputy economy minister for banking and insurance affairs says budgetary constraints have indeed imperiled government moves to help increase the capital of banks. "But I hope that amendments to the budget law of 2016-17 which were approved by parliament will be implemented and capital adequacy of the banks will increase."

The amendments to the budget law of 2016-17, the implementation of which was officially proposed by President Hassan Rouhani in early November, contain measures to increase banks' capital and settle their debts.

According to another deputy minister of economy Shapour Mohammadi, the government has several plans to increase the capital adequacy of banks including cash injections with the help of foreign exchange resources of the Central Bank of Iran.

"It was proposed that proceeds from selling the shares of state companies could be utilized based on Article 44 of the Islamic Republic of Iran Constitution [which calls for the privatization of state firms]. These proceeds may be used to increase the capital of state banks which has won Majlis approval,” Mohammadi had said in June.

According to Qazavi, there is also the issue of several privately-owned banks in which the government holds a stake. If these banks choose to offer their stocks, he says, it should be "natural for the government to help in increasing their capital."

The official says in light of budgetary limitations, it seems that the government is willing to reduce its role in banks and let the capital market play its role in increasing their capital.

The main purpose of the amendments to the 2016-17 budget law is to allow the government to settle its debts to the banking sector by using the CBI foreign exchange resources. The government will have the authority to repay up to 450 trillion rials ($14 billion) of its debts to lenders through these resources.

Qazavi notes that when international banks want to collaborate with their Iranian peers, they look into their financial ratios, namely capital adequacy, non-performing loans, return on assets and stocks.

He, however, stresses that when a bank or country wishes to work with Iran on a large scale it should gauge the country within the framework of its extraordinary circumstances. He quickly adds that this does not mean the capital adequacy ratios of Iranian banks must not improve.

"This is a necessity. But in general, hurdles must be removed by way of improving or reforming the structure of bank's financial statements and giving the other side (foreign banks) the necessary assurances."  

Qazavi adds that in the case of government-owned banks, foreign banks can be swayed even if the bank's capital adequacy is below 8% because the government would be its stockholder "and if problems arise, they know that the government is there to help the bank(s)."

Production Loans Lagging

A deputy minister of industries, mining and trade has criticized the banks' performance in allocating loans to promote production in the country.

"Unfortunately, even though 90 cases were sent to private banks to receive loans to improve production, the banks have paid no attention," Reza Rahmani said in the 62nd meeting of the government and the private sector.

Pointing to the CBI governor Valiollah Seif's promise of delivering 16 trillion rials ($499.4 million) worth of loans to the ailing small and medium-sized enterprises (SMEs), the official said "so far, only 11 trillion rials ($343.3 million) has been paid to 16,194 industrial units."

Rahmani recalled that the CBI head had promised that "if any SME does not get the funding by the time the 16 trillion rials has been paid out, the volume of loans will increase."