In recent years credit crunch in terms of decrease in available financial resources and increase in financial facilities’ costs have been strengthened in Iran. Lack of infrastructures in risk management, law deficits and problems in structures lead to accumulation of non-current claims and also frozen assets. Items which are mentioned resulted in financial instability and also increase in interest rate in order to attract more resources. In this regard, unfair competition has occurred between banks and according to risk/ reward relation, only high-risk projects are being accepted to allocate facilities in hope of gaining more profit which is a sign of inefficient allocation in banking system and is egregious in profitability and stability ratios and indices. This inefficient allocation leads to recession deepening and intensifying imbalance in economy. Problems of Iran’s banking system can be classified in three groups:
- 1. Weaknesses in structures, laws and financial instruments and low depth of financial markets.
- 2. Decrease in earning of banks’ assets (frozen assets) as a result of accumulation of non-current claims, the government’s debts and bank’s investment in illiquid projects.
- 3. Problems in banks’ cash flows that is obvious in reduction of granted facilities /deposits ratio, high interest rate and unfair competition in financial institutes.
All above items besides lack of resources resulted in decrease of capital adequacy’s ratio.
Iran’s economy is bank oriented and almost 90 percent of financing is being done through banking system so that financial system’s modification and reinforcement of financing methods in economy are necessities of achieving desired growth in sixth development plan.
Cash flow and bad assets are considered as short-term and mid-term issues respectively and in order to improve these faults, we need instant actions in order to increase the availability of cash flows in banks, mid-term actions for balance sheet’s modification and fundamental actions for structures.
In this regard, banking system’s amendment has been planned in three categories.
- Reinforcement of central bank’s supervisory and policy-making role.
This topic has been divided to 10 different sub-category such as legal deposit ratio modification, merge and liquidation of banks and credit institutions, classification of banks and supervising banks that are in trouble. These plans are done in order to eliminate unfair competition and modify interest rates in harmony with inflation rate. Another one is open market operation which is used to control inflation rate and also by applying this policy, central bank’s liquidity is reversible. This policy leads to monetary and financial stability. Raising capital in banks is one of the main topics in this category that improves health of banking system, avoids banking instability and increase the banks’ ability to provide more loans and credits to their customers.
- Organizing the government’s debts under the supervision of Ministry of Economic Affairs and Finance.
Government’s debt securitization can be used as not only an appropriate instrument in order to implement monetary policy but also a new financial resource for government’s borrowings in the future. Note that in order to control the inflation rate, sufficient number of securities should be available in banking system’s balance sheet to use for monetary policies.
With implementation of this section, credit crunch removal through settlements of bank’s claims is possible. Issuing Sukuk helps discovering real interest rate and is a substitute for predetermined rates assigned by the central bank. So that issuing Sukuk augments monetary policy instruments and open market operation implementation. In addition to items that mentioned above, government’s debts are being arranged and illiquid debts turn to liquid ones. Sukuk in first stage aren’t traded in capital market and allocate to contractors and creditors with one to five years maturity and they can hold them until maturity date or sell them with discount in capital market. Before issuing these sukuk it is urgent to determine appropriate ceiling on issue in accordance with gross domestic production and consider its financial cost in annual budget and timely repayment of principal and interest of Sukuk.
- Raising capital in banks
According to Basel regulation, in order to control risk taken by banks, they should maintain minimum level of risk coverage by equity’s capital. Facilitation power of banks is intensified by raising capital. Beside this, some modification in bank’s balance sheet will be done which makes risk coverage better in banks.
Finally, interconnected nature of financial market players makes this plan as a complex of relevant and regular factor so that successful implementation of this plan needs different organization’s cooperation, more active capital market and increase in foreign funding.